National Organization for Marriage v. US, Internal Revenue Service , 807 F.3d 592 ( 2015 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2363
THE NATIONAL ORGANIZATION FOR MARRIAGE, INC.,
Plaintiff - Appellant,
v.
THE UNITED STATES OF AMERICA, Internal Revenue Service,
Defendant - Appellee.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. James C. Cacheris, Senior
District Judge. (1:13−cv−01225−JCC−IDD)
Argued: September 16, 2015 Decided: December 2, 2015
Before GREGORY, AGEE, and DIAZ, Circuit Judges.
Affirmed by published opinion. Judge Diaz wrote the opinion, in
which Judge Gregory and Judge Agee joined.
ARGUED: William Earl Davis, PUBLIC INTEREST LEGAL FOUNDATION,
Plainfield, Indiana, for Appellant. Ivan C. Dale, UNITED STATES
DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. ON
BRIEF: Kaylan L. Phillips, Noel H. Johnson, Joseph A.
Vanderhulst, ACTRIGHT LEGAL FOUNDATION, Plainfield, Indiana;
John C. Eastman, CENTER FOR CONSTITUTIONAL JURISPRUDENCE,
Orange, California; Jason Torchinsky, Shawn Toomey Sheehy,
HOLTZMAN VOGEL JOSEFIAK, PLLC, Warrenton, Virginia, for
Appellant. Caroline D. Ciraolo, Acting Assistant Attorney
General, Richard Farber, Tax Division, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C.; Dana J. Boente, United States
Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Alexandria,
Virginia, for Appellee.
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DIAZ, Circuit Judge:
The National Organization for Marriage (“NOM”) appeals the
district court’s denial of its motion under 26 U.S.C.
§ 7431(c)(3) to collect attorneys’ fees from the Internal
Revenue Service. NOM contends that the district court abused
its discretion by determining that NOM was not a “prevailing
party” under 26 U.S.C. § 7430(c)(4)(A) because (1) it did not
“substantially prevail[] [in litigation against the IRS] with
respect to the amount in controversy, or . . . the most
significant . . . issues presented,” and, alternatively, (2) the
government’s position in the litigation was “substantially
justified” under § 7430(c)(4)(B). We agree with the district
court that the government’s litigation position was
“substantially justified,” which, by itself, is sufficient to
find that NOM was not a “prevailing party” under the statute.
Consequently, we affirm.
I.
A.
NOM is a tax-exempt, nonprofit organization whose mission
is “to protect marriage and the faith communities that sustain
it across the United States.” J.A. 11. Each year, NOM must
file IRS Form 990, which includes the names, addresses, and
contribution amounts of donors who gave $5,000 or more during
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the year. 26 U.S.C. § 6033(a)(1); 26 C.F.R. § 1.6033-2(a)(2).
While federal law requires the IRS to make information in a tax-
exempt organization’s return available to the public, the IRS
must redact the names and addresses of donors listed in a Form
990 filing. 26 U.S.C. § 6104(b); 26 C.F.R. § 301.6104(b)-1(b),
(d).
Despite these rules, an IRS clerk released NOM’s unredacted
donor list from its 2008 filing after receiving a request in
January 2011 for NOM’s publicly available tax information. The
IRS destroyed the request after forty-five days per its standard
policy. Consequently, little is known about it other than that
it was made by a Matthew Meisel, who identified himself as a
member of the media.
Meisel gave NOM’s Form 990 information to the Human Rights
Campaign (the “HRC”)—an ideological opponent of NOM. The HRC
then forwarded the information to the Huffington Post. Both the
HRC and the Huffington Post published the donor list online.
After discovering its unredacted donor list on the
Internet, NOM sought to mitigate any potential harm. It
undertook its own investigation of the unauthorized disclosure
and attempted to have its tax-return information removed from
the HRC’s and the Huffington Post’s websites. Additionally, it
urged the Treasury Inspector General for Tax Administration as
well as certain members of Congress to investigate the
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disclosure. NOM also was forced to mount a defense to a
complaint filed with California’s Fair Political Practices
Commission by a man named Fred Karger. The complaint, which
alleged violations of California election law, referenced the
unredacted information contained in NOM’s 2008 Form 990.
B.
NOM filed suit against the IRS “seeking damages pursuant to
26 U.S.C. § 7431 for unlawful inspection and disclosure of
confidential tax information by agents of the [IRS] in violation
of 26 U.S.C. § 6103.” J.A. 9. NOM sought statutory damages,
actual damages, punitive damages due to “willful and grossly
negligent disclosures and inspections of NOM’s return and return
information,” and costs and attorneys’ fees under § 7431(c).
J.A. 31–32.
In its answer, the government admitted that on one
occasion—the response to Meisel’s request—it inadvertently
disclosed an unredacted copy of NOM’s Form 990 information. The
government conceded this act entitled NOM to a single recovery
of statutory damages. It denied, however, that NOM was entitled
to actual or punitive damages, costs, or attorneys’ fees.
After a period of discovery, the government moved for
summary judgment. It argued that NOM failed to present
sufficient evidence that (1) the IRS conducted any unauthorized
inspections, (2) NOM was entitled to punitive damages because
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the IRS’s disclosure was willful or grossly negligent, and (3)
NOM was entitled to actual damages. 1 With regard to this final
contention, the government maintained that the unauthorized
disclosure was neither the “but-for” nor proximate cause of
NOM’s alleged damages. Additionally, the government argued that
NOM mitigated its claims for actual damages through aggressive
and successful fundraising.
The district court granted partial summary judgment to the
government. As to NOM’s punitive damages claim, the court found
that NOM failed to present sufficient evidence showing that the
IRS acted willfully or with gross negligence. The court also
ruled for the government on NOM’s claim of unlawful inspection
because NOM failed to present sufficient evidence to carry its
burden.
The district court, however, denied summary judgment on
NOM’s claim for actual damages. The court explained that it
1 By this point in the litigation, NOM’s basis for actual
damages, and consequently the amount it sought to recover, had
changed. NOM’s complaint sought “actual damages according to
proof,” and specifically identified lost donations in the amount
of $50,000 as well as damages based on defending the Karger
complaint in California in the amount of $10,500. J.A. 31–32.
Later in the litigation, however, NOM elected to withdraw its
claim for the $50,000 in lost donations. NOM then added $2,000
to the damages it sought for defending the Karger complaint and
$46,086.37 in additional legal expenses arising from NOM’s
efforts to prevent the further dissemination of its donor
information. This brought the total revised amount of claimed
actual damages to $58,586.37.
6
“ha[d] little trouble concluding that the unlawful
disclosure . . . was the actual cause of [NOM’s] claimed
damages.” Nat'l Org. for Marriage, Inc. v. United States, 24 F.
Supp. 3d 518, 529 (E.D. Va. 2014). As for proximate cause, the
court noted that the question was “a closer call” given that
“proximate cause is a ‘flexible concept’ not easily defined or
implemented.” Id. at 530 (quoting Paroline v. United States,
134 S. Ct. 1710, 1719 (2014)). Nevertheless, the court
explained, “[t]he independent actions of Meisel, the HRC, and
others cannot immunize the IRS from responsibility in this
case,” and therefore “[t]he fact that a third-party was involved
in [the] chain of events does not foreclose finding proximate
cause on the[] facts [presented].” Id. at 531. Finally, the
district court rejected the government’s mitigation argument
because there was “a continuing factual dispute as to whether
the cited contributions were caused by the disclosure, and if
so, in what amount.” Id. at 532.
The parties subsequently entered into a consent judgment.
The government agreed to pay NOM $50,000 to resolve its claims
for actual damages and costs. Additionally, the parties agreed
that the court would retain jurisdiction so NOM could seek
attorneys’ fees under § 7431(c)(3).
NOM moved for $691,025.05 in attorneys’ fees. The district
court denied the motion. This appeal followed.
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II.
Under § 7431(a)(1), a taxpayer may bring suit against the
United States if an “employee of the United States knowingly, or
by reason of negligence, inspects or discloses any return or
return information with respect to a taxpayer in violation of
any provision of section 6103.” 2 Reasonable attorneys’ fees are
potentially available under § 7431(c)(3), but “if the defendant
is the United States, reasonable attorneys fees may be awarded
only if the plaintiff is the prevailing party (as determined
under section 7430(c)(4)).” Section 7430(c)(4)(B)(i) mandates
that if the government is the defendant, the plaintiff “shall
not be treated as the prevailing party . . . if the United
States establishes that [its] position . . . in the proceeding
was substantially justified.”
The district court held that the government’s position was
substantially justified under § 7430(c)(4)(B). The court
reasoned that the government “reasonably contested NOM’s
unfounded conspiracy allegations, and unfounded willful
disclosure and inspection allegations that would have supported
a claim for punitive damages if properly proven.” Nat'l Org.
for Marriage, Inc. v. United States, No. 13cv1225, 2014 WL
2 26 U.S.C. § 6103 generally provides that tax-return
information should be kept confidential. It is undisputed that
by releasing NOM’s unredacted Form 990, the IRS violated § 6103.
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5320170, at *6 (E.D. Va. Oct. 16, 2014). The court did not
comment, however, on whether the government’s position
respecting actual damages was substantially justified.
NOM seizes on the district court’s silence on this issue,
arguing that it amounts to an abuse of discretion. 3 NOM also
argues that once the government’s contention on actual damages
is taken into account, it becomes clear that the government’s
position was not substantially justified. We will assume the
district court abused its discretion as NOM contends.
Therefore, we turn directly to whether the government’s position
in this litigation was substantially justified in light of its
arguments regarding actual damages.
The government’s litigation position is “substantially
justified” if it has a “reasonable basis in law and fact,”
United States v. 515 Granby, LLC, 736 F.3d 309, 315 (4th Cir.
2013) (quoting Cody v. Caterisano, 631 F.3d 136, 141 (4th Cir.
2011)), or if it is “justified to a degree that could satisfy a
reasonable person,” Pierce v. Underwood, 487 U.S. 552, 565
(1988). 4 It is not necessarily enough that the government’s
3 We review the district court’s denial of attorneys’ fees
for abuse of discretion. Bowles v. United States, 947 F.2d 91,
94 (4th Cir. 1991).
4 A number of the cases we cite in this opinion, including
Granby and Pierce, deal with a provision analogous to
§ 7430(c)(4)(B) in the Equal Access to Justice Act (“EAJA”), 28
(Continued)
9
position is “more than merely undeserving of sanctions for
frivolousness” to qualify as “substantially justified.” Granby,
736 F.3d at 315 (quoting Pierce, 487 U.S. at 566). On the other
hand, the government’s position need not necessarily carry the
day. Pierce, 487 U.S. at 569. The burden is on the government
to show—based on the totality of the circumstances—that its
position was substantially justified. § 7430(c)(4)(B)(i);
Bowles, 947 F.2d at 94 (noting that “‘all the facts and
circumstances surrounding the proceeding[]’ provide guidance to
the court” (quoting In re Testimony of Arthur Andersen & Co.,
832 F.2d 1057, 1060 (8th Cir. 1987))).
To assess whether the government’s position was
substantially justified, we first consider “the available
‘objective indicia’ of the strength of the Government’s
position.” United States v. Paisley, 957 F.2d 1161, 1166 (4th
Cir. 1992) (citing Pierce, 487 U.S. at 568–71). The pertinent
indicia will change depending on the case, but as relevant here
U.S.C. § 2412(d)(1)(A). We have said that the EAJA’s definition
of “substantially justified” is “essentially the same” as in
§ 7430. Bowles, 947 F.2d at 94; see also Kenagy v. United
States, 942 F.2d 459, 464 (8th Cir. 1991) (“The ‘not
substantially justified’ standard was copied by Congress from
the EAJA provisions. Thus, where the wording is consistent,
courts read the EAJA and § 7430 in harmony.”). Consequently, we
rely on judicial interpretations of the EAJA’s “substantially
justified” language.
10
they include “the terms of the settlement agreement that ended
the underlying litigation, the stage at which the merits were
thereby decided, and the views of other courts on the strength,
hence reasonableness, of the Government’s position.” Id.
(citing Pierce, 487 U.S. at 568–71).
The fact that the parties reached a settlement cannot alone
establish the unreasonableness of the government’s position.
Pierce, 487 U.S. at 568. Additionally, the fact that the
government’s position survives or dies during the pleading
stage—or even makes it all the way to the Supreme Court—does not
conclusively establish the strength or weakness of the position.
See id. at 568-69 (“At least where, as here, the dispute centers
upon questions of law rather than fact, summary disposition
proves only that the district judge was efficient.”); Paisley,
957 F.2d at 1166 (concluding that a final merits decision before
the Supreme Court could not establish the strength of the
prevailing position because “unfounded claims sometimes, for a
variety of reasons, survive beyond their just desserts”); see
also Pierce, 487 U.S. at 569 (“[The government] could take a
position that is substantially justified, yet lose.”).
If the “objective indicia” are inconclusive, we “turn[] to
an independent assessment of the merits of the Government’s
position.” Paisley, 957 F.2d at 1166. Here too, “merits
decisions in a litigation, whether intermediate or final,
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cannot, standing alone, determine the substantial justification
issue.” Id. at 1167. Nevertheless, “they—and more critically
their rationales—are the most powerful available indicators” of
whether the government’s position was “substantially justified.”
Id.Moving to the first step of the analysis, we consider three
indicia bearing on the reasonableness of the government’s
position. The first two are (1) the fact that the parties
ultimately settled the actual damages claim, and (2) the fact
that the claim survived summary judgment. These are
insufficient to carry the day without more. The third objective
factor that NOM asks us to consider is the District of
Nebraska’s decision in Jones v. United States, 9 F. Supp. 2d
1119 (D. Neb. 1998). See Appellant’s Br. at 26. Specifically,
NOM argues that Jones demonstrates that third parties abusing
confidential tax-return information is a reasonably foreseeable
consequence of an unauthorized disclosure. Id. at 33–34.
We find NOM’s reliance on Jones unavailing. First, one
other district court’s view is not enough to establish or refute
the reasonableness of the government’s position. See Pierce,
487 U.S. at 569 (“Obviously, the fact that one other court
agreed or disagreed with the Government does not establish
whether its position was substantially justified.”); see also
§ 7430(c)(4)(B)(iii) (directing that courts “shall take into
12
account whether the United States has lost in courts of appeal
for other circuits on substantially similar issues” in
undertaking the substantial justification inquiry (emphasis
added)).
Second, Jones involves distinguishable facts, rendering it
a weak objective indicator of the merits of the government’s
position in this case. In Jones, an IRS agent investigating
criminal violations unlawfully disclosed to a confidential
informant that the government planned to execute a search
warrant at the plaintiffs’ business. Jones, 9 F. Supp. 2d at
1123. The confidential informant then told the media, resulting
in videotaped news coverage of the day-long execution of the
warrant. Id. at 1124–25.
The court held that the IRS agent’s disclosure proximately
caused the damage resulting from the media’s coverage because
(1) the IRS agent should have known that even “the suggestion of
criminal activity” can have devastating consequences for the
person or business implicated, id. at 1143–44 (quoting Diamond
v. United States, 944 F.2d 431, 434 (8th Cir. 1991)), and (2)
based on his personal knowledge regarding the informant and the
plaintiffs, the IRS agent should have foreseen that the
confidential informant “harbored bad feelings” for the
plaintiffs and therefore might seek to harm them, id.13
In this case, in contrast, there is no evidence that the
IRS knew whether Meisel held any ill will toward NOM. Nor did
it have any reason to think that the disclosure of NOM’s tax-
return information would implicate NOM criminally. In short,
the IRS did not have as clear of a reason as in Jones to believe
disclosure would cause NOM damage. Consequently, we find the
objective indicia inconclusive.
We next conduct an independent assessment of the merits of
the government’s position with respect to actual damages. Our
analysis of proximate cause in this case leads us to conclude
that the government’s position was substantially justified. As
the Supreme Court recently noted, proximate cause “defies easy
summary” and is a “flexible concept.” Paroline, 134 S. Ct. at
1719 (quoting Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639,
654 (2008)). We think it reasonable for the government to have
argued that the third-party intervening conduct of Meisel, the
Huffington Post, and the HRC broke the chain of proximate
causation. While this contention was not a winner at the end of
the day, it need not be to qualify as “substantially justified.”
See Pierce, 487 U.S. at 569 (“[The government] could take a
position that is substantially justified, yet lose.”); see also
Kaffenberger v. United States, 314 F.3d 944, 960 (8th Cir. 2003)
(“[D]isputes that preclude summary judgment do not establish
14
that the moving party’s position is not substantially
justified.”).
The district court’s ruling on proximate cause further
confirms that the government’s position was substantially
justified. While the court easily disposed of the government’s
“but-for” causation argument regarding actual damages, it found
the question of proximate causation to be “a closer call.”
Nat'l Org. for Marriage, 24 F. Supp. 3d at 529–30. Thus, like
us, the district court identified this issue as a more difficult
legal question, suggesting that the government’s litigation
position was substantially justified.
Finally, the context in which the government asserted its
defense respecting actual damages further bolsters our
conclusion. Because we assess the reasonableness of the
government’s position in light of the totality of the
circumstances, we must take care not to view the government’s
position on a single issue in a vacuum.
In this litigation, NOM sought statutory, actual, and
punitive damages. We conclude that the government adopted a
reasonable strategy in conceding statutory damages, but
challenging the existence and amount of both actual and punitive
damages. Conceding actual damages prematurely could have harmed
the government’s position later if NOM had been able to submit
15
evidence enabling it to proceed on the punitive damages issue. 5
In addition, prior to the district court’s ruling on summary
judgment, NOM added and subtracted different categories and sums
of actual damages to its calculation, thus keeping the type and
extent of actual damages in flux. See supra n.1. Moreover, NOM
bore the burden of proving any actual damages. In light of
these considerations, we cannot say that the government acted
unreasonably prior to the summary judgment stage of the
litigation by waiting to see what NOM’s evidence was and then
challenging its sufficiency.
In sum, we conclude that the government’s position was
substantially justified. As a result, NOM is not a “prevailing
party” and is therefore not entitled to attorneys’ fees.
III.
For the reasons given, we affirm the judgment of the
district court.
AFFIRMED
5 Of course, the government ultimately prevailed on NOM’s
unfounded claim for punitive damages.
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