Robert Kreimes Joan E. Kreimes v. Department of Treasury ( 1985 )

CELEBREZZE, Senior Circuit Judge.¹

In this tax refund case, the government appeals the award of attorney’s fees to plaintiffs, Robert and Joan Kreimes, pursuant to the Equal Access to Justice Act, 28 U.S.C. § 2412(d) (1982). The government contends that the plaintiffs are not entitled to attorney’s fees because they were not the “prevailing party” under Section 2412(d) and that, if they were the prevailing party, the government’s position in the litigation was “substantially justified.” The government further argues that even if an award of attorney’s fees was proper, the amount awarded should be reduced to reflect plaintiffs’ limited success in the litigation and to exclude any award of attorney’s fees for administrative proceedings.

I.

The Kreimeses live in Sandusky, Ohio on a peninsula that juts into Lake Erie. In June and November 1972, storms on the lake damaged their property and they claimed a casualty loss of $1,570 on their 1972 tax return as attributable to these storms. In March 1973, another storm struck causing further damage to the Kreimeses’ house and land. Because the region was declared a federal disaster area, the Kreimeses became eligible for a Small Business Administration loan to make repairs and applied for such a loan in the amount of $13,165. The Small Business Administration, however, only granted the Kreimeses $2,000 for repairs. The loan was subsequently forgiven by the Small Business Administration.

On their 1973 tax return, the Kreimeses claimed a casualty loss deduction of $27,-725 attributable to the March 1973 storm pursuant to I.R.C. § 165 (1982).² The Kreimeses apparently relied on a real estate appraiser’s report that valued their loss at over $30,000. The Internal Revenue Service, however, disallowed the deduction. The Kreimeses paid the resulting tax deficiency and filed an action in district court seeking recovery of the tax paid plus interest.

The case was tried before a magistrate, by consent of the parties, with a jury.³ The jury found that the Kreimeses were entitled to a casualty loss deduction of $8,500 for the year 1973. The Kreimeses subsequently moved for judgment notwithstanding the verdict and for attorney’s fees under the Equal Access to Justice Act, 28 U.S.C. § 2412(d)(1)(A) (1982). The magistrate denied the motion for judgment notwithstanding the verdict but granted the plaintiffs attorney’s fees in the amount of $9,825. The government appeals from the award of attorney’s fees.

II.

Resolution of this case depends on our interpretation of 28 U.S.C. § 2412(d)(1)(A) (1982) which provides that “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 ... unless the court finds that the position of the United States was substantially justified.” (emphasis added). The government maintains that it was the prevailing party in the case because the jury’s verdict was closer to its position than the Kreimeses’. Further, the government contends that its litigating position was substantially justified. We shall consider each of these arguments in turn.

A.

A plaintiff is a prevailing party under the Equal Access to Justice Act if he “ ‘succeedfs] on any significant issue in litigation which achieves some of the benefit the part[y] sought in bringing suit.’ ” Hensley v. Eckerhart, 461 U.S. 424, 433, 103 S.Ct. 1933, 1939, 76 L.Ed.2d 40 (1983) (quoting Nadeau v. Helgemoe, 581 F.2d 275, 278-79 (1st Cir.1978)); Omaha Tribe of Nebraska v. Swanson, 736 F.2d 1218, 1220-21 (8th Cir.1984); Austin v. Department of Commerce, 742 F.2d 1417, 1419 (Fed.Cir.1984). The central issue in this case concerns the amount of deductible loss the Kreimeses incurred due to the 1973 storm.⁴ Consequently, this is simply a tax valuation case of the kind which frequently confronts the tax court, the district courts, and this court. See e.g., Estate of Kaplin v. Commissioner, 748 F.2d 1109 (6th Cir. 1984). Thus, we must now determine what constitutes succeeding on a significant issue in a tax valuation case.

This is an issue of first impression in the tax context. A number of cases in the condemnation area, however, are instructive. In these cases, the dispute is over the amount of compensation which the government must pay to acquire land through eminent domain. The government has frequently deposited a sum which the plaintiff claims is insufficient. As a result, the issue for the jury is simply determining the value of the property; hence, they are analogous to the present type of case.

Two of the condemnation cases have held that the landowner is the prevailing party if he wins “far more than the government had offered,” United States v. 329.73 Acres of Land, Situated in Grenada and Yalobusha Counties, State of Mississippi, 704 F.2d 800, 809 (5th Cir.1983) (en banc), or an award “substantially greater than the government’s deposit,” United States v. 101.80 Acres of Land, More or Less, in Idaho County, Idaho, 716 F.2d 714, 723 (9th Cir.1983). In Grenada County, the government had only offered $6,350 for a tract of land, and the jury awarded $48,260, the exact amount that the landowner was seeking. Grenada County, 704 F.2d at 801 n. 1. In Idaho County, the government had deposited $12,162.92 and $40,000 for two tracts of land and the jury awarded the landowners $22,500 and $144,600, respectively.⁵ Idaho County, 716 F.2d at 716-17. Both courts found on the facts that the landowners had prevailed. Grenada County, 704 F.2d at 813 (implied); Idaho County, 716 F.2d at 726.

A more recent condemnation case, however, has rejected this approach and held that the landowner is a prevailing party if he wins any amount more than what the government offered. United States v. 341.45 Acres of Land, More or Less, Located in the County of St. Louis, State of Minnesota, 751 F.2d 924, 938 (8th Cir. 1984).⁶ In St. Louis County, the government had offered $34,000, $6,000, and $2,200 for three tracts of land; the jury found that the tracts were worth $204,500, $36,460, and $25,500, respectively.⁷ St. Louis County, 751 F.2d at 927. The Eighth Circuit concluded the landowners were the prevailing parties simply because they won more than the government offered.

In adopting this rule, the St. Louis County court explicitly rejected the “substantially greater” and “far more” tests of Grenada County and Idaho County. The Court, citing a dissent in Grenada County,⁸ reasoned that no principled way exists to make a determination as to who is a prevailing party based upon the size of the award. St. Louis County, 751 F.2d at 938. Because of this dilemma, the Eighth Circuit adopted the bright-line test that a party prevails if they win any amount more than what the government has offered.

The reasoning of the St. Louis County court is sound. The test adopted in Grenada County and Idaho County is plainly too vague. District courts will have difficulty in deciding whether a plaintiff has won “substantially” or “far” more than the government offered. Inconsistent adjudications will certainly be the result of such an indeterminate rule and, consequently, needless appeals will follow. See Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983) (“request for attorney’s fees should not result in a second major litigation”). Further, the standard espoused by the Fifth and the Ninth Circuits is not conducive to settlements. Since entering into an unfavorable settlement may result in the imposition of attorney’s fees, see Citizens Coalition for Block Grant Compliance, Inc. v. City of Euclid, 717 F.2d 964, 966 (6th Cir.1983), neither side will want to accept an amount that is closer to the other side’s position. In cases like this in which the issues are purely factual, we do not want to inhibit the settlement process.

In our view, the rule adopted by the Eighth Circuit also comports with the design and purpose of the Equal Access to Justice Act. The Act is designed so that a prevailing party is not entitled to attorney’s fees if the government’s position was substantially justified. In deciding whether the government’s position was substantially justified, the district court will examine the merits of the government’s arguments and determine whether the case should have been contested. If we adopted the “substantially greater” or the “far more” test, we would in essence be evaluating the merits of the case in determining who was the prevailing party. See Grenada County, 704 F.2d at 813, 816 n. 7 (Rubin, J., dissenting).

The purpose of the Equal Access to Justice Act is to award litigants “expenses of seeking review of or defending against unreasonable government action.” Grenada County, 704 F.2d at 801 (footnote omitted). Congress did not want citizens to be deterred by the expense involved in securing the vindication of their rights in civil actions and in administrative proceedings. Equal Access to Justice Act, Pub.L. No. 96-481, § 202, 94 Stat. 2321, 2325 (1980). Thus, the focus of the Act is on the position of the government and not on the plaintiff’s position. We therefore hold that the government’s position alone should be scrutinized under the Equal Access to Justice Act; the comparative position of the taxpayer is irrelevant.⁹ Accordingly, we hold that the taxpayers in this case were the prevailing party because the jury found that they suffered a larger casualty loss than what the government would concede.

B.

We next consider whether the government’s position was substantially justified. The government’s position is substantially justified if it has a reasonable basis in law and fact. Westerman, Inc. v. NLRB, 749 F.2d 14, 17 (6th Cir.1984); Wyandotte Savings Bank v. NLRB, 682 F.2d 119, 120 (6th Cir.1982). The magistrate in this case determined that the government took an unreasonable position.

We will only reverse the magistrate’s holding if there has been an “abuse of discretion.” Westerman, Inc., 749 F.2d at 17.

In [the context of the Equal Access to Justice Act], however, the term ‘abuse of discretion’ takes on a special meaning, [citation omitted]. With respect to findings based upon the district judge’s assessment of the probative value of the evidence, a highly deferential standard of review such as the clearly erroneous standard is in order, [citation omitted]. With respect to the district court’s evaluation of the government’s legal argument, a de novo standard is appropriate, [citations omitted]. damage had occurred during that storm, advancing that theory even through trial.

Sigmon Fuel Co. v. Tennessee Valley Authority, 754 F.2d 162, 167 (6th Cir.1985). Since the central issue in this case is a purely factual one, the amount of deductible damage which the Kreimeses suffered due to the 1973 storm, we can only reverse the magistrate’s decision if it is clearly erroneous.

The magistrate began his analysis by noting that the government’s position was that other than the $2,000 forgiven by the SBA loan no “deductible damage occurred during the 1973 storm.”¹⁰ The magistrate then set forth his reasons concerning why the government’s position was not substantially justified. First, according to the magistrate, the evidence contrary to the government’s position was overwhelming. In our view, this conclusion was amply supported by the record. Initially, the magistrate pointed out that the destructive impact of the 1973 storm should have been apparent immediately to any reasonable person; due to the storm, the area where the Kreimeses resided was declared a disaster area. Further, almost all the other evidence, including testimony by three expert appraisers,¹¹ supported the taxpayer’s position. In fact, the only support for the government’s position was that the Small Business Administration only granted $2,000 of the $13,165 requested by the Kreimeses on their loan form. The proba-five force of this loan is diminished significantly because no evidence was introduced pertaining to how the $2,000 figure was reached.¹² Finally, the magistrate concluded, and we agree, that a reasonable position the government could have taken was to contest the amount of the deduction; rather, the government claimed that, other than the $2,000 loan which was forgiven, the entire deduction constituted a false claim. These reasons forwarded by the magistrate “provide a concise but clear explanation of its reasons for the fee award.” Hensley v. Eckerhart, 461 U.S. 424, 437, 103 S.Ct. 1933, 1941, 76 L.Ed.2d 40 (1983). We hold, accordingly, that the magistrate’s ruling is not clearly erroneous.

The government finally contends that the Supreme Court’s decision in Hensley v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), mandates reduction of the amount of attorney’s fees awarded to reflect the Kreimeses’ limited success.¹³ We do not believe that Hensley requires such a result. The Court in Hensley did note that the degree of success was a critical factor in determining a proper award of attorney’s fees. Id. at 436, 103 S..Ct. at 1941. Nevertheless, the Court explicitly rejected any mathematical approach to attorney’s fees, id. at 435 n. 11 & 436, 103 S.Ct. at 1940 n. 11 & 1941, and emphasized that a district court has discretion in determining appropriate fee awards, id. at 437, 103 S.Ct. at 1941. The magistrate in the present case considered the Supreme Court’s decision in Hensley and recognized that the plaintiffs obtained only about one-third of the relief they requested. The magistrate, however, indicated that the jury in this case “lost its way” by arriving at a figure for which no rational basis existed¹⁴ and that the Kreimeses’ counsel could not have prevented this from occurring. Also, he described the presentation of the case by Kreimeses’ counsel as “straight-forward” and “professional.” Consequently, the magistrate reasoned that the Kreimeses should not be penalized because the jury went astray and hence concluded that this was not a proper case for proportional reduction of the attorney’s fees based upon the degree of success. These findings by the magistrate make clear that he “considered the relationship between the amount of the fee awarded and the results obtained.” Hensley, 461 U.S. at 437, 103 S.Ct. at 1941. We therefore affirm the magistrate’s refusal to proportionately reduce the award of attorney’s fees.¹⁵

In summary, we hold that in a tax valuation case a taxpayer is a prevailing party for purposes of the Equal Access to Justice Act if he wins any amount more than what the government has conceded. We believe that such a bright-line rule will encourage settlements and comports with the policies behind the Equal Access to Justice Act. Further, in our view, the Supreme Court’s decision in Henlsey v. Eckerhart, 461 U.S. 424, 103 S.Ct. 1933, 76 L.Ed.2d 40 (1983), does not mandate that attorney’s fees be proportionately reduced to reflect limited success on the merits; rather, Hensley merely requires that the trier of fact consider the extent of relief obtained and explain why a reduction is or is not warranted. In this case, the magistrate considered appropriately the taxpayer’s limited success and set forth adequately his reasons for not reducing the award of attorney’s fees. Accordingly, the decision of the magistrate is affirmed.

1 . The Author acknowledges the substantial contribution of Judge Martin to this opinion.

2 . In taking this deduction, the Kreimeses did not account for the $2,000 loan which the SBA had forgiven. A taxpayer is not entitled to a casualty loss deduction for any loss made good by insurance or any other source. Treas.Reg. § 1.165 — 1(c)(4).

3 . Direct appeal was taken to this Court pursuant to 28 U.S.C. § 636(c)(3) (1982).

4 . The magistrate in his first opinion determined incorrectly that the case presented two issues, i.e., first, whether a loss was suffered due to the 1973 storm and, second, if so, what was the amount of the loss. After further briefing and argument, however, the magistrate in a second opinion recognized that the government conceded that a deductible loss had occurred and that the only dispute was over the amount.

5 . The Idaho County opinion is unclear concerning what amount the landowners were seeking.

6 . The Eleventh Circuit has also adopted this standard. United States v. 640.00 Acres of Land, More or Less in the County of Dade, State of Florida, 756 F.2d 842, 847-48 (11th Cir.1985).

7 . In a companion case to St. Louis County, the United States had offered an oil company $965.76 for its mineral interests in a 107-acre tract. The jury eventually awarded the oil company $19,350. St. Louis County, 751 F.2d at 928.

8 . Grenada County, 704 F.2d at 813, 816 n. 7 (Rubin, J., dissenting).

9 . Unreasonable positions taken by taxpayers can be remedied by the imposition of double costs for a frivolous appeal or by imposing "just damages.” See Fed.R.App.Proc. 38; Martin v. Commissioner, 756 F.2d 38, 40-41 (6th Cir. 1985).

10 . We note that the magistrate’s first opinion misinterpreted the government’s position. See supra note 4. However, in a second opinion dealing solely with the attorney’s fees issue the magistrate recognized that the government’s position was that the Kreimeses incurred no deductible loss due to the 1973 storm.

11 . A realtor testified that the loss in value to the property due to the storm was between $25,000 and $30,000; an engineer indicated that the cost to repair the Kreimeses’ property would be approximately $26,000; and a real estate appraiser estimated that the loss due to both the 1972 and 1973 storms was $31,300.

12 . The Small Business Administration, pursuant to its internal policy, destroyed all records relating to the Kreimeses’ loan. Consequently, no evidence exists concerning the method or reasons by which the Small Business Administration arrived at the $2,000 figure.

13 . Although Hensley dealt with attorney's fees under 42 U.S.C. § 1988 (1982), the standards set out in Hensley are applicable generally to attorney's fees cases. E.g., Ruckelshaus v. Sierra Club, 463 U.S. 680, 691-92 (1983); Hensley, 461 U.S. at 433 n. 7, 103 S.Ct. at 1939 n. 7.

14 . The $8,500 figure which the jury arrived at was never mentioned by either party.

15 . The government contends on appeal that the taxpayers cannot collect attorney’s fees for the administrative proceedings before the IRS. Compare White v. United States, 740 F.2d 836, 842 (11th Cir.1984) (attorney’s fees incurred at administrative level not recoverable) with Con-stantino v. United States, 536 F.Supp. 60, 64 (E.D.Pa.1982) (attorney's fees incurred at administrative level recoverable). The government, however, failed to raise adequately this argument before the district court and, accordingly, we decline to consider the issue for the first time on appeal. E.g., Hormel v. Helvering, 312 U.S. 552, 556, 61 S.Ct. 719, 721, 85 L.Ed. 1037 (1941); Sigmon Fuel Co. v. Tennessee Valley Authority, 754 F.2d 162, 164-65 (6th Cir. 1985); Schneider v. Electric Auto-Lite Co., 456 F.2d 366, 375 (6th Cir.1972).