JOHN R. GIBSON, Circuit Judge.
Lawrence Keasler and Keasler Body Company were assessed excise taxes on truck hoist units they had assembled. They prevailed in an action for a refund and after the government's appeal was dismissed, they obtained an award of attorney's fees under the Equal Access to Justice Act, 28 U.S.C. § 2412(d) (1982). The government challenges the award on the grounds that the fee application filed after dismissal of the appeal was untimely, and that its position was substantially justified, even though the only appellate decision in point, one from another circuit, was contrary to its position. We affirm the award of attorney's fees.
Keasler Body was in the business of fitting hydraulic hoists and truck bodies on truck chassis. For the period January 1974 to September 1975, the Internal Revenue Service assessed an excise tax on all the truck-hoist units that Keasler had assembled. The IRS contended that the assembly process constituted taxable manufacturing under I.R.C. § 4061(a)(1). This had been the IRS position since at least 1969. See Rev.Rul. 69-195, 1969 C.B. 276. This ruling had, however, been expressly disapproved by the Tenth Circuit in Jacobs Equipment Co. v. United States, 574 F.2d 1040 (10th Cir.1978), a case involving facts nearly identical to the case at bar.
Keasler paid the assessment and sought a refund from the IRS. Although the IRS acknowledged that Keasler's position was supported by Jacobs, it declined to follow the case and refused the requested refund.
The threshold question is whether Keasler filed a timely application for attorneys' fees incurred during proceedings before the district court. Section 2412(d)(1)(B) requires that an application be submitted to the court "within thirty days of final judgment in the action."
The most persuasive view originated in McDonald v. Schweiker, 726 F.2d 311 (7th Cir.1983). In McDonald, summary judgment was entered for the claimant. The government filed a timely notice of appeal but dismissed the appeal six days later. Within thirty days, the claimant moved for attorneys' fees in the district court. The court of appeals held that the motion was timely. The Seventh Circuit stated that "final judgment," which appears 151 times in the United States Code, does not have a single fixed meaning. Id. at 313. Analyzing the practical consequences under the Act, the court concluded that "final judgment" means the completion of all appellate proceedings. Id. at 315.
On October 11, 1984, Congress passed a bill amending and extending section 2412(d). It added a definition to the EAJA providing that "`final judgment' means a judgment that is final and not appealable." H.R. 5479, 98th Cong., 2d Sess. § 2(b)(3)(G), 130 Cong.Rec. H11479 (daily ed. Oct. 4, 1984). S.Rep. No. 919, 98th Cong., 2d Sess. 16 (1984), expressly approved the Seventh Circuit's opinion in McDonald. The President refused to sign H.R. 5479 and it did not become law. See Premachandra v. Mitts, 753 F.2d at 642 n. 9. Nevertheless, the bill influenced the Third Circuit when it decided Taylor v. United States, 749 F.2d 171 (3d Cir.1984) (per curiam). In Taylor, the claimant prevailed on the merits in the district court and the judgment was affirmed on appeal. Within thirty days of the appellate affirmance, the claimant filed a request for fees with the district court. The Third Circuit held that the application was timely under the following construction: "fee petitions under the EAJA must be filed no later than thirty days after the expiration of the time to appeal, or after the termination of the litigation by the court of last resort, or after a losing party asserts that no further appeal will be taken." Id. at 174.
Most recently, the Sixth Circuit approved McDonald. Feldpausch v. Heckler, 763 F.2d 229 (6th Cir.1985). Relying also on the legislative history discussed in Taylor, the court held that an application for fees is timely if made within thirty days after the expiration of the time to appeal. Id. at 232.
Two circuits have taken a different path. In McQuiston v. Marsh, 707 F.2d 1082 (9th Cir.1983), the district court dismissed the suit as moot. Nearly three months later, the claimant moved for fees under section 2412(d). Following a brief discussion, which interpreted "final judgment" to mean the same thing under section 2412(d), Fed.R.Civ.P. 54, and 28 U.S.C. § 1291 (1982),
In Gold Kist, Inc. v. USDA, 741 F.2d 344 (11th Cir.1984), the claimant lost in proceedings against the government in the district court. On appeal, judgment was entered for the claimant, and it requested an award of attorneys' fees although no application had been filed with the district court. The court recognized the holding in McQuiston that "final judgment" means final in the district court, and agreed with its construction "when the non-governmental party prevails below." Id. at 349 (dictum). Nevertheless, it felt that requiring a party losing before the lower court to apply for fees "would be senseless." Id. Thus, it concluded that "when the non-government party loses in the district court but prevails on appeal, it must file its application for fees under the EAJA within 30 days of the judgment of the appellate court." Id.
The reasoning in McQuiston and the dictum in Goldkist are too abbreviated to be persuasive. We believe McDonald was rightly decided and its acceptance by the other circuit underscores its strength. We also find significant the context in which section 2412(d) appears. Chapter 161, part 6 of the Judicial Code, in addition to containing section 2412, regulates the payment of judgments and compromise settlements by the government. 28 U.S.C. § 2414 (1982) provides that "[w]henever the Attorney General determines that no appeal shall be taken from a judgment or that no further review will be sought from a decision affirming the same, he shall so certify and the judgment shall be deemed final." Because of its proximity to the statute in question, section 2414 provides one of the best indications of what constitutes a final judgment against the government. Under this definition, the government's dismissal
The second issue is whether the district court erred in awarding fees against the government for proceedings at the trial level. First, the government bears the burden of showing that its "position" was substantially justified.
In determining the reasonableness of the government's position, the legislative history of section 2412(d) is helpful. The House Judiciary Committee stated that the "reasonableness" standard "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 at 11, reprinted in 1980 U.S.Code Cong. & Ad.News at 4990. More specifically, however, the Committee noted that "[c]ertain types of case dispositions may indicate that the government action was not substantially justified. A court should look closely at cases, for example, where there has been a judgment on the pleadings or where there is a directed verdict * * *. Such cases clearly raise the possibility that the Government was unreasonable in pursuing the litigation." Id., 1980 U.S.Code Cong. & Ad.News at 4889-90. The district court granted summary judgment for Keasler on the substantive issues in this suit, and this judgment is quite similar to a directed verdict or judgment on the pleadings. See 10 C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure § 2713, at 593-95, § 2713.1, at 614-16 (1983). Thus, this case is plainly one that Congress envisioned may justify fees.
We now explore the substantive justification offered by the government. During the tax periods in question, section 4061(a)(1) imposed an excise tax on manufacturers of truck bodies and chassis. The accompanying Treasury regulation defined "manufacturer" as "any person who produces a taxable article * * * from new or raw material, by processing, manipulating, or changing the form of an article, or by combining or assembling two or more articles." Treas.Reg. § 346.4(a) (1954). In
The government urges that it was justified in pressing this litigation because: (1) the legislative history and case law of section 4061(a)(1) indicate that the term "manufacturer" should be given a broad construction; (2) Rev.Rul. 69-195 was valid during the years in question and entitled to judicial deference; (3) the taxpayer was independently liable on the theory that it changed the "transportation function" of the vehicle it sold; (4) the legislative history of section 4063(d) indicates post-facto congressional approval of the IRS position.
All of these arguments were either expressly or implicitly rejected by the Tenth Circuit in Jacobs Equipment Co. v. United States, 574 F.2d 1040 (10th Cir.1978). On facts virtually identical to those in this case, the court held that attaching a hoist to a truck body did not constitute manufacturing for excise tax purposes. The court specifically declined to follow Rev.Rul. 69-195, noting that it represented only the latest in a series of shifting IRS positions on the subject. Id. at 1042; see Rev.Rul. 59-62, 1959 C.B. 249, 250. The court also rejected the argument that the comments accompanying the passage of section 4063(d) implied congressional approval of Rev.Rul. 69-195, interpreting them as merely recognizing the existence of the regulation. Id.
Thus, the IRS knew that the basis for its lawsuit against Keasler had been undercut by the Jacobs decision.
In ruling on the merits, the district court accepted none of the IRS's contentions and adopted the reasoning and result in Jacobs. The court rejected the validity of Rev.Rul. 69-195, interpreting the addition of section 4063(d) as proof that Congress felt the ruling was an erroneous interpretation of section 4061(a)(1). The court also distinguished cases that the government relied upon in urging a broad interpretation of "manufacturing." Keasler v. United States, No. J-C-79-175, slip op. at 2-4 (E.D.Ark. Sept. 30, 1981). The district court reconsidered the merits of the government's position when ruling on the attorneys' fees motion. It found that Rev.Rul. 69-195 did not substantially justify the government's position. The court reasoned that revenue regulations deserve little deference, especially following their rejection by a circuit court of appeals. 585 F.Supp. at 838-39; see Estate of Lang v. Commissioner, 64 T.C. 404, 407 (1975) (Tax Court dismissed revenue ruling as "simply the contention of one of the parties to the litigation"), aff'd, 613 F.2d 770, 776 (9th Cir.1980). Second, the court again distinguished the case law urged by the government in support of its definition of manufacturing. Id. at 840.
The government urges that its decision to challenge Jacobs here was substantially justified as part of the IRS enforcement scheme. This system was succinctly described in Divine v. Commissioner, 500 F.2d 1041, 1049 (2d Cir.1974):
The Supreme Court will generally grant certiorari in tax cases only when two or
The government supports this argument with the Supreme Court's recent decision in United States v. Mendoza, 464 U.S. 154, 104 S.Ct. 568, 78 L.Ed.2d 379 (1984). The Court held that nonmutual offensive collateral estoppel did not apply to preclude the government from relitigating the constitutionality of certain immigration administrative procedures. The Court relied, in part, on the following reasoning:
Id. 104 S.Ct. at 572 (citations omitted).
Mendozo does not settle the issue here. Prohibiting the government from relitigating an issue is considerably different than penalizing an unsuccessful subsequent effort with attorneys' fees liability. As the court noted in Trujillo v. Heckler, 582 F.Supp. 701, 705 (D.Colo.1984): "There is an obvious distinction between the threat of attorneys fees and a rule of nonmutual collateral estoppel. The latter forbids any more litigation while the former merely increases the stakes on the table." See Spencer v. NLRB, 712 F.2d 539, 559 (D.C.Cir.1983) ("The government is always free, of course, to seek modification or repudiation of established doctrine, but individual private litigants should not be compelled to subsidize such reevaluations of controlling doctrine."), cert. denied, 466 U.S. 936, 104 S.Ct. 1908, 80 L.Ed.2d 457 (1984). Nor can we foresee a substantial chilling effect caused by the possibility of a fee award. "If the issue is important enough, government officials, who of course are not personally liable for the payment of fees, should not be dissuaded by the prospect of an award of fees to a private party's counsel." Id. Any chilling effect would be minimal, because attorneys' fees may be paid from the government's judgment fund rather than the offending agency's budget. See 28 U.S.C. § 2412(d)(4) (1982); S.Rep. No. 586, 98th Cong., 2d Sess. 20 (1984).
Under the law governing tax cases filed after February 1983, a taxpayer may recover attorneys' fees from the government upon showing, among other things, that "the position of the United States in the civil proceeding was unreasonable." I.R.C. § 7430(c)(2)(A)(i) (West Supp.1985). The government relies on the legislative history of the current statute to validate its position under the EAJA. The Senate Finance Committee has indicated that: "Generally, the pursuit of litigation by the government to establish a conflict among the United States Circuit Courts of Appeals would not be unreasonable." Technical Explanation of Committee Amendment, 127 Cong.Rec. S15577, S15594 (daily ed. Dec. 16, 1981); see also Contini v. United States, 1984-2 U.S.Tax.Cas. (CCH) 9969 (N.D.Cal.1984) ("The fact that the IRS explored a legal theory, however obscure, which did not ultimately help the government to win, is not, alone, sufficient to establish unreasonableness [under section 7430].").
The appellate review process in tax cases has been significantly criticized. See Commission on Revision of the Federal Court Appellate System, Structure and Internal Procedures: Recommendations for Change, 67 F.R.D. 195, 349-54, 362-69 (1975) (hereinafter cited as Hruska Report); Carrington, Crowded Dockets and the Courts of Appeals: The Threat to the Function of Review and the National Law, 82 Harv.L.Rev. 542, 608-09 (1969); Miller, A Court of Tax Appeals Revisited, 85 Yale L.J. 228 (1975); Vestal, supra, at 124-25; Divine v. Commissioner, 500 F.2d at 1049. Because the Supreme Court seldom grants review in tax cases, see, e.g., Leading Cases of the 1983 Term, 98 Harv.L.Rev. 87, 312 (1984) (only three full opinions rendered dealing with tax cases), taxpayers in different circuits are treated differently and the goal of uniformity in application of the revenue laws is not often attained. As the district court noted, however, it is not the function of the courts to dictate IRS enforcement policy. 585 F.Supp. at 841 n. 10. Nor are we confronted with the issue of whether the IRS is substantially justified in generally seeking to establish a conflict between the circuits.
The purpose of the EAJA was to diminish the deterrent effect that attorneys' fees may have on challenges to unreasonable government action. Pub.L. No. 96-481, § 202, 94 Stat. 2321, 2325 (1980). Congress was concerned that "[i]n far too many cases, a party will knuckle under to a Federal order he knows to be wrong because he cannot afford the cost of taking the matter to court." 125 Cong.Rec. 21441 (1979) (statement of Sen. Thurmond). The IRS's unwillingness to defer to decisions from other circuits may victimize a class of persons intended to benefit from the EAJA:
Hruska Report, 67 F.R.D. at 350; see id. at 367 (reflecting concern with "unfairness to `the small taxpayer who cannot afford legal counsel'"); Treasury-Post Office Departments Appropriations for 1957, Hearings Before the Subcomm. on Treasury-Post Office Departments Appropriations of the House Comm. on Appropriations, 84th Cong., 2d Sess. 462 (1956) (statement of Rep. Murray) (raising question as to why when the IRS "loses an issue in the court of appeals [it] does not promptly conform its administrative and litigation practice, inasmuch as its refusal to do so imposes an unfair burden on small taxpayers who cannot undertake the expense and delay of further litigation"); cf. Of Course, Inc. v. Commissioner, 499 F.2d 754, 761 (4th Cir.1974) (Boreman, J., concurring and dissenting) ("Few, if any, taxpayers who are confronted with a pre-existing decision in their particular Circuit which supports the government will be intrepid enough or financially strong enough to carry a case seeking an overruling decision through the Tax Court, through a regular panel, and through the Court of Appeals en banc.").
Note, Collateral Estoppel: Loosening the Mutuality Rule in Tax Litigation, 73 Mich.L.Rev. 604, 619 (1975) (footnotes omitted). We conclude that the government was not substantially justified in bringing the suit against Keasler.
Our holding does not limit or discourage efforts to achieve intercircuit conflicts. We simply feel that if the government chooses to embark on such an escapade in a case like this, it should be prepared to pay the piper.
The final issue is whether the government was substantially justified in appealing the judgment on the merits. Summary judgment was entered for Keasler on October 2, 1981. Pending a review of the case by the Solicitor General, the government filed a notice of appeal on November 30. On December 21, the government dismissed the appeal following the Solicitor General's decision not to pursue it. The district court found that the government's actions on appeal were not substantially justified: "Just because the Justice Department's internal processes are slow does not exculpate the United States from the consequences of filing frivolous appeals." 585 F.Supp. at 840. The government challenges this conclusion, arguing that the appeal was dismissed as soon as administratively practicable.
The government's arguments are not convincing. First, if the trial position of the government was unreasonable, an appeal based on that position is a fortiori not substantially justified. Second, as noted above, the government has conceded on this appeal that a court of appeals decision on the merits in this case would have served "little point." The government contends, however, that "it was not the intent of the [drafters of the] EAJA to penalize the Government by making it pay attorney's fees where it terminates an otherwise meritorious lawsuit for legitimate reasons." Appellant's Reply Brief at 13-14. This statement is a mischaracterization of the issue. The government is not being penalized for terminating the appeal, but for filing it. Moreover, the suit was not "otherwise meritorious," because the government's position in the district court and pre-trial was not reasonable. Finally, we recognize the channels in which administrative
The judgment of the district court is affirmed.
A true copy.
122 Cong.Rec. 19420 (1976) (statement of Senator Hansen). This statement implies that Rev.Rul. 69-195 was not a correct statement of the law under section 4061(a)(1).
On appeal, the government urges that Vinal v. Peterson Mortuary, 353 F.2d 814 (8th Cir.1965), made it reasonable to test the "transportation function" theory in this circuit, Jacobs notwithstanding. The taxpayer in Vinal had purchased two automobiles and through "a substantial amount of rebuilding" had converted them into a hearse and an ambulance. Peterson Mortuary v. Vinal, 238 F.Supp. 346, 347 (D.Neb.1965). The district court concluded that the transformation of these two vehicles was an act of manufacture because a new and different article had been produced. Id. at 349. Although neither party challenged this finding on appeal, 353 F.2d at 816, in dicta this court approved this conclusion. The posture of the court's comments and the factual distinctions show that Vinal was not a reasonable basis for the IRS to expect this court not to follow Jacobs, a case that could hardly be more in point. Moreover, this court had implicitly adopted a "complexity" analysis in United States v. Gamble-Skog-Mo., Inc., 91 F.2d 372, 376 (8th Cir.1937) ("The installing of the units was a trivial operation which we think did not rise to the dignity of manufacturing.") (citation omitted.)
At least three reasons suggest that Cornella II is not controlling here. First, in light of this circuit's strong policy of avoiding conflicts with other circuits in tax cases, it cannot fairly be said that the IRS had "no guidance" as to whether this court would follow Jacobs. Second, the IRS was not simply defending its success in a judgment below, as in Cornella II, but pursuing Keasler in an attempt to "resurrect its own discredited version of the law." 585 F.Supp. at 839. Finally, the substantive issues in this case lack continuing vitality in light of tax law amendments, which makes further litigation less reasonable than in Cornella II.