Opinion ID: 835212
Heading Depth: 1
Heading Rank: 1

Heading: statutes and procedural background

Text: An understanding of the text of the statutes that authorize awards of damages and attorney fees by the tax court will aid our discussion of the procedural context and decision below. Accordingly, we quote those statutes at this point. ORS 305.437 provides: (1) Whenever it appears to the Oregon Tax Court that proceedings before it have been instituted or maintained by a taxpayer primarily for delay or that the taxpayer's position in such proceeding is frivolous or groundless, damages in an amount not to exceed $5,000 shall be awarded to the Department of Revenue by the Oregon Tax Court in its judgment. Damages so awarded shall be paid within 10 days after the judgment becomes final. If the damages remain unpaid, the department may collect the amount awarded in the same manner as income taxes are collected under ORS 314.430. (2) As used in this section, a taxpayer's position is `frivolous' if there was no objectively reasonable basis for asserting the position. ORS 20.105 provides, in part: (1) In any civil action, suit or other proceeding in a circuit court or the Oregon Tax Court, or in any civil appeal to or review by the Court of Appeals or Supreme Court, the court shall award reasonable attorney fees to a party against whom a claim, defense or ground for appeal or review is asserted, if that party is a prevailing party in the proceeding and to be paid by the party asserting the claim, defense or ground, upon a finding by the court that the party willfully disobeyed a court order or that there was no objectively reasonable basis for asserting the claim, defense or ground for appeal. With those provisions in mind, we turn to the procedural history that gives rise to this appeal. Taxpayers filed an income tax return for the year 2002, in which they claimed that they had received no income. The department disagreed and issued a notice of assessment to taxpayers. On November 15, 2004, taxpayers, proceeding pro se, filed a complaint in the magistrate division of the Oregon Tax Court, making arguments that, as they now concede, lacked an objectively reasonable basis. [3] The department defended its assessment and requested an award of damages under ORS 305.437. The department, however, offered no evidence of the nature or the extent of its damages resulting from taxpayers' frivolous arguments. On February 22, 2005, the magistrate issued a decision that upheld the assessment and agreed that taxpayers' arguments were frivolous. However, in a later order dated March 24, 2005, the magistrate declined to award damages to the department, stating: The court's sticking point, however, is that [the department's] actual damages are trivial. The court has made an economical use of its resources. [The department's] participation to date has consisted of filing a routine pleading and participating in a brief telephone hearing. Under the thinking that any award would be de minimus [ sic ], the court will not revise its Decision to allow damages. Taxpayers paid the assessed tax, together with penalties and interest, on or around April 4, 2005. On April 22, 2005, the department appealed to the regular division of the Oregon Tax Court, seeking an order remanding the case to the magistrate with instructions to award damages under ORS 305.437, because taxpayers had asserted a frivolous position before the magistrate. In their answer, taxpayers argued that their position was not frivolous. In particular, taxpayers pointed out that [t]he order from [the magistrate] was clear in that it stated that the damages were `trivial.' The department then moved for summary judgment, asking the tax court to uphold the assessment of taxes and award damages under ORS 305.437. The department sought to dispute the magistrate's conclusion that the department had incurred only trivial damages by attaching an affidavit averring that the department had paid approximately $285 to two employees to audit taxpayers' return. The department argued that, notwithstanding that expense, the court was not limited to that sum in determining damages under ORS 305.437 and that it could consider other factors, such as resources expended by the department and by the court, and taxpayers' defiant attitude. In their response, taxpayers repeated several arguments that the magistrate had found frivolous, but also expressly relied on the magistrate's description of the department's actual damages as trivial. The tax court denied summary judgment. Each party filed amended pleadings, and the matter proceeded toward trial on the department's claim for damages. [4] Prior to trial, taxpayers retained legal counsel. On the eve of the trial, taxpayers moved to withdraw their original complaint in the magistrate division and explained that they ha[d] accepted, and do now accept, the magistrate's decision, that they had not appealed from the magistrate's decision, and that they had paid the tax deficiency 10 months earlier. The tax court denied the motion, stating that it had no authority to allow withdrawal of the complaint from a separate proceeding before the magistrate division. Croslin, 19 OTR at 73. At trial before the tax court, the department maintained that ORS 305.437 mandated an award of damages because taxpayers had asserted frivolous arguments before the magistrate and also in the regular division, at least until they withdrew them before trial. The department asserted that it was not required to prove its damages with evidence. Finally, the department contended that the court's authority to award damages under ORS 305.437 was not limited to the department's expenses. In the department's view, that statute also permitted the court to award an amount that would punish taxpayers, prevent a waste of resources, and send a message of deterrence to other taxpayers. Taxpayers again confirmed that they had abandoned their earlier frivolous arguments. They argued that they were not liable for damages under ORS 305.437 because they had not instituted or maintained the proceeding in the regular division, within the meaning of that statute. Taxpayers defended the magistrate's decision declining to award damages on the ground that the record before the magistrate had lacked any evidence of the department's damages. They pointed out that the department had introduced evidence of its approximately $285 auditing expense for the first time in the regular division. They asserted that there was no evidence establishing a causal link between taxpayers' frivolous arguments and the department's auditing expense. Finally, taxpayers asserted that the department was not entitled to an award of attorney fees. The tax court acknowledged taxpayers' concession that their arguments before the magistrate division had been frivolous and also determined that taxpayers had continued to assert those arguments in the regular division before abandoning them prior to trial. Their abandonment of those arguments was of limited help, the court stated, and amounted to an attempt to extend the white flag of surrender at the eleventh hour in order to stave off an award of attorney fees and damages. Croslin, 19 OTR at 75 (quoting Masse II v. Dept. of Rev., 18 OTR 240, 253, 2005 WL 950019 (2005) (internal quotation marks omitted)). Next, the tax court rejected taxpayers' argument that ORS 305.437 did not apply to the proceeding in the regular division because taxpayers had not instituted or maintained it. The tax court concluded that ORS 305.437 applied to all proceedings regardless of which party instituted or maintained the action, id. at 77, and that taxpayers' argument on that point was not only wrong, but was frivolous itself. Id. at 78. The tax court then turned to taxpayers' argument that the department had failed to prove its damages. The tax court opined that it was authorized by ORS 305.437 to award damages for any of three purposes  punishment, deterrence, and compensation  and that that statute imposed no requirements of pleading or proof as predicates for an award of damages. Nonetheless, the tax court held that taxpayers' argument on that point was not frivolous, because they might have relied on statements in the magistrate's decision. Croslin, 19 OTR at 80. In sum, the tax court held that taxpayers' arguments before both the magistrate division and the regular division were frivolous, with the one exception of taxpayers' argument regarding proof of the appropriate amount of damages. On the basis of the arguments that the tax court deemed frivolous, the court awarded damages to the department under ORS 305.437 in the sum of $1,000. The tax court next addressed the department's request for attorney fees under ORS 20.105. First, the court determined that the department was the prevailing party. The court then stated that a single nonfrivolous claim, defense or ground for appeal ordinarily would enable taxpayers to avoid an award of attorney fees. Id. at 81 (citing Patton II v. Dept. of Rev., 18 OTR 256, 262, 2005 WL 950016 (2005)). However, the court held that the statutory phrase claim, defense or ground for appeal referred solely to arguments raised in the pleadings. According to the tax court, taxpayers had not advanced their one nonfrivolous argument, that the magistrate correctly declined to award damages, until the eve of trial. The tax court held that taxpayers could not avoid an award of attorney fees simply by throwing a nonfrivolous argument into the mix at the last minute. Id. at 82. Accordingly, the tax court awarded attorney fees to the department in the amount of $6,000. On appeal to this court, taxpayers challenge the awards of damages and attorney fees by the tax court.