Court Opinion

ID: 9473621
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:34:23.201348+00
Date Added: 2024-06-11T17:43:37.829296
License: Public Domain

BOYCE F. MARTIN, Jr., Circuit Judge,
dissenting.
I respectfully dissent. Although I agree completely with the majority’s legal conclusions, I believe that the magistrate’s holding that the government’s position was not substantially justified is clearly erroneous. I therefore must conclude that the award of attorney’s fees in this case was improper.
I agree with the majority that the government’s principal position is that the taxpayers suffered no deductible loss other than the $2,000 loan forgiven by the SBA. In holding that this position was not substantially justified, the magistrate stated:1
Upon such reconsideration, I reaffirm the conclusions which I reached in my earlier memorandum and order (namely, that the plaintiffs were the prevailing party, and that the government failed to show that its position in this litigation was substantially justified). Without elaborating upon the reasons which I earlier expressed, I remain persuaded that there can be no question that the plaintiffs prevailed on the principal contention between the parties about whether deductible damage had occurred during the 1973 storm: the government remained unyielding in its position that no such
*1193At trial, the evidence to the contrary was overwhelming. In my opinion, to repeat my earlier statement in the August 9, 1983, memorandum and order, the destructive consequences of the March, 1983, storm should have been immediately apparent to a reasonable agent who was undertaking a modicum of fair-minded inquiry into the basis for the plaintiffs’ claim on their 1973 tax return.
In addition, as also noted in my earlier memorandum and order, the government’s position that no loss could be claimed for 1973 was taken at a time when the taxpayer-plaintiffs were foreclosed from amending their 1972 return to obtain the benefits of a deduction for that year. The government’s position, therefore, is classic Catch-22: though there was a loss, it could not be claimed because the taxpayers, in the government’s view, falsely sought to split the loss into two years. The fact that the plaintiffs, were left, as a result of the government’s position and the timing of its assertion, unable to claim the loss in either year is, in my opinion, a moderately aggravating factor to consider when assessing the question of substantial justification for the government’s position.
A final additional consideration — or one which bears perhaps more mention than it received in my August 9, 1983, memorandum and order — is that the government’s position was based, in the last analysis, upon the proposition that the plaintiffs were liars. The government did not simply contest the amount of the deduction (which might have been a more reasonable position); rather, they contended that no loss whatsoever had been suffered in the 1973 storm. In other words, the government’s position was that every nickel being claimed as a deduction as a result of that event constituted a false claim. This aspect of the government’s position is also, in my opinion, an aggravating circumstance when assessing whether the government’s position was substantially justified.
The magistrate thus found that the government position was not substantially justified because (1) the evidence was overwhelming against it; (2) the government was attempting to keep the taxpayers from claiming the loss in either 1972 or 1973;2 and (3) the government should have contested only the amount of the claim.
The second and third reasons set forth by the magistrate to support his holding are clearly irrelevant to the question of whether the government’s position was substantially justified. As the majority recognizes, the central issue in reviewing the government’s position in this type of case is whether that position has a reasonable basis in fact. Westerman, Inc. v. NLRB, 749 F.2d 14, 16 (6th Cir.1984). The magistrate’s conclusion that the government’s position was designed to prevent the taxpayer from claiming a deduction in either 1972 or 1973, besides being legally incorrect,3 has no bearing on whether the government’s "position had a reasonable basis in fact. The magistrate’s third justification — that the government should have quibbled over the amount of deduction instead of allowing no deduction — assumes that the government’s position had no reasonable basis in fact. If the government had reasonable grounds to believe that the taxpayers suffered no deductible loss beyond the forgiven $2,000 SBA loan, then the government had no reason to allow the taxpayers a deduction beyond that amount. Therefore, the one justification that can support the magistrate’s holding is his conclusion that evidence overwhelmingly contradicted the government’s position, or, using the appropriate language, that the government’s position had no reasonable *1194basis in fact. To determine whether the magistrate’s conclusion in this respect is clearly erroneous, I must review the evidence in the case, keeping in mind that the magistrate’s determination should only be reversed if I am “left with the definite and firm conviction that a mistake has been committed.”4 United States v. United States Gypsum Co., 383 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). See also Anderson v. City of Bessemer City, — U.S.-,-, 105 S.Ct. 1504, 1512, 84 L.Ed.2d 518 (1985).
Several different pieces of evidence were produced regarding the amount of casualty loss suffered by the taxpayers. First, there was the $2,000 loan by the SBA to the taxpayers to repair their house. Although the government was not able to present documenting evidence from the SBA as to how the loan amount was calculated, both taxpayers testified that they had only received $2,000 of the total amount they had requested and that they had not contested the amount.5
Second, there was the $13,165 amount that the taxpayers requested in their loan application to the SBA. Although the taxpayers were not awarded this amount, it is evidence of what the taxpayer’s themselves considered their loss to be.
Finally, three different appraisals as to the plaintiff's loss were entered into evidence. A relator, who testified for the taxpayers at trial, stated that he had examined the house after the 1973 storm and that he felt the Kreimeses had suffered between $25,000 and $30,000 in damages. An engineer, who also testified at trial, testified that the 1973 storm caused damages in the amount of $26,318 to the taxpayers’ property. The engineer, however, did not inspect the taxpayer’s property until three years after the storm. A real estate appraisers’ report was also admitted into evidence which concluded that the storm had caused $31,300 in damages. This appraisal was seriously flawed, however, because it was based on a general decline of property values in the area hit by the storm and not on the taxpayers’ own identifiable damages. See infra n. 6.
Given this evidence, I think the government clearly had a reasonable basis in fact for its position. That basis was the SBA's loan determination. To obtain the SBA loan, the Kreimeses had to fill out a comprehensive application including a list of all damaged or lost property. 14 C.F.R. § 123.8 (1973). The SBA then considered the proper amount of the loan based on the cost of “restoring, rehabilitating or replacing damaged or destroyed property.” 13 C.F.R. § 123.5(b) (1973). Loan funds would then be granted “to restore [the Kreimes-es’] home ... as nearly as possible to predi-saster condition.” 13 C.F.R. § 123.3(a)(1) (1973). An SBA loan determination would therefore be a reasonable indicator of how much damage the Kreimeses suffered in the March 1973 storm and how much it cost them to restore their house to its prior condition.
The SBA’s loan determination is clearly relevant as to the amount of casualty loss deduction allowable under I.R.C. § 165. Under section 165, the Kreimeses were entitled to deduct the difference in the fair market value of their home before the storm and the fair market value after the storm. Treas.Reg. § 1.165-7(2)(i). Any reduction in fair market value arising from a general decline in market values in the area must be separated from the casualty loss, however, and is not deductible. Id. Thus, the Kreimeses were not entitled to deduct any reduction in the fair market value of their home resulting from the fact that their home was not as marketable because it was in a high risk area for *1195storms.6 The only loss that was deductible was “the actual loss resulting from damage to the property,” id., and the cost of repairs is acceptable evidence of such a loss. Treas.Reg. § 1.165 — 7(2)(ii). The SBA’s loan, which was granted on the basis of cost of repairs, was excellent evidence of what was the Kreimeses’ deductible loss under section 165.
The magistrate even recognized that the $2,000 SBA determination was a reasonable appraisal of the amount of damage to the taxpayer’s house. In denying the plaintiff’s motion for judgment notwithstanding the verdict, the magistrate stated:
The gravaman of plaintiffs’ motion for judgment n.o.v. or an additur is that the jury could have reached only one verdict as to the amount of the deduction to which the plaintiffs were entitled: namely, $27,750. This is, in my opinion, incorrect. Although the evidence was overwhelming that damage had been suffered as a result of a storm in 1973, several figures were available to the jury when it came to determine the amount of the deduction which could properly have been claimed for that tax year. These included $2,000 (amount expended for repairs for which receipts were available: also, amount of Small Business Administration loan); $13,165 (amount of loss as stated in plaintiffs’ application for the SBA loan); and $27,750 (amount of claimed deduction).
Because the evidence could have led the jury to return a verdict in any one of three amounts, plaintiffs’ motion for judgment n.o.v. cannot be granted,
(emphasis added). The magistrate’s own conclusion that a reasonable jury could have found that Kreimeses’ loss was limited to the $2,00 SBA loan seriously undermines his holding that the government was not substantially justified in relying on the SBA’s determination.
Moreover, the jury’s determination as to the amount of loss could easily lead one to conclude that they found the SBA loan to be very probative evidence. The jury determined that the taxpayers were only entitled to an $8,500 casualty loss deduction. Although one can only speculate as to how the jury arrived at that amount,7 it is significant that that amount was much closer to the $2,000 SBA determination than to any of the taxpayers’ appraisals.
I therefore must conclude that the magistrate’s holding that the government’s position was not substantially justified is clearly erroneous. In my view, as long as the government has a reasonably authoritative appraisal of a taxpayer’s claimed loss, the government’s position is substantially justified if it relied on that appraisal. See 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, 940 (8th Cir.1984) (government’s position is substantially justified if it is based upon qualified appraisal). Without such a rule, the courts can reach anomalous results as in the present case where the government successfully reduced a taxpayer’s claimed deduction by almost $20,000, resulting in an increased tax liability, but at the same time was forced to pay out a larger amount in attorneys’ fees. The net result is a loss to the government even though it litigated what turned out to be a valid claim. I do not believe that the purposes behind the Equal Access to Justice Act require such an odd result. I therefore dissent.

. The quoted language is taken from the magistrate’s second opinion which he issued.after the government asked him to reconsider the award of attorneys' fees. As the majority notes, majority opinion at n. 4, the magistrate’s first opinion did not properly identify the government’s contentions.

. The magistrate’s statements in this regard were directed to the government’s contention that taxpayers had failed to prove what loss occurred in the March 1973 storm and what loss occurred in the 1972 storms.

. Under I.R.C. §§ 1311-1314, the taxpayers would have been entitled to claim the loss for 1972 if the jury had determined that that was the appropriate year for the deduction.

. Although the clearly erroneous standard is a deferential one, "it does not render us a rubber stamp." Estate of Kaplin v. Commissioner, 748 F.2d 1109, 1110 (6th Cir.1984) (quoting Miami Valley Broadcasting Corp. v. Commissioner, 594 F.2d 556, 557 (6th Cir.1979)). We must still undertake a rigorous review of the record.

. Moreover, the taxpayers only presented receipts to document repairs in the amount of 12,000.

. It was for this reason that the taxpayer’s appraisal following the storm was seriously flawed. The appraiser simply compared market values of similar properties in the area before and after the storm and concluded that market values in the area had fallen 38%. Based on this estimate, the appraiser, concluded that the taxpayers’ home had decreased in value 38% from $82,500 to $51,500 for a loss of $31,300. This conclusion is obviously inadequate for the purposes of section 165 because it fails to identify what part of the decrease in market value was attributable to actual damages and what part was attributable to the fact that prospective buyers do not want a house where it is likely to be hit by a storm.

. The magistrate speculated that the jury subtracted the amount of an insurance award from the amount of loss to reach the $8,500 figure.