Marre v. United States ( 1994 )

United States Court of Appeals,
Fifth Circuit.
Nos. 92-2962, 93-2291.
Richard L. MARRÉ, Plaintiff-Appellant, Cross-Appellee,
Agritech Enterprises, Plaintiff-Appellant,
v.
UNITED STATES of America, Defendant-Appellee, Cross-Appellant.
Nov. 29, 1994.
Appeals from the United States District Court for the Southern District of Texas.
Before REAVLEY, DAVIS and DeMOSS, Circuit Judges.
W. EUGENE DAVIS, Circuit Judge:
Richard L. Marré ("Marré") and Agritech Enterprises, Inc. ("Agritech") sued the United
States under 26 U.S.C. § 7431 for wrongful disclosure of tax return information. The district court
awarded statutory damages and attorney's fees to Marré. Marré and Agritech appeal the district
court's damage award to Marré and its rejection of Agritech's claim. The government cross appeals
the amount of attorney's fees awarded by the district court. For reasons that follow, we affirm in part,
vacate in part and remand for further proceedings.
I.
In 1981, Marré founded Agritech Enterprises, Inc. ("Agritech") to build solar-heated
greenhouses in Ellis and Waller Counties, Texas. The greenhouses were sold as tax shelters to limited
partnerships and individual investors. Most of the limited partnerships were formed by financial
planners in California, who served as general partners.
In 1985, Internal Revenue Service ("IRS") Special Agent Lindell Parrish began a criminal
investigation of both Marré and Agritech for allegedly aiding and assisting in the filing of false tax
returns in violation of 26 U.S.C. § 7206(2). The IRS believed that Marré had marketed the solar
greenhouses as a tax shelter, sold the investors an interest in the greenho uses, and then failed to
construct complete greenhouses. The IRS took the position that the deductions taken by the owners
of the greenhouses for incomplete, nonfunctional greenhouses were fraudulent.
As part of the investigation, Parrish interviewed various Agritech investors, promoters,
suppliers and employees. He also sent form letters, referred to as "circular letters," to the investors
and certain suppliers. In the interviews and letters, Parrish disclosed that Marré and Agritech were
under investigation by the Criminal Investigation Division of the IRS for allegedly aiding and assisting
in the filing of false tax returns relative to the greenhouses. In the circular letters to the investors,
Parrish also assured the investors that Marré was the sole target of the investigation and warned that
any deductions taken for the greenhouses would be fraudulent. An attached questionnaire included
two statements that indicated Marré had been dishonest with the investors in representing that he
would furnish complete greenhouses.
Marré and Agritech sued the United States under 26 U.S.C. § 7431, seeking damages for
wrongful disclosures of tax return information. Following a bench trial, the district court found that
Agent Parrish had made 215 unauthorized disclosures. These include: 88 disclosures via circular
letters to the investors, 23 disclosures to Agritech suppliers, 10 disclosures to promoters, and 94
"other" disclosures. Neither party challenges these findings on appeal. The court further found that
Marré suffered no actual damages and that it was precluded from awarding punitive damages in the
absence of a compensatory damage award. The court awarded Marré statutory damages of $1000
per disclosure, or $215,000.
The court also held that Agritech was not entitled to damages because it had ceased doing
business before the disclosures were made. It concluded that an award of damages to Agritech would
amount to a double recovery for Marré, Agritech's sole owner. Finally, the court held that Marré was
entitled to recover reasonable litigation costs, including attorney's fees, under 26 U.S.C. § 7430. The
court awarded Marré $326,182.62 in attorney's fees and costs.
Marré and Agritech appeal the district court's damage award to Marré and its rejection of
Agritech's claim. The government cross-appeals the amount of attorney's fees awarded to Marré.
The government also filed a motion to dismiss Marré and Agritech's appeal as premature.
II.
As an initial matter, we address the go vernment's motion to dismiss this appeal. The
government contends that the district court's judgment never ripened into an appealable order because
the district court did not formally resolve the Rule 59 mo tions Marré and Agritech filed after the
court entered judgment. After the district court entered its final judgment in this case, Marré and
Agritech filed a motion to alter or amend the judgment or, in the alternative, for a new trial. The
court denied the motion in a written minute entry that was entered on the docket, but did not issue
a written order denying the motion.
The government contends that the lack of a separate, written order renders the appeal
premature under Fed.R.Civ.P. 58. While Rule 58 clearly requires the entry of a separate, written
order, courts generally distinguish between the granting of a post-trial motion and the denial of a
post-trial motion. When the court grants a post-trial Rule 59 motion, it affects the judgment, and its
new ruling becomes the final judgment. As such, Rule 58 requires a written order. By contrast, the
denial of a post-trial motion leaves the pre-existing judgment unaffected. Thus, there is no need to
issue a new judgment.
The Seventh, Ninth and Eleventh Circuits have recognized this distinction and do not require
a separate, written order for the denial of a post-trial motion. See Wright v. Preferred Research, Inc.,
937 F.2d 1556, 1560-61 (11th Cir.1991), cert. denied, --- U.S. ----, 112 S. Ct. 915, 116 L. Ed. 2d 815(1992); Hollywood v. City of Santa Maria, 886 F.2d 1228, 1230-31 (9th Cir.1989); Charles v.
Daley, 799 F.2d 343, 347 (7th Cir.1986). We agree with this approach and deny the government's
motion to dismiss.
III.
A.
On the merits, Marré argues first that the district court erred in not awarding him actual
damages for his alleged mental suffering. Marré maintains that he presented unrefuted evidence of
mental suffering and emotional anguish that resulted from the unauthorized disclosures. Marré
presented evidence that Parrish's disclo sures damaged his reputation, caused him emotional stress
which led to his divorce, and limited his future employment opportunities.
The district court found that
[t]he evidence of actual damages is simply not there. The demise of Agritech was pretty
much a fait accompli long before Parrish began his rampage through the IRS regulations; the
evidence shows that many months before the events complained of, Agritech's income had
dried up and no more greenhouses were being sold; in fact, several investors had already sued
Marré. Thus we cannot find that Parrish's misdeeds scuttled Marré's dreams of commercial
success. Nor can we find that the collapse of Marré's marriage should be laid to Parrish's
door.
We, of course, review findings of fact for clear error. See Anderson v. City of Bessemer City, N.C.,
470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518 (1985).
The district court did not find Marré's damage evidence sufficiently credible to support an
award of actual damages. We give great deference to the trial court's credibility determinations, and
"[w]here there are two permissible views of the evidence, the factfinder's choice between them cannot
be clearly erroneous." Id. at 574, 105 S.Ct. at 1511. The district court did not err in denying Marré's
claim for actual damages.
B.
Marré argues next that the district court erred in holding that it was precluded from awarding
punitive damages in the absence of actual damages. Section 7431(c) of the Internal Revenue Code
provides:
(c) Damages—In any action brought under subsection (a), upon a finding of liability
on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal
to the sum of—
(1) the greater of—
(A) $1,000 for each act of unauthorized disclosure of a return or return information
with respect to which such defendant is found liable, or
(B) the sum of—
(i) the actual damages sustained by the plaintiff as a result of such
unauthorized disclosure, plus
(ii) in the case o f a willful disclosure or a disclosure which is the result of
gross negligence, punitive damages, plus
(2) the costs of the action.
26 U.S.C. § 7431(c).
Marré contends that the plain language of the statute permits recovery of punitive damages
in the absence of actual damages, so long as punitive damages exceed the subsection (1)(A) statutory
damages. The government argues that the plain language of the statute links an award of punitive
damages to a finding of actual damages, in keeping with the common law rule that punitive damages
may not be awarded in the absence of actual damages. See, e.g., 1488, Inc. v. Philsec Inv. Corp., 939
F.2d 1281, 1291 (5th Cir.1991).
We leave undecided the statutory interpretation question because we are convinced that the
evidence is not sufficient to support a punitive damage award even if recoverable. The statute
authorizes a punitive damage award only if the disclosures are willful or grossly negligent. To resolve
this question, our task is to determine whether the record would support a finding that Parrish made
the disclosures without ground for believing that they were lawful or with a reckless disregard of
Marré and Agritech's rights. See Rodgers v. Hyatt, 697 F.2d 899, 906 (10th Cir.1983); Malis v.
United States, 59 A.F.T.R.2d 87-988, 1986 WL 15721 (C.D.Cal.1986). While the record supports,
and the government does not dispute, the district court's findings that Marré was entitled to statutory
damages, it does not reveal conduct by Agent Parrish so egregious as to warrant an award of punitive
damages.
Marré contends that several of Parrish's disclosures were willful or grossly negligent. Marré
points first to Parrish's disclosure in the interviews and letters that the IRS was conducting a criminal
investigation of Marré and Agritech for aiding and assisting in tax fraud through marketing and
promoting the greenhouses. We found no cases where such a disclosure drew a punitive damages
award. Cf. Diamond v. United States, 944 F.2d 431 (8th Cir.1991) (holding that disclosure in
circular letter that agent was a criminal agent investigating taxpayer's tax liability was a good faith,
but erroneous, interpretation of § 6103); Schachter v. United States, 1994 WL 592556, --- F.Supp.
---- (N.D.Cal.1994) (holding that placement of "Criminal Investigation Division" at the top of a
circular letter was a good faith but unauthorized disclosure). The record reflects that in an
investigative interview an agent usually identifies himself, shows his pocket commission, and briefly
explains the purpose of the investigation. The pocket commission includes the words "Criminal
Investigation Division." Moreover, Chapter 347 of the "Handbook for Special Agents" advises
agents to put "Criminal Investigation Division" in the signature block of circular letters. Although
Parrish's disclosure that he was conducting a criminal investigation for a particular crime involving
a particular scheme was improper, it was not sufficiently egregious to warrant punitive damages.
Marré next complains of additional disclosures made by Parrish to the investors, which
suggest ed t hat Marré was guilty of wrongdoing in advising the investors to take deductions for
incomplete greenhouses. Parrish stated in the circular letters that the IRS believed that Marré had
caused the investors to file false returns and that the IRS was not investigating the investors for those
returns. In the questionnaire attached to the letters, Parrish also stated:
33. I can assure you that the most that you have ever had during the years 1982, 1983 and
1984 could best be described as framing for a solar greenhouse. You have never had an
operable solar pond. You have never had anything close to what was described in the
promotion material.
34. How do you feel about Marré remaining silent and not telling you the truth about the true
condition of you [sic] invesement [sic].
In dealing with the investors, Agent Parrish faced the difficult task of securing their
cooperation. Parrish needed testimony from the investors about Marré's role in persuading them to
invest in the tax shelter. Because the investigation concerned Marré's role in causing the investors
to claim false tax deductions, the investors were understandably reluctant to talk to Parrish for fear
of implicating themselves. In fact, the IRS was actively auditing many of the investors at the time.
Parrish testified that he first attempted to interview a number of the investors in person. Many
refused to take his calls, failed to show up for appointments, or brought along counsel who demanded
to know more before allowing their clients to talk. In some cases, Parrish issued summons to those
investors who refused to meet with him. Ultimately, Parrish decided that it would be more efficient
to send circular letters to a large number of the investors.
The record does not support a finding that Parrish's disclosures were a flagrant violation of
26 U.S.C. § 6103. In conducting an investigation, an IRS agent has discretion under § 6103(k)(6)
to "disclose return information to the extent that such disclosure is necessary in obtaining information,
which is not otherwise reasonably available." Parrish did not grossly abuse that discretion. Parrish
made a number of attempts to contact the investors and met with little success. He thus had good
reason to believe that to gain their cooperation he must persuade them that they were not the target
of the investigation and that they should assist him in developing a case against Marré, whom he
believed was the most culpable party. Under these circumstances, the record does not support a
punitive damage award.
C.
Agritech, a corporation owned entirely by Marré, argues that the district court erred in
denying it recovery. The district court stated that because Agritech was "dead in the water" and
"little more than a corporate corpse," it refused to "allow Marré what would amount to a double
recovery simply because Agritech has not yet been lowered into its grave." The court cited Shapiro
v. Smith, 652 F. Supp. 218 (S.D.Ohio 1986) (holding that wrongful disclosure action does not survive
death of individual taxpayer) for the proposition that Agritech was as good as dead and therefore not
entitled to damages.
Agritech had not actively engaged in business in the two years before the disclosures at issue.
Although the Texas Secretary of State forfeited Agritech's charter twice while this suit was pending,
these forfeitures were set aside prior to trial after Agritech paid its delinquent franchise taxes. Under
Texas law, "the reinstatement of [a corporation's] charter will relate back and will revive whatever
rights the corporation had at the time the suit was filed," M & M Constr. Co., Inc. v. Great American
Ins. Co., 747 S.W.2d 552, 555 (Tex.App.—Corpus Christi 1988, no writ). Thus, Agritech was
technically alive at the time.
Section 7431(c) provides that the United States "shall be liable" to a taxpayer upon a finding
of liability. Agritech argues that as a "taxpayer" it is entitled to recover in its own right for Parrish's
disclosures. The Internal Revenue Code defines "taxpayer" t o include "any person subject to any
internal revenue tax," 26 U.S.C. § 7701(a)(14), and further defines "person" as "an individual, a trust,
estate, partnership, association, company or corporation." Id. § 7701(a)(1). Agritech was and is a
taxpayer subject to payment of tax under the Internal Revenue Code. In fact, the government treated
Agritech as a separate target of the criminal investigation until after this action was filed.
The government argues that Congress did not intend to allow a defunct corporation to
recover under § 7431. It contends that corporate alter-ego principles—which allow courts to
disregard the corporate form and treat a corporation and its shareholders as one1—should bar a
separate award of damages to Agritech. However, the government cites no support from the
statutory language or the legislative history to support this argument.
At the outset, it is clear to us that if the government had succeeded in obtaining a conviction
against Agritech, the corporation would have been primarily responsible to pay any criminal penalty.
Also, it is not obvious to us that Marré will make a double recovery if Agritech is allowed to recover
separate damages. It is just as reasonable to infer that the creditors of this insolvent corporation
would benefit from Agritech's recovery. We vacate the court's take nothing judgment as to Agritech
and remand for reconsideration of Agritech's claim for damages and attorney's fees.
D.
On cross-appeal, the government argues that the district court erred in awarding attorney's
fees to Marré in an amount greater than those required under his contingency fee agreement with his
attorneys. Section 7430(a) provides that "the prevailing party may be awarded a judgment ... for
reasonable litigation costs incurred" in a tax case. Section 7430(c)(1)(B)(iii) includes as reimbursable
costs the reasonable fees "paid or incurred" for the services of an attorney. In this case, Marré
contracted to pay his attorneys 507 of any recovery plus costs. Because the court awarded Marré
$215,000, the government argues that Marré "incurred" attorney's fees of only $107,500. The district
court, however, awarded Marré fees of $170 per hour for 1,814.38 hours, plus costs of $17,738.02,
for a total award of $326,182.62.
In a case involving similar fee-shifting provisions of the Uniform Relocation Assistance and
Real Property Acquisition Policies Act, 42 U.S.C. § 4654, the Eighth Circuit held that a party
"actually incurs" only the amount owed under a contingency fee agreement. United States v. 122.00
Acres of Land, 856 F.2d 56, 58 (8th Cir.1988). This interpretation is consistent with other decisions
under § 7430 and the Equal Access to Justice Act ("EAJA"), 28 U.S.C. § 2412. See United States
v. Paisley, 957 F.2d 1161, 1164 (4th Cir.1992) (holding that party entitled to full indemnification of
1
See, e.g., Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1152 (5th Cir.1987).
attorney's fees by her employer did not "incur" any expenses under EAJA); McCormack v. United
States, 891 F.2d 24, 25 (1st Cir.1989) (rejecting pro se attorney's argument that he "paid" for his
services by forgoing other opportunities on basis that taxpayer had not "paid" for services of an
attorney or "incurred" any debt under § 7430); United States v. McPherson, 840 F.2d 244, 245 (4th
Cir.1988) (same).
By contrast, the fee-shifting provision of the civil rights statute, 42 U.S.C. § 1988, allows the
courts to award prevailing parties "reasonable attorney's fee as part of the costs," without any
requirement that those fees be "incurred." In Blanchard v. Bergeron, 489 U.S. 87, 109 S. Ct. 939,
103 L. Ed. 2d 67 (1989), the Supreme Court determined that this provision "contemplates reasonable
compensation ... for the time and effort expended by the attorney," and that "a contingency-fee
contract does not impose an automatic ceiling on an award of attorney's fees." Id. at 93-94, 109 S.Ct.
at 944.
Because § 7430 limits attorney's fees to those actually incurred, Marré is entitled only to the
amount owed under the contingency fee agreement plus costs, to the extent reasonable. We therefore
modify the district court's judgment to reduce the award of attorney's fees to $107,500, the amount
Marré owed under the contingency fee agreement, plus costs of $17,738.02, for a total award of
$125,238.02.2
IV.
For the foregoing reasons, we affirm the district court's statutory damages award of $215,000.
We vacate the district court's take nothing judgment as to Agritech and remand for reconsideration
of Agritech's claim for damages and attorney's fees. We also modify the district court's judgment to
reduce its attorney's fees award on the Marré claim to the sum of $107,500.
AFFIRMED in part; MODIFIED in part; VACATED and REMANDED in part.
2
Because we hold that the district court erred in awarding attorney's fees in an amount greater
than that actually incurred under the contingency fee agreement, we need not reach the
government's alternative arguments that the fees should be limited to the statutory rate or that the
award was unreasonable.