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Advocacy Group Can’t Collect Fees from IRS

A marriage advocacy group that settled its suit against the IRS for disclosure of a donor list from the group’s tax return for $50,000 cannot collect attorney’s fees of nearly $700,000 from the IRS; the Alexandria U.S. District Court says the donor group did not substantially prevail in terms of damages, when it sought $217,172.74, nor did it prevail on the issues, as most of its claims were dismissed on summary judgment.

The government admitted to an inadvertent disclosure of an unredacted copy of the group’s 2008 Form 990 Schedule B, which listed personal information of donors who contributed $5,000 or more to the National Organization for Marriage Inc. After the court dismissed NOM’s unlawful inspection claim and its request for punitive damages, the only issue that remained for trial was NOM’s damages from the 2008 Schedule B disclosure.

Two weeks later, the parties notified the court of a proposed settlement. The court entered a consent judgment that ordered that NOM shall recover judgment against the government of $50,000 inclusive of NOM’s claims for actual damages and costs of the action, but the court would retrain jurisdiction so NOM could file a motion for attorney’s fees under 26 U.S.C. § 7431(c)(3). Otherwise, the case was dismissed with prejudice.

NOM contends it is entitled to an attorney’s fee award of $691,025.05 because it substantially prevailed both as to the amount in controversy and as to the most significant issue/s presented, and second, because the government’s positon was not substantially justified.

The court must calculate the total amount in controversy before it can determine whether NOM substantially prevailed, by first determining the actual damages at issue and then the additional amount of punitive damages, if any. Without additional guidance from the 4th Circuit, the court adopts this instructive definition of “amount in controversy” from Don Johnson Motors Inc. v. U.S., No. B-06-47 (S.D. Tex. March 14, 2008): The amount in controversy is any amount placed at issue by the pleadings increased by any amount subsequently placed at issue by any party.

In strictly construing the fee-award statute in the government’s favor, the compensatory damage amount at issue in this litigation is $117,586.37, which includes both actual and statutory damages. NOM argues the $50,000 claim for lost donations should not be included because the government was not obligated to defend that claim when it was “withdrawn” prior to the motion for summary judgment. This argument is not persuasive. The government had to defend against this $50,000 claim since the inception of the litigation, until it was “withdrawn” over five months later. The court includes any amount at issue at any point in the litigation, including the $50,000 claim sought in NOM’s complaint.

Also, the total amount in controversy must account for the punitive damages sought by NOM throughout this litigation, which was ultimately dismissed by the court on summary judgment. While precedent appears to be limited on this issue, at least one appellate court affirmed the use of a “2:1 ratio” multiplier by a district court awarding punitive damages to punish a willful and grossly negligent unauthorized disclosure of taxpayer return information.

Here, NOM sought $108,586.37 in actual damages, which is $117,586.47 in total compensatory damages less $9,000 in statutory damages. Due to the substantial amount NOM sought in compensatory damages, the court finds an equal amount, but not a multiplier, of punitive damages is appropriate, which brings the total amount in controversy to $217,172.74.

When the court compares the amount in controversy of $217,172.74 with the ultimate recovery of $50,000, it cannot find that NOM substantially prevailed. NOM only recovered 23 percent of what it originally sought.

Likewise, NOM did not substantially prevail on the issues presented in this litigation. Apart from the government’s admission to a single inadvertent disclosure, the majority of NOM’s claims were dismissed by the court on summary judgment. The end result of this litigation is exactly what NOM already knew as early as December 2013, if not prior: the IRS inadvertently disclosed a single copy of an unredacted 2008 IRS Form 990, Schedule B. Finally, the government’s position was substantially justified, as it was reasonably based in law and fact.

Motion for attorney’s fees denied.

The National Organization for Marriage Inc. v. U.S. Internal Revenue Service (Cacheris) No. 1:13cv1225, Oct. 16, 2014; USDC at Alexandria, Va. VLW 014-3-533, 16 pp.

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