The opinion of the court was delivered by: Decker, District Judge.
This case is currently before the court on plaintiffs'
application for attorney's fees submitted pursuant to the
provisions of the Equal Access to Justice Act,
28 U.S.C. § 2412(d)(1)(A). That section provides as follows:
On December 4, 1981, plaintiffs, Ethan J. Allen and Marie T.
Allen, filed their petition
for attorney's fees, requesting that the court award them
$2,383.50. After the defendant United States of America
opposed that request, plaintiffs filed an amended request for
fees, increasing both the total amount of hours claimed and
the claimed hourly compensation rate. The amended request asks
for a total award of $11,843.75.
The following is the procedural history of this case leading
up to plaintiffs' current request for fees. On September 13,
1979, plaintiffs filed their complaint, requesting a refund of
alleged overpayments of individual income taxes and the
abatement of certain penalty assessments made against
plaintiff Ethan Allen. Defendant responded by answering the
complaint and filing a counterclaim against the Allens and two
other named individuals. After some discovery and, apparently,
negotiations between the parties, the parties agreed to settle
the litigation. Under the terms of the settlement, plaintiffs
dismissed their complaint against the government, and the
government dismissed its counterclaim against the
plaintiffs.*fn1 The docket entry for September 15, 1981,
notes "Cause will be dismissed by agreement, upon filing of
stipulation and order." The stipulation and order referred to
were never filed, and at a subsequent status hearing held on
December 3, 1981, the controversy between the Allens and the
government was dismissed on an oral motion by the government.
The parties do not dispute that the settlement agreement was
extremely favorable for plaintiffs, and therefore they may be
considered the prevailing parties in this litigation.
The United States has three arguments against allowing
plaintiffs' request for attorney's fees. First, defendant
argues that plaintiffs are not entitled to an award of fees
that were incurred before October 1, 1981, the effective date
of the Equal Access to Justice Act. Second, the government
suggests that the special circumstances of this case would
make an award of fees unjust. Finally, the defendant claims
that it was substantially justified in maintaining its
position in this case and so an award of fees would be
improper. The government also argues that plaintiffs' amended
claim is untimely, because it was not filed within thirty days
of the final judgment in this action. The court will first
address the government's claim that its position in the
underlying litigation was substantially justified.
The "substantially justified" standard was carefully
considered by Congress whet the Equal Access to Justice Act
was passed. The House Report contains the following
"The test of whether or not a Government action
is substantially justified is essentially one of
reasonableness. Where the Government can show
that its case had a reasonable basis both in law
and fact, no award will be made. . . .
"The standard, however, 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. 96-1418, 96th Cong., 2d Sess. 10-11,
reprinted in  U.S.Code Cong. & Ad.News 4953, 4984,
4989-90. In order to determine whether or not the government's
case here was reasonable, it is necessary to carefully review
the facts of the underlying dispute which culminated in this
This case arose out of the failure of two organizations,
Medical Health Testing Centers, Inc. ("MHTC") and Northbrook
Clinical and X-Ray Laboratories, Inc. ("Northbrook Clinical")
to pay taxes withheld from their employees during 1974 and
1975. Until June 1, 1973, Northbrook Clinical was a sole
proprietorship, owned and run by plaintiff Ethan Allen. On
that date, Northbrook Clinical was acquired by Associated
Medical Labs ("AML"), located in Park Ridge, Illinois.
On July 13, 1973, AML also acquired MHTC. Both Northbrook
Clinical and MHTC were operated as divisions of AML, rather
than as subsidiary corporations having identities separate and
distinct from the parent corporation.
During at least part of the period that MHTC and Northbrook
Clinical allegedly failed to make the required tax payments,
defendant Ethan Allen was a member of AML's board of directors
and served from time to time as chairman of the board and
treasurer of the corporation. He was also listed as one of the
persons authorized to sign checks drawn on one of AML's
accounts. After acquiring MHTC and Northbrook Clinical, AML
collected all their receipts and paid out their wages and
expenses. AML prepared all the federal tax withholding forms
for its divisions and made some tax deposits.
In addition, Ethan Allen was named as president of
Northbrook Clinical when it was first formed as a corporation.
Until May 1974, he was authorized to write checks on
Northbrook Clinical's account. The record shows that in late
August 1974, Ethan Allen was removed from his corporate
offices with both Northbrook Clinical and AML. After that
date, he no longer had any authority to make any payments to
the IRS or anyone else.
Penalties were assessed against Mr. Allen, for the failure
of MHTC and Northbrook Clinical to pay the withholding taxes,
under 26 U.S.C. § 6672, which provides as follows:
"Any person required to collect, truthfully
account for, and pay over any tax imposed by this
title who willfully fails to collect such tax, or
truthfully account for and pay over such tax, or
willfully attempts in any manner to evade or
defeat any such tax or the payment thereof,
shall, in addition to other penalties provided by
law, be liable to a penalty equal to the total
amount of the tax evaded, or not collected, or
not accounted for and paid over."
The purpose of Section 6672 is "to cut through the shield of
organizational form and impose liability upon those actually
responsible for an employer's failure to withhold and pay over
the tax." Pacific National Insurance Co. v. United States,
422 F.2d 26, 31 (9th Cir.), cert. denied, 398 U.S. 937, 90 S.Ct.
1838, 26 L.Ed.2d 269 (1970).
Discovery during the course of this litigation evidently
showed that Mr. Allen, despite his positions as officers of
the various corporations, was not the person actually
responsible for the failure to pay the taxes. When that fact
became known to the government, it agreed to settle the
outstanding litigation with Mr. Allen. Under the terms of the
settlement, the government retained the nearly $1,800. that
the Allens had already paid on the penalty assessments, in
return for dismissing the counterclaim totaling almost
Plaintiffs argue that, despite the facts outlined above, the
government was not substantially justified in pressing this
litigation. Plaintiffs claim that the penalties were assessed
against Mr. Allen based purely on his position as an officer
of Northbrook Clinical and AML. Plaintiffs point to Dudley v.
United States, 428 F.2d 1196 (9th Cir. 1970), for the
proposition that corporate officeholders are not per se liable
for the corporation's failure to pay its employees' withholding
taxes. While plaintiffs' position would be well taken if the
issue here was Allen's ultimate liability for the tax payments,
it does not necessarily indicate that the government's
litigation position was unreasonable. Though the facts might
ultimately show that Mr. Allen was not actually responsible for
the tax payments, his positions as president, chairman of the
board, and treasurer of the relevant corporations, plus the
fact that he was authorized to write checks on the corporate
accounts, could certainly lead, as an initial matter, to a
reasonable assumption that he had some responsibility for
making the payments.
As a second argument, plaintiffs suggest that the
government's position in this litigation was unreasonable
because such a long period was involved from the time the
penalty assessments were made until this suit
was finally dismissed. Plaintiffs claim that the facts which
ultimately led to the settlement of the suit on December 3,
1981, were known to the government as early as July 1978, when
the Allens filed their administrative request for a refund and
abatement of the assessments. Attached to the claim was Mr.
Allen's statement in which he outlined the facts demonstrating
that he was not responsible for payment of the taxes at issue,
despite the appearances to the contrary.
This argument too is unconvincing. The government clearly
cannot be faulted for failing to remove the penalty
assessments based purely upon the self-serving affidavit of
Mr. Allen. Contrary to the Allens' position, it would have
been unreasonable for the government to give up its case
without some independent corroboration of the factual
statements in Mr. Allen's statement. Apparently, that
necessary support was found in the discovery phase of this
litigation, with the result that settlement terms were agreed
to. In sum, the court finds that the government's actions in
making the initial penalty assessments, and its prosecution of
this suit until its settlement, were reasonable and
In addition to the court's conclusion that the government's
position in the underlying litigation was substantially
justified, the court believes that there is a second adequate
and independent reason for denying the Allens' request for
attorney's fees. As is clear from the court's recitation of
the procedural history of this case, the great majority of the
Allens' attorney's fees were incurred before the October 1,
1981, effective date of the Equal Access to Justice Act. In
fact, not counting the time spent by the Allens' attorney in
preparing the two fee applications and supporting memoranda of
law, only one half hour of the total of approximately 75 hours
used in the underlying litigation was spent after October 1.
In addition, it is clear that all the substantive work was
completed before September 15, 1981. On that day, the
government's attorney reported that the parties had reached
agreement and the case involving the Allens would be
dismissed. Relying on those facts, the government argues that
the doctrine of sovereign immunity precludes an award of
attorney's fees for work done before the effective date of the
Section 208 of the Equal Access to Justice Act provides as
"This title and the amendments made by this
title shall take effect of [sic] October 1, 1981,
and shall apply to any adversary adjudication, as
defined in section 504(b)(1)(C) of title 5,
United States Code, and any civil action or
adversary adjudication described in section 2412
of title 28, United States Code, which is pending
on, or commenced on or after, such date."
The Allens argue that because their civil action was
technically "pending on" October 1, 1981, they are entitled to
receive all attorney's fees they incurred in the prosecution
of their litigation, whether the fees were incurred before or
after October 1.
A recent decision of the U.S. Court of Claims provides this
court with guidance in resolving the parties' arguments. In
Brookfield Construction Co. v. United States, 661 F.2d 159
(Ct.Cl. 1981), the court reviewed the Contract Disputes Act of
1978, 41 U.S.C. § 601 et seq. The question directly addressed
in that case was whether a contractor, who elected to proceed
under the Act, could recover interest on its subsequently
allowed claims for periods of time prior to the effective date
of the Act, or whether the contractor could only receive
interest for the period after the effective date. The Court of
Claims concluded that interest was only available for the
latter periods. In reaching its conclusion, the court relied on
three separate factors.
First, the court recognized that if it allowed the claims
for interest, a very large liability would be placed on the
government; a liability that was not acknowledged in the Act's
legislative history. Supreme Court precedent strongly suggests
that courts should not read a statute to place large
liabilities on the federal government unless the words or
intent of the statute is clear. See United States v. Zazove,
334 U.S. 602, 68 S.Ct. 1284, 92 L.Ed. 1601 (1948); Pine Hill
Coal Co. v. United States, 259 U.S. 191, 42 S.Ct. 482, 66 L.Ed.
894 (1922). Second, the Court of Claims noted that allowing
pre-Act interest would not serve the legislative purpose of the
interest section. Its purpose was to speed resolution of
contract disputes between the Government and contractors.
Penalizing delay that occurred at a time when there had been no
incentive to expedite action would not serve to speed
resolution in the future. Finally, the Court of Claims
concluded that its resolution of the issue was more harmonious
with the long-established principle that the Government would
not waive its sovereign immunity from interest claims, unless
Congress clearly stated that that was its intention. See Lehman
v. Nakshian, 453 U.S. 156, 101 S.Ct. 2698, 69 L.Ed.2d 548
The three factors recognized in Brookfield Construction are
present in this case as well, and they all suggest that
attorney's fees incurred before the effective date of the Equal
Access to Justice Act should not be awarded. This case itself
demonstrates that a large liability could be placed on the
government. In their amended petition, the Allens are
attempting to recover all the attorney's fees they incurred in
the course of three years of litigation. The cost estimate of
the Equal Access to Justice Act, prepared by the Congressional
Budget Office, does not show an immediately large and steady
outlay of funds throughout the life of the Act, as would be
expected if the Allens' position were accepted. Rather, the
cost estimate shows the outlays starting low in the fiscal year
1981 and increasing sharply in each of the two following years.
See H.R.Rep.No.96-1418, supra, at 21. To the extent that
Congress' intent can be inferred from those figures, it appears
that Congress did not mean for litigants to receive a windfall
award of attorney's fees incurred before the Act took effect.
Allowing pre-Act fees would not promote the intent of the
Equal Access to Justice Act. Both parties here agree that the
purpose of the Act is "to reduce the deterrents and disparity
[of defending against unreasonable governmental action] by
entitling certain prevailing parties to recover an award of
attorney fees, expert witness fees and other expenses against
the United States." H.R.Rep.No.96-1418 at 6, U.S. Code Cong.
& Admin.News 1980, p. 4984. It is clear that individuals who
challenged governmental action before the effective date of
the Act were, in fact, not deterred by the high costs of
litigation from protecting their interests against the
government. An award of attorney's fees to those litigants
would not contribute to solving the problems identified by
Finally, the Congress did not expressly provide that pre-Act
attorney's fees should be paid to litigants who prove
victorious in suits involving the government. To the contrary,
the Allens' argument relies on statutory language at least as
ambiguous as that contained in the Contract Disputes Act. The
court here reaches a conclusion similar to that reached by the
Court of Claims, and holds that the Allens are not entitled to
an award of attorney's fees incurred before the effective date
of the Equal Access to Justice Act.
The Allens cite several cases which they claim support their
position that retroactive attorney's fees awards are proper.
See Hutto v. Finney, 437 U.S. 678, 695, 98 S.Ct. 2565, 2575, 57
L.Ed.2d 522 (1978); Bradley v. Richmond School Board,
416 U.S. 696, 711, 94 S.Ct. 2006, 2016, 40 L.Ed.2d 476 (1974); Dawson v.
Pastrick, 600 F.2d 70, 78 (7th Cir. 1979). Each of those cases
involves attorney's fees awarded under various civil rights
legislation, and each does hold that fees incurred before the
effective dates of the various provisions may properly be
awarded to prevailing litigants. However, none of those cases
involves an award of attorney's fees against the federal
government; rather, they involve awards in suits against local
governing bodies or private individuals. None of the three
factors identified in Brookfield Construction, which relate to
the issue of whether or not the government has waived its
sovereign immunity, were addressed in those cases, nor were
they relevant there. Consequently,
the cases cited by the Allens are clearly distinguishable
from, and irrelevant to, the issue before this court.
Because the court has found both that the government's
position in the underlying litigation was substantially
justified and that the Allens are not entitled to receive
attorney's fees incurred before the effective date of the
Equal Access to Justice Act in any event, it is not necessary
for the court to consider the alternative arguments raised by
the government in this case. In particular, the court need not
consider whether the Allens' amended petition for fees, which
increased substantially the amount that they originally
requested, was timely filed under the Act.
For all the reasons stated above, plaintiffs Allens'
application for attorney's fees and amended application for
attorney's fees are both denied.