The opinion of the court was delivered by: Decker, District Judge.
MEMORANDUM OPINION AND ORDER
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:
"Except as otherwise specifically provided by
statute, a court shall award to a prevailing
party other than the United States fees and other
expenses [including attorney's fees], in addition
to any costs awarded pursuant to subsection (a),
incurred by that party in any civil action (other
than cases sounding in tort) brought by or
against the United States in any court having
jurisdiction of that action, unless the court
finds that the position of the United States was
substantially justified or that special
circumstances make an award unjust."
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. ...