Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 75 C 2401 -- Nicholas Bua, Judge.
Pell, Circuit Judge, Coffey, Circuit Judge, and Neaher, Senior District Judge.*fn*
NEAHER, Senior District Judge.
These appeals, consolidated by the Court's order of December 17, 1982, arise from a judgment of the district court awarding Tabcor Sales Clearing, Inc. (Tabcor), five thousand dollars ($5,000.00) in costs and attorney's fees.
The genesis of the dispute was a tax refund suit by Tabcor in which the United States counterclaimed to recover an unpaid portion of a tax assessment. The underlying problem of whether some of Tabcor's personnel were independent contractors, not subject to tax, or employees, subject to tax, has generated a multitude of litigation. United States v. Dema, 544 F.2d 1373 (7th Cir. 1976) (the dissenting opinion of Chief Judge Markey, 544 F.2d at 1378, details the facts); Tabcor Sales Clearing, Inc. v. Department of Treasury, 471 F. Supp. 436 (N.D. Ill. 1979); Dema v. Feddor, 470 F. Supp. 152 (N.D. Ill. 1979), aff'd, 661 F.2d 937 (7th Cir. 1981). Through section 530 of the Revenue Act of 1978, Public Law 95-600, Congress settled the issue in the taxpayer's favor; thus the government consented to a judgment and, subsequently, Tabcor sought costs and fees. We turn first to the government's contention that the district court erred in awarding costs and fees.
We find that the district court erred in awarding costs and fees based upon the record before it. Accordingly, we vacate the judgment and remand the case for further proceedings consistent with this opinion.
The appropriate standard of review is stated in Holcomb v. United States, 622 F.2d 937, 942 (7th Cir. 1980):
"The first question to be resolved in this matter is whether [42 U.S.C.] § 1988 is applicable to the counter-claim. That section, literally applies to actions by or on behalf of the government, and the courts, in general have held the statute not applicable to suits instituted by taxpayers to obtain refunds.
"But where, as here, the government has responded with a counter-claim, there has been held to be an action 'by or on behalf of the United States, ' and § 1988 is applicable.
"Although § 1988, by its terms, leaves the decision to award attorney's fees to the discretion of the trial court, the courts have held that attorney's fees are appropriate only where the government's action was instituted in bad faith or was frivolous, harassing, or vexatious." (Citations omitted.)
Applying this standard of review, the district court ruled as follows:
"To illustrate the unreasonable nature of the government's conduct in the matter at bar, Tabcor points to the assessment, for the tax year 1970, forming the basis of the defendant's counterclaim. The assessment for 1970 was $143,000, as compared to the plaintiff's total gross income for that year of $89,000.
"Without more, these figures do not, as the plaintiff contends, provide a basis of comparison sufficient to allow this court to determine, with relative certainty, whether the government's counterclaim was reasonable. These figures do, however, suggest that the assessment was excessive, and this suggestion is strengthened further by the fact that the government has offered no explanation or objective reason for such a ...