Blakley v. United States

United States Court of Appeals for the Federal Circuit

2009-5047

BRIAN ALAN BLAKLEY (d/b/a TCS),

Plaintiff-Appellee,

v.

UNITED STATES,

Defendant-Appellant.

Robert G. Nath, Robert G. Nath, PLLC, of McLean, Virginia, argued for plaintiff-
appellee.

Teresa T. Milton, Attorney, Appellate Section, Tax Division, United States
Department of Justice, of Washington, DC, argued for defendant-appellant. With her on
the brief were John A. DiCicco, Acting Assistant Attorney General, and Thomas J.
Clark, Attorney.

Appealed from: United States Court of Federal Claims

Judge Susan G. Braden
 United States Court of Appeals for the Federal Circuit

2009-5047

BRIAN ALAN BLAKLEY (d/b/a TCS),

Plaintiff-Appellee,

v.

UNITED STATES,

Defendant-Appellant.

Appeal from the United States Court of Federal Claims 06-CV-749,
Judge Susan G. Braden.

___________________________

DECIDED: January 27, 2010
___________________________

Before MAYER, PLAGER, and DYK, Circuit Judges.

DYK, Circuit Judge.

Defendant United States appeals from a decision of the Court of Federal Claims

awarding plaintiff Brian Alan Blakley (d/b/a TCS) (“Blakley”) $10,732.00 in attorneys’

fees pursuant to Internal Revenue Code (“I.R.C.”) § 7430. In finding Blakley entitled to

an award of fees, the Court of Federal Claims determined that the position of the United

States in an underlying tax refund proceeding was not substantially justified.

On appeal, the United States contends that the Court of Federal Claims erred in

finding that the position of the United States was not substantially justified. We agree,

and, accordingly, we reverse.
 BACKGROUND

Blakley holds a license from the Bureau of Alcohol, Tobacco, Firearms and

Explosives (“ATF”) as a manufacturer of firearms. In December 2003, Blakley

manufactured two allegedly similar Model AR16 firearms with serial numbers “ATF0001”

and “0000001.” The latter one is the primary subject of this case.

The I.R.C. imposes a $200 transfer tax on the transfer of “machine guns” with

certain exceptions. See National Firearms Act (“NFA”), Pub. L. No. 73-474, § 3, 48

Stat. 1236 (1934) (current version at I.R.C. § 5801 et seq.); I.R.C. § 5811(a). On or

around December 21, 2003, Blakley submitted ATF0001 to the ATF with a request that

ATF determine that the firearm was not a machine gun and thus fell outside the scope

of I.R.C. § 5811(a).

While Blakley’s first request was still pending, on May 14, 2004, Blakley filed an

Application for Tax Paid Transfer and Registration of Firearm (“Form ATF 4”) with the

ATF for his other Model AR16 firearm, serial number 0000001. Although Blakley

described the firearm on Form ATF 4 as a “machine gun,” he stated in a footnote that it

was “subject to Firearms Tech. Branch Determination,” i.e., the determination requested

with respect to ATF0001. The form also stated that the firearm had been transferred to

another firearms manufacturer, AWE Technology, Inc. (“AWE”). Both Blakley and AWE

held special occupational taxpayer status under the NFA, I.R.C. § 5801 et seq. Under

I.R.C. § 5852(d), the transfer was exempt from the $200 NFA tax because it was a

transfer between special occupational taxpayers. However, Blakley did not indicate on

Form ATF 4 that he was claiming this exemption. Along with the form, Blakley

submitted payment for the $200 tax.

2009-5047 2
 The ATF subsequently informed Blakley that it had classified firearm ATF0001 as

a machine gun. Blakley filed a claim for a refund of the $200 transfer tax that he had

paid on his other firearm, 0000001, asserting that it was not a “machine gun” and

therefore the transfer of the firearm to AWE was not a taxable transfer of a machine

gun. After the ATF denied this refund claim on the ground that its classification had

been correct, Blakley filed suit against the United States in the Court of Federal Claims

in November 2006 seeking a refund of the $200 federal tax. Blakley again alleged that

the firearm transferred to AWE was not a machine gun and therefore was not taxable

under I.R.C. § 5811. The United States responded that Blakley was not entitled to a

refund because the weapon had not been misclassified. Neither party raised the issue

of whether the tax exemption for transfers between special occupational taxpayers

applied.

On June 28, 2007, government counsel wrote to notify Blakley that he was

entitled to a refund of $200, plus interest, because the transfer had been eligible for the

tax exemption for transfers between special occupational taxpayers. Although the

United States requested that Blakley execute a stipulation for dismissal of the case, he

refused to do so. The United States then filed a motion for entry of judgment for the

amount sought in Blakley’s complaint, which the Court of Federal Claims granted on

July 13, 2007. Blakley filed a motion to vacate the court’s order, claiming that the

government had not conceded his case because it had not conceded that his firearm

was not a machine gun under the NFA. The Court of Federal Claims denied his motion

and entered judgment in his favor. On appeal, we affirmed, rejecting the taxpayer’s

2009-5047 3
contention that the refund award was unauthorized because the machine gun issue had

not been resolved. Blakley v. United States, 280 Fed. App’x. 968, 969 (Fed. Cir. 2008).

Thereafter, Blakley sought an award of attorneys’ fees under I.R.C. § 7430 and

under the Equal Access to Justice Act (“EAJA”), Pub. L. 96-481, § 203(a)(1), 94 Stat.

2321 (1980) (codified as amended at 5 U.S.C. § 504; 28 U.S.C. § 2412). The Court of

Federal Claims then granted, in part, Blakley’s motion for an award of attorneys’ fees

pursuant to I.R.C. § 7430 in the amount of $10,732, finding that the government’s

position was not substantially justified because the transaction between Blakley and

AWE was exempt from the NFA tax. Memorandum Opinion and Final Order Regarding

Attorney Fees and Costs, Blakley v. United States, No. 06-749 T, slip. op. at 14, 20 (Ct.

Fed. Cl. Dec. 31, 2008) (“Final Order”). 1 The court rejected Blakley’s additional claim

that the EAJA applied to this proceeding, finding that Congress intended for I.R.C. §

7430 to supplant the EAJA for attorneys’ awards whenever § 7430 applied. Final Order,

slip op. at 11-12. The court entered judgment in favor of Blakley on the same day.

Judgment, Blakley v. United States, No. 06-749 T (Ct. Fed. Cl. Dec. 31, 2008).

The United States timely appealed, and we have jurisdiction under 28 U.S.C.

§ 1295(a)(3).

1
Section 7430(a) of the I.R.C. states:
In any administrative or court proceeding which is brought by or against
the United States in connection with the . . . refund of any tax . . . under
this title, the prevailing party may be awarded a judgment or a settlement
for . . . reasonable administrative costs incurred in connection with such
proceeding within the Internal Revenue Service, and . . . reasonable
litigation costs incurred in connection with such court proceeding.
I.R.C. § 7430(a).

2009-5047 4
 DISCUSSION

Assuming that Blakley was otherwise a prevailing party because the court

ordered the United States to pay Blakley $200, an award is permissible only if the

government’s position was not substantially justified. 2 The central question on appeal is

whether the Court of Federal Claims erred in finding that the position of the United

States was not substantially justified. The Court of Federal Claims based its decision to

award attorneys’ fees on its finding that: “The ATF’s refund denial was in error and the

Government’s decision initially to defend that error in litigation was not ‘substantially

justified,’ albeit that decision subsequently was corrected.” Final Order, slip op. at 14.

The United States contends that the Court of Federal Claims erred in finding that the

government’s position in the tax refund proceeding was not substantially justified.

Section 7430 defines the “position of the United States” with reference to judicial

and administrative proceedings. 3 A 1985 amendment to the EAJA, using somewhat

different language, states that the “position of the United States” means,

2
I.R.C. § 7430(c)(4)(B)(i) provides: “A party shall not be treated as the
prevailing party in a proceeding . . . if the United States establishes that the position of
the United States in the proceeding was substantially justified.”
3
Section 7430 defines the “position of the United States” as
(A) the position taken by the United States in a judicial proceeding to
which subsection (a) applies, and
(B) the position taken in an administrative proceeding to which subsection
(a) applies as of the earlier of—
(i) the date of the receipt by the taxpayer of the notice of the
decision of the Internal Revenue Service Office of Appeals, or
(ii) the date of the notice of deficiency.
I.R.C. § 7430(c)(7).

2009-5047 5
 in addition to the position taken by the United States in the civil action, the
action or failure to act by the agency upon which the civil action is based;
except that fees and expenses may not be awarded to a party for any
portion of the litigation in which the party has unreasonably protracted the
proceedings . . . .

Pub. L. No. 99-80, § 2(c)(2)(B), 99 Stat. 183, 185 (1985) (codified as amended at 28

U.S.C. § 2412(d)(2)(D)). In the context of EAJA claims, we have held that the “position

of the United States” in judicial proceedings refers to the United States’ position

“throughout the dispute, including not only its litigating position but also the agency’s

administrative position.” Doty v. United States, 71 F.3d 384, 386 (Fed. Cir. 1995); see

also Gavette v. Office of Pers. Mgmt., 808 F.2d 1456, 1467 (Fed. Cir. 1986) (“[I]t is now

clear that the position of the United States includes the position taken by the agency at

the administrative level.”). Because of the different language in § 7430, the government

argues § 7430 makes clear that, where attorneys’ fees are sought for judicial

proceedings, the government’s position is defined solely by its litigating position in court.

The Court of Federal Claims read the language of § 7430 differently, apparently finding

that there was no difference between the EAJA formulation and the § 7430 formulation.

We need not decide that question here because we conclude that both the United

States’ litigating position in court and the ATF’s position at the agency level were

substantially justified.

The key here is that Blakley’s claim for refund to the ATF did not mention the

exemption for special occupational taxpayers. The refund claim was based solely on

2009-5047 6
the machine gun issue; Blakley deliberately chose not to assert the exemption and

indeed urged that the refund on that basis was improper. 4

Just as with refund requests submitted to the Internal Revenue Service (“IRS”),

the ATF is only required to consider theories asserted by the taxpayer. Under the

statute, a refund may be allowed only if the taxpayer files a timely administrative claim

for refund “according to the provisions of law in that regard, and the regulations of the

Secretary established in pursuance thereof.” I.R.C. § 7422(a). The relevant regulations

clearly state that claims for tax refunds

must set forth in detail each ground upon which . . . refund is claimed and
facts sufficient to apprise the appropriate [Alcohol and Tobacco Tax and
Trade Bureau] officer of the exact basis thereof. . . . A claim which does
not comply with this paragraph will not be considered for any purpose as a
claim for the refund . . . .

27 C.F.R. § 70.123(b)(1) (2006) (emphasis added). 5 In interpreting similar language for

claim refund requests to the IRS, courts have determined that the agency is only

required to consider the grounds for refund asserted by the taxpayer. Charter Co. v.

United States, 971 F.2d 1576, 1579 (11th Cir. 1992). And when a taxpayer’s refund

claim is denied, the taxpayer is limited in subsequent litigation to the grounds contained

4
See Motion to Vacate Final Order, To Restore Case to Active Docket, or
Alternatively, to Amend or Clarify Final Order, Blakley v. United States, No. 06-749 T at
3 (Ct. Fed. Cl. July 13, 2007) (“Plaintiff did not claim . . . that his firearm . . . was exempt
from the transfer tax under any provision of the NFA (including the exemption for
transfers between special occupational taxpayers . . . ), except for contending that the
firearm was not subject to the tax since it was not a ‘machine gun’ within the meaning of
the NFA.”).
5
Similar language appears in the IRS’s regulations. See 26 C.F.R. §
301.6402-2(b)(1) (2005) (discussing how tax refund claims must “set forth in detail each
ground upon which a credit or refund is claimed and facts sufficient to apprise the
Commissioner of the exact basis thereof”).

2009-5047 7
within the refund claim by the variance doctrine. See Computervision Corp. v. United

States, 445 F.3d 1355, 1363 (Fed. Cir. 2006); Charter, 971 F.2d at 1579 (explaining that

only “grounds fairly contained within the refund claim” may be raised in a refund suit);

Edwards v. Malley, 109 F.2d 640, 645 (1st Cir. 1940) (discussing how “taxpayer in suing

is confined to the scope of the grounds for refund asserted in the claim”). The purpose

of the variance doctrine is “to prevent surprise and to give adequate notice to the

[government] of the nature of the claim and the specific facts upon which it is

predicated” so as to allow administrative investigation. Computervision, 445 F.3d at

1363. Hence, the action of the government here is to be judged solely by the ground for

refund that the taxpayer asserted before the agency. Because Blakley’s sole basis for

seeking refund was that, in his view, the firearm was misclassified as a machine gun,

the justification of the government’s position must be solely determined with regard to

that argument.

Neither the ATF nor the United States in the course of litigation ever took the

position that Blakley was not entitled to the exemption for special occupational

taxpayers. Rather, their position was that Blakley was not entitled to a refund because

the firearm was a machine gun. Blakley never claimed and indeed the Court of Federal

Claims never found that the United States’ litigation position before the Court of Federal

Claims—namely, that the gun in question was a machine gun subject to the tax—was

not substantially justified. Moreover, the ATF took only one action that was judicially

contested: it denied Blakley’s claim for a refund based on its conclusion that the firearm

at issue was a machine gun. Because the government never took the position that

2009-5047 8
Blakley was not entitled to the exemption for special occupational taxpayers, its actions

cannot be the basis for an award of attorneys’ fees.

We conclude that neither the ATF’s action in denying the refund on the basis that

the firearm had not been misclassified nor the government’s action in defending the

denial of the refund on the same grounds was without substantial justification. We

therefore hold that the Court of Federal Claims erred in granting Blakley attorneys’ fees

under I.R.C. § 7430, and we reverse. 6

REVERSED

6
We need not address Blakley’s assertions that EAJA governs fees in this
case and allows fees for the administrative proceedings. Even if these assertions were
correct, Blakley would not be entitled to fees under EAJA since EAJA, like § 7430,
incorporates a without substantial justification requirement. 28 U.S.C. § 2412(d)(1)(A).

2009-5047 9