CHURCH OF SCIENTOLOGY WESTERN UNITED STATES, Plaintiff,
UNITED STATES of America, Defendant.
United States District Court, S.D. California.
Oct. 15, 1992.
KEEP, Chief Judge:
*1 On March 21, 1991, the Internal Revenue Service issued a third-party
summons to the First Interstate Bank, located at 401 B Street, San Diego,
California, demanding the bank records of plaintiff Church of Scientology
Western United States. On March 25, 1991, plaintiff filed a petition to quash
the IRS summons. Upon receipt of the petition, the IRS withdrew the summons,
and plaintiff stipulated to dismissal of the action, specifically reserving the
issue of plaintiff's entitlement to fees and costs.
On October 11, 1991, United States Magistrate Judge Harry McCue heard
plaintiff's motion for an order awarding attorneys' fees, expenses, and costs
to petitioner. Magistrate Judge McCue denied the motion on July 31, 1992.
Plaintiff, however, did not have notice of Magistrate Judge McCue's denial
until September 9, 1992, when the order was served as an attachment to the
IRS's opposition to plaintiff's motion for a status conference. Plaintiff
filed an objection to Magistrate Judge McCue's order on September 23, 1992,
within the ten day period allotted by Federal Rules of Civil Procedure 72
Federal Rule of Civil Procedure 72(a), incorporated herein by reference,
provides that a district court reviews a magistrate's order concerning a non-
dispositive question under a clearly erroneous standard. Magistrate orders
concerning dispositive questions are reviewed, however, under a de nova
standard. F.R.Civ.P. 72(b). In order to determine whether an issue is
dispositive or non-dispositive, the court must determine how the issue would be
characterized under the Federal Magistrates Act, 28 U.S.C. s 631, et seq. See
Perales v. Casillas, 950 F.2d 1066, 1070 (5th Cir.1992). Section
636(b)(1)(A) allows a judge to hear and determine any nondispositive pretrial
matter, such determination being subject to a clearly erroneous standard of
review. On the other hand, section 636(b)(1)(B) states that a magistrate
may only issue recommendations on eight listed dispositive matters, which are
subject to a de nova standard of review. The question of whether to award
attorney's fees is not among the eight listed matters. Thus, the court must
determine whether the matter is in nature similarly dispositive by looking at
the legislative intent underlying section 636(b)(1)(B). See 11 Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure s 3076.5 at 46
Dispositive questions warrant a higher standard of review because "of the
possible constitutional objection that only an article III judge may ultimately
determine the litigation." See generally H.R.Rep. No. 94-1060, 94th Cong., 2d
Sess. 10-11 (1976). Thus, matters that affect that final outcome of the
litigation are dispositive, whereas pretrial matters not integral to the
determination of the merits of the action are non-dispositive.
The question of whether an award of attorney's fees is dispositive has not
been addressed in the Ninth Circuit. In West v. Redman, 530 F.Supp. 545
(D.Del.1982), the district court determined that an award of attorney's fees
was a dispositive matter. The court reasoned that attorney's fees are
"essential to a full disposition of the petitioner's claim and the defendant's
liability." Id. at 548. Because the Third Circuit held that attorney's
fees were integral to the merits of an action rather than collateral and
"clearly part of the overall relief sought and granted," the court held that
attorney's fees are dispositive. Id. (citing Croker v. Boeing, 662 F.2d
975, 983 (3d Cir.1981) (en banc)). I agree with the District Court of
Delaware's analysis, and hold that an award of attorney's fees is dispositive
in nature. I therefore will review Magistrate Judge McCue's order denying
attorney's fees de novo.
*2 Petitioner has requested attorneys' fees and costs pursuant to 26
U.S.C. s 7430, which provides that "[i]n any ... court proceeding which is
brought ... against the United States in connection with the determination,
collection, or refund of any tax ... under this title, the prevailing party may
be awarded a judgment or a settlement for ... reasonable litigation costs."
26 U.S.C. s 7430(a). In order for a party to be awarded reasonable
litigation costs under section 7430, three requirements must be met. First,
the taxpayer must exhaust all administrative remedies available within the
Internal Revenue Service. Id. at s 7430(b)(1). Second, the taxpayer
must be the "prevailing party" as defined by section 7430(c)(4). Third, the
taxpayer must show that the requested litigation costs are "reasonable."
Id. at s 7430(c)(1).
The government argues, and I agree, that Magistrate Judge McCue correctly
denied petitioner's request for attorney's fees and costs because petitioner
did not exhaust its administrative remedies. Although the Treasury Regulations
promulgated under 26 U.S.C. s 7430 are no longer binding on cases filed
after January 1, 1986 due to a "sunset" provision that renders them
inapplicable to such proceedings, the Regulations still serve as a guide for
taxpayers who wish to comply with the statutory requirement to exhaust
administrative remedies. See Kenlin Industries, Inc. v. United States
[91-1 USTC P 50,122], 927 F.2d 782, 786-88 (4th Cir.1991). Under the
Regulations, a taxpayer is not considered to have exhausted his or her
administrative remedies with regard to a summons unless the taxpayer submits
the dispute to the district director before filing suit. See 26 C.F.R. s
301.7430-1. Even though the Regulations serve as only a guide to the taxpayer,
in order to obtain attorneys' fees and costs under 26 U.S.C. s 7430(b)(1),
the taxpayer must still show that he or she attempted to exhaust the
administrative remedies offered by the IRS.
In this case, plaintiff has failed to show that it took any steps to exhaust
administrative remedies within the IRS before filing a suit to quash the
summons in district court. Although the exhaustion of administrative remedies
is not required to obtain the remedy of quashing the summons, the plaintiff is
required to exhaust administrative remedies before it is entitled to
reimbursement for its litigation expenses.
For the reasons stated above, I affirm Magistrate Judge McCue's order denying
attorneys' fees and costs.
IT IS THEREFORE ORDERED that the order of Magistrate Judge McCue is affirmed
in its entirety.