Lewis B. Smith Helen M. Smith v. Nicholas Brady, Secretary of Treasury John Murphy, Acting Commissioner of Internal Revenue

Lewis B. Smith and Helen M. Smith (“Smiths”) sued the Internal Revenue Service (“IRS”) seeking to have a letter expunged from the Smiths’ files and to prevent the IRS from using such a letter in the future. The letter labeled their church, the Church of Scientology, a “sham” religion. After various motions to dismiss the case were rejected by the district court, the suit was settled almost a year after it was filed. The Smiths received most of the relief requested in their complaint. The district court then granted the Smiths’ request for attorney’s fees pursuant to the Equal Access to Justice Act (“EAJA”), 28 U.S.C. § 2412 (d)(1)(A). The IRS appeals the award of fees.

We reverse the district court’s award of attorney’s fees. We find that the exclusive means of recovering attorney’s fees in this tax-related case is Internal Revenue Code § 7430. Because the Smiths did not exhaust their administrative remedies as required by the I.R.C. provision, attorney’s fees cannot be awarded.

FACTS

In the course of an audit of the Smiths’ 1987 tax return the IRS sent the Smiths a letter (“Letter”) dated February 14, 1989, disallowing a claimed deduction of $61,086 for contributions to the…