Deja Vu-Lynnwood, Inc. v. United States

MEMORANDUM

Deja Vu appeals the decision of the district court denying its motion for litigation costs. Deja Vu owns nightclubs in the Seattle area that feature exotic dancers. Deja Vu treats its dancers as “tenants” rather than employees, and thereby avoids paying employment taxes. The IRS audited Deja Vu, determined that the dancers were employees of Deja Vu, and assessed back taxes. Deja Vu filed a complaint in district court challenging the assessments. After this court issued its opinion in Marlar, Inc. v. United States, 151 F.3d 962 (9th Cir.1998), which held that a club treating its female dancers as tenants was not subject to employment taxes, the government conceded its case against Deja Vu before trial. Deja Vu moved for litigation costs under 26 U.S.C. § 7430 . The district court denied the motion for costs and Deja Vu appealed to this court.

I.

We review a district court’s decision to deny a prevailing party an award of attorney fees under 26 U.S.C. § 7430 for an abuse of discretion. See United States v. Ayres, 166 F.3d 991, 997 (9th Cir.1999). Section 7430 allows an award of litigation costs, including attorneys’ fees, where the government’s position is not…

dissenting.

I dissent because I believe that the government was substantially justified in arguing that the ladies’ drink credits constituted “payments” under section 6041, and thus that Deja Vu had not satisfied section 530’s filing requirements.

26 U.S.C. § 7430 (a) provides that the prevailing party “[i]n any administrative or court proceeding which is brought by or against the United States in connection with... [tax liability] .. .may be awarded ... reasonable litigation costs incurred in connection with such court proceeding,” including attorneys fees. A party is not to be treated as the prevailing party “if the United States establishes that... [its position] .. .in the proceeding was substantially justified.” 26 U.S.C. § 7430 (c)(4)(B)(i). The Supreme Court in Pierce v. Underwood, 487 U.S. 552, 565 , 108 S.Ct. 2541 , 101 L.Ed.2d 490 (1988) (internal quotation marks omitted), stated that “substantially justified” means “justified in substance or in the main-that is, justified to a degree that could satisfy a reasonable person.” We review the district court’s opinion to deny a prevailing party an award of attorney fees under 26 U.S.C. § 7430 for an abuse of discretion.…