CIC Services, LLC et al v. Internal Revenue Service et al

Filing 162

ORDER: The Court OVERRULES Plaintiff's objection 160 and ACCEPTS and ADOPTS Judge McCook's report and recommendation 159 . Accordingly, CICs motion for attorneys fees pursuant to the EAJA 149 is hereby DENIED. Signed by District Judge Travis R McDonough on 9/8/2023. (AWS)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
CIC SERVICES, LLC,
Plaintiff,
v.
INTERNAL REVENUE SERVICE,
DEPARTMENT OF TREASURY, and
THE UNITED STATES OF AMERICA,
Defendants.

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Case No. 3:17-cv-110
Judge Travis R. McDonough
Magistrate Judge Jill E. McCook

ORDER
On July 12, 2023, United States Magistrate Judge Jill E. McCook filed a report and
recommendation (Doc. 159) pursuant to 28 U.S.C. 636(b)(1) and Federal Rule of Civil
Procedure 72(b), recommending that Plaintiff CIC Services, LLC’s (“CIC”) motion for
attorney’s fees (Doc. 149) pursuant to the Equal Access to Justice Act (“EAJA”), 28 U.S.C. §
2412(d)(2)(B)(ii), be denied. CIC timely filed an objection (Doc. 160). For the reasons that
follow, the Court will OVERRULE CIC’s objection (id.) and ACCEPT and ADOPT the report
and recommendation (Doc. 159).
I.

BACKGROUND
In her report and recommendation, Magistrate Judge McCook detailed the procedural and

factual background underlying this matter. (Doc. 159, at 1–7.) The parties have not objected to
Magistrate Judge McCook’s recitation of the facts, and the Court finds that the facts set forth in
the report and recommendation are accurate. Accordingly, for the purposes of reviewing CIC’s

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objections to Magistrate Judge McCook’s report and recommendation, the Court ADOPTS BY
REFERENCE the facts set forth in the report and recommendation (Doc. 159).
II.

STANDARD OF REVIEW
This Court must conduct a de novo review of those portions of the report and

recommendation to which objections are made. 28 U.S.C. § 636(b)(1)(C). Although the Court is
required to engage in a de novo review of specific objections, if the objections merely restate the
arguments asserted in a defendant’s earlier motion, which were addressed by the magistrate
judge’s report and recommendation, the Court may deem those objections waived. See
VanDiver v. Martin, 304 F. Supp. 2d 934, 937 (E.D. Mich. 2004) (“An ‘objection’ that does
nothing more than state a disagreement with a magistrate’s suggested resolution, or simply
summarizes what has been presented before, is not an ‘objection’ as that term is used in this
context.”); see also Cole v. Yukins, 7 F. App’x 354, 356 (6th Cir. 2001) (“The filing of vague,
general, or conclusory objections does not meet the requirement of specific objections and is
tantamount to a complete failure to object.”).
III.

ANALYSIS

The EAJA entitles a prevailing party in an action brought against the United States to
attorney’s fees, “unless the court finds that the position of the United States was substantially
justified or that special circumstances make an award unjust.” 28 U.S.C. § 2141(d)(1)(A).
According to the United States Court of Appeals for the Sixth Circuit, “the government’s
position under the EAJA is substantially justified if it is justified . . . to a degree that could satisfy
a reasonable person.” United States v. Real Prop. Located at 2323 Charms Rd., 946 F.2d 437,
440 (6th Cir. 1991) (citations omitted). The court went on to state that “[a] position can be
justified even though it is not correct, . . . [as long as] a reasonable person could think it is

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correct, that is, if it has a reasonable basis in law and fact.” Id. It is the Government’s
responsibility to prove its position was substantially justified. DeLong v. Comm’r of Soc. Sec.,
748 F.3d 723, 725–26 (6th Cir. 2014). As Magistrate Judge McCook notes, neither party
disputes that CIC prevailed in an action against the United States. (Doc. 159, at 8.) Rather,
“[t]he question is whether the IRS’s position in this litigation was substantially justified.” (Id.)
CIC’s objections to Judge McCook’s report can be distilled into two main qualms: (1) the
report failed to “apply the full weight of this Court’s finding that Notice 2016-66 was arbitrary
and capricious” (Doc. 160, at 7); and (2) the report improperly focused on the IRS’s litigation
positions at the exclusion of its behavior precipitating the action (id. at 4–5). The Court will
address each in turn.
A.

Whether a Finding of Arbitrary and Capricious Action Renders the IRS’s
Position Not Substantially Justified

In determining whether the Government’s position is substantially justified, courts must
first “consider[ ] each of the government’s arguments individually” before assessing its behavior
holistically. Griffith v. Comm’r of Soc. Sec., 987 F.3d 556, 571 (6th Cir. 2021). This threshold
determination allows courts to consider the Government’s pre-litigation conduct as well as its
behavior throughout litigation. E.E.O.C. v. Memphis Health Ctr., Inc., 526 F. App’x 607, 614
(6th Cir. 2013) (“The threshold determination, which could also consider the government’s prelitigation conduct, was meant to cover the cost of all phases of civil litigation addressed by the
statute.”) (citation omitted).
Litigation of this matter centered on three questions: (1) whether the Court possessed
subject-matter jurisdiction over the action in light of the Anti-Injunction Act (“AIA”); (2)
whether the IRS’s issuance of Notice 2016-66 was subject to the Administrative Procedures
Act’s (APA) notice-and-comment requirements; and (3) whether the IRS’s issuance of Notice

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2016-66 was arbitrary and capricious under the APA for lacking sufficient supporting data. CIC
concedes that the IRS’s position on the jurisdiction question was substantially justified but
dismisses it as a “side-issue to the main, merits question”: the APA claim. (Doc. 149, at 9; Doc.
159, at 7.) CIC contends that, because the undersigned determined the IRS acted arbitrarily and
capriciously in issuing Notice 2016-66, its position on that issue is not substantially justified.
(Doc. 160, at 5–6.) The Court will therefore first assess whether the IRS was substantially
justified in its actions related to Notice 2016-66.
Though a finding that agency behavior was arbitrary and capricious may support a finding
that the Government’s position was not substantially justified, it is not a foregone conclusion.
See Pierce v. Underwood, 487 U.S. 552, 566 n.2 (1988) (noting that “a position can be justified
even though it is not correct” and that a position can be substantially justified “if a reasonable
person could think it is correct”); Andrew v. Bowen, 837 F.2d 875, 878 (9th Cir. 1988) (“We
agree with the Secretary that arbitrary and capricious conduct is not per se unreasonable.”).
Thus, government action, even if later deemed arbitrary and capricious, can still be substantially
justified “if there is a genuine dispute, or if reasonable people could differ as to the
appropriateness of the contested action.” Noble v. Barnhart, 230 F. App’x 517, 519 (6th Cir.
2007).
This Court has found that the IRS acted arbitrarily and capriciously in issuing Notice
2016-66, but it is unclear whether the IRS was substantially justified in doing so. The Court
based its ruling on the dearth of relevant data justifying the IRS’s decision to designate microcaptive transactions as a “transaction of interest” due to their perceived potential to serve as a
conduit for tax avoidance or evasion. (Id. at 10–11 (noting that the IRS claims to be “aware” of
micro-captive insurance arrangements, which it identifies as a potentially abusive tax structure,

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without actually citing to data).) But, despite the fact that the IRS failed to examine relevant
facts and data to support its conclusion and subsequent issuance of Notice 2016-66 in violation
of the APA, the Court acknowledged that “the IRS may ultimately be correct that micro-captive
insurance arrangements have the potential for tax avoidance or evasion.” (Doc. 123, at 13.)
And, according to the IRS, it reasonably identified micro-captive transactions as having “a
potential for tax avoidance or evasion” based on “the potential for abuse inherent in these
transactions”—a “commonsense” observation that “spoke for itself.” (Doc. 161, at 10–11
(quoting 26 U.S.C. § 6707A(c)(1), the IRS’s enabling statute).) On one hand, the IRS flatly
ignored the APA’s command to examine relevant data and articulate a satisfactory explanation
for its decision. (Doc. 123, at 8 (citations omitted).) On the other, the IRS’s rationale for doing
so may be “justified . . . to a degree that could satisfy a reasonable person.” See Real Prop.
Located at 2323 Charms Rd., 946 F.2d at 440 (citations omitted). However, because resolution
of this point is not essential to the Court’s decision, it will assume arguendo the IRS was not
substantially justified in issuing Notice 2016-66.
B.

Whether the IRS’s Position, Viewed Holistically, Was Substantially Justified

Even if a court finds that the Government’s actions at the agency level were not
substantially justified, its position as a whole may still be so. Gushen v. Comm’r of Soc. Sec.,
No. 16-cv-10003, 2017 WL 3484493, at *3 (E.D. Mich. Aug. 15, 2017) (“Critically, the
Government’s position as a whole can be substantially justified even if the Government’s actions
at the agency level were not substantially justified.”) (citations omitted); Amezola-Garcia v.
Lynch, 835 F.3d 553, 555 (6th Cir. 2016) (quoting Memphis Health Ctr., 526 F. App’x at 615 )
(advising courts assessing whether the Government’s position was substantially justified for
EAJA purposes to look to its behavior “as a whole,” including “both the underlying agency

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action and the current litigation”). On this point, courts within the Sixth Circuit have declined to
award EAJA fees when the Government’s overall position is substantially justified, even when it
was found to have acted arbitrarily and capriciously. See, e.g., Raza v. Chertoff, No. 3:07-cv646-H, 2009 WL 111758, at *2 (W.D. Ky. Jan. 15, 2009) (finding the Government’s position in
a case brought by a plaintiff seeking to compel adjudication of his permanent-residency
application substantially justified when “a reasonable person could find the Government’s
position, that the Court had no jurisdiction over the case, substantially justified”); see also In re
Fee Motions in Various Soc. Sec. Cases Affected by the Sixth Cir. Decision, No. 17-5206, 2019
WL 6119220, at *5 (E.D. Ky. Nov. 18, 2019), aff’d sub nom. Griffith v. Comm’r of Soc. Sec.,
987 F.3d 556 (6th Cir. 2021) (“The Court finds that, even if arguendo the Government’s position
on the APA issue that was found to be arbitrary and capricious is not substantially justified, the
other more prominent claims . . . were substantially justified.”).
Though Sixth Circuit precedent has yet to draw out the relative weight courts should give
the Government’s pre- and post-litigation behavior when undertaking this hyperopic evaluation,
Amezola-Garcia v. Lynch, 835 F.3d 553 (6th Cir. 2016) is instructive.1 At issue in that case was
whether the Government was substantially justified after its voluntary-departure decision as to a
noncitizen plaintiff was remanded. Id. Despite holding that the Government’s pre-litigation
position on the voluntary-departure issue was not substantially justified, the court nonetheless
determined that its position as a whole was. Id. at 555 (“Assuming that the Government’s prelitigation position on voluntary departure was not justified, the fact that the remainder of the
Government’s case was justified renders the Government’s position in this case, as a whole,

1

CIC insists that the Government’s “underlying action that led to the litigation is to be the
primary focus of an EAJA inquiry.” (Doc. 159, at 4.) The Court finds no support for this tenet
in the relevant caselaw.
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substantially justified.”). In doing so, the court acknowledged that “[n]o Sixth Circuit case
elaborates on the ‘as a whole’ standard” and decided to base its decision on the fact that “the
majority of the Government’s arguments [distinct from the voluntary-departure issue] were
justified” and that “the Government’s litigation position before th[e] court was entirely justified.”
Id. The court also observed that the arguments the Government proffered in support of the
voluntary-departure issue were not the primary driving force of the case, given it “made up only
seven pages out of the twenty-five pages of argument in [the plaintiff’s] brief, and it was the last
argument made.” Id. On this point, the court referenced its prior holding that an EAJA
application fails when the Government’s position on the more prominent of the multiple, distinct
claims involved in the case was substantially justified. Id. (quoting Memphis Health Ctr., 526 F.
App’x 6 at 615 ).2
Though, as in Amezola-Garcia, the Government’s pre-litigation position was not
substantially justified, its behavior thereafter renders its position in the case, viewed holistically,
substantially justified.3 As the Court noted, supra Section III.A., three general issues dominated

2

District courts within the Sixth Circuit have since applied this logic to EAJA requests. See,
e.g., Slone v. Saul, No. 7:18-cv-052, 2021 WL 9349954, at *2 (E.D. Ky. Mar. 16, 2021) (“[E]ven
if the Government’s argument ‘on a less-prominent claim was not reasonable, its position as a
whole may have been substantially justified.’”) (citations omitted). The Sixth Circuit has
interchanged “prominence” with “importance” in the EAJA context. See Griffith, 987 F.3d at
572 (describing an issue as “significantly less important than the other issues involved in the
case” in concluding that “the government’s arguments on the ‘prominent’ issues in the litigation
were reasonable”).
3

CIC objects to Judge McCook’s report in part because it contends she failed to give due
consideration to the IRS’s pre-litigation behavior, i.e., its issuance of Notice 2016-66 absent
sufficient data. (Doc. 160, at 4–5). But Judge McCook did account for the IRS’s underlying
agency action in her analysis. Despite noting that the jurisdictional question was a “threshold
question” that “drove the IRS’s defense in this case,” she acknowledged that “considering the
IRS’s AIA argument in a vacuum [would be] contrary to the Sixth Circuit’s guidance” and also
considered the IRS’s behavior before and throughout litigation. (Doc. 159, at 11.) She went on
to summarize this Court’s finding that the IRS acted arbitrarily and capriciously in issuing Notice
2016-66, taking care to note that such a finding “does not compel an award of fees.” (Doc. 159,
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litigation of this matter: (1) whether the Court possessed subject-matter jurisdiction over the
action in light of the AIA; (2) whether the IRS’s issuance of Notice 2016-66 was subject to the
APA’s notice-and-comment requirements; and (3) whether the IRS’s issuance of Notice 2016-66
was arbitrary and capricious under the APA for want of sufficient supporting data. The latter
two issues implicate the IRS’s pre-litigation behavior, and the Government’s position on the
third, as noted above, may not have been substantially justified. See supra Section III.A. Even
so, CIC concedes that the Government was justified in its position on the jurisdictional
question—an issue that journeyed to the Supreme Court and back, thereby eating up a significant
chunk of the litigation. See CIC Servs., LLC v. IRS, 925 F.3d 247, 258 (6th Cir. 2019), rev’d and
remanded, 141 S. Ct. 1582 (2021). And the Court agrees with Judge McCook’s finding that the
IRS’s position on the notice-and-comment issue—which served as the basis for the Court’s
issuance of an injunction against the IRS’s enforcement of Notice 2016-66 against CIC—was
also substantially justified.4 (Doc. 159, at 13–14.) Thus, even assuming the IRS’s position as to
the adequacy of support justifying the issuance of Notice 2016-66 was not substantially justified,

at 15–16 (quoting Summer Hill Nursing Home LLC v. Sebelius, 677 F. Supp. 2d 181, 186
(D.D.C. 2010)).)
4

According to Judge McCook, “[t]he IRS [] did not take a position [on the notice-and-comment
issue] that was ‘flatly at odds with the controlling case law’ but instead it ‘lost because an
unsettled question was resolved unfavorably.’” (Doc. 159, at 13–14 (quoting Griffith, 987 F.3d
at 572).) She arrived at this conclusion by considering the fact that other courts analyzing the
IRS’s argument found it to be reasonable and, in at least one case, superior. (Id. at 13 (citing,
among other cases, Mann Constr., Inc. v. United States, 539 F. Supp. 3d at 745 (E.D. Mich.
2021)).) Judge McCook also noted in regard to the IRS’s argument that Notice 2016-66 was an
interpretive rule not subject to formal adjudication requirements that “[t]he line between
interpretive rules and legislative rules is fuzzy and enshrouded in considerable smog.” (Id. at 14
(quoting NRDC v. Wheeler, 955 F.3d 68, 83 (D.C. Cir. 2020)) (internal quotation marks
omitted).) Though this Court ultimately ruled against the IRS (Doc. 82), its position on the issue
is “justified . . . to a degree that could satisfy a reasonable person.” See Real Prop. Located at
2323 Charms Rd., 946 F.2d at 440 (citations omitted).
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it is only one of at least three separate issues driving litigation5 in this matter, and the
Government occupied substantially justified positions on the remaining two. For this reason, the
Court OVERRULES CIC’s objections (Doc. 160) to Judge McCook’s report and
recommendation (Doc. 159).
IV.

CONCLUSION

For the reasons stated above, the Court OVERRULES Plaintiff’s objection (Doc. 160)
and ACCEPTS and ADOPTS Judge McCook’s report and recommendation (Doc. 159).
Accordingly, CIC’s motion for attorney’s fees pursuant to the EAJA (Doc. 149) is hereby
DENIED.
SO ORDERED.  
/s/ Travis R. McDonough
TRAVIS R. MCDONOUGH
UNITED STATES DISTRICT JUDGE

5

As Judge McCook observed, the IRS’s AIA argument “drove [its] defense in this case.” (Doc.
159, at 10–11.)

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