THE SUPREME COURT OF THE
FEDERATED STATES OF MICRONESIA
Cite as FSM Social Security Administration v. Mallarme ,
6 FSM Intrm. 230 (Pohnpei 1993)
FSM SOCIAL SECURITY ADMINISTRATION,
CIVIL ACTION NO. 1992-022
MEMORANDUM OF DECISION
Andon L. Amaraich
Trial: September 9, 1993
Decided: October 29, 1993
For the Plaintiff: Fredrick L. Ramp, Esq.
P.O. Box 1480
Kolonia, Pohnpei FM 96941
For the Defendant: Daniel J. Berman, Esq.
Rush, Moore, Craven, Sutton, Morry & Beh
2000 Hawaii Tower
745 Fort Street
Honolulu, HI 96813
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Attorney, Trial Counselor and Client ) Fees; Taxation
A taxpayer who owes social security taxes to the government as employer contributions under the FSM Social Security Act is liable for reasonable attorney's fees if the tax delinquency is referred to an attorney for collection; however, the court may exercise discretion in determining the reasonableness of the fees assessed in light of the particular circumstances of the case. FSM Social Sec. Admin. v. Mallarme, 6 FSM Intrm. 230, 232 (Pon. 1993).
Attorney, Trial Counselor and Client ) Fees; Taxation
Among the factors which the court may consider in determining the amount of attorney's fees recoverable in an action brought under 53 F.S.M.C. 605 is the nature of the violation, the degree of cooperation by the taxpayer, and the extent to which the Social Security Administration
prevails on its claims. FSM Social Sec. Admin. v. Mallarme, 6 FSM Intrm. 230, 232-33 (Pon. 1993).
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ANDON L. AMARAICH, Associate Justice:
This matter came to trial on the sole issue of attorney's fees. The plaintiff claims attorney's fees under a provision of the FSM Social Security Act, 53 F.S.M.C. 605(4), in the amount of $1,155. The defendant argues against liability for any attorney's fees. The Court finds the defendant liable for attorney's fees in the amount of $312.
I. FINDINGS OF FACT
The plaintiff, FSM Social Security Administration, brought action against defendant Max Mallarme d/b/a "The Builders" on February 7, 1992 for alleged failure to file quarterly social security tax returns and pay tax contributions due for the quarter ending December 31, 1990 and all subsequent quarters. Mr. Mallarme denied the allegations in his answer to the complaint.
On July 29, 1992, the FSM Social Security Administrator sent Mr. Mallarme a letter stating that he owed returns and taxes as "The Builders" for the quarters ending March 31, 1992 and June 30, 1992.1 Defendant later showed that he had in fact reported and paid taxes for those quarters.
The defendant moved for summary judgment on October 9, 1992 on grounds that he was not in business as "The Builders" during the quarters which the FSM Social Security Administration sought to collect contributions. Mr. Mallarme stated by affidavit that "The Builders" had terminated business by June 30, 1990. The court file contains a copy of a Social Security Administration quarterly tax return signed by Mallarme on January 9, 1992 as "The Builders" for the quarter ending December 31, 1991. The return listed four active employees as of that time. The Court denied the motion for summary judgment on February 9, 1993.
On October 29, 1992 the Social Security Administrator sent another demand letter to Mallarme. The letter did not specify quarters or amounts due.
Prior to trial the parties settled their claims except for the attorney's fees currently in dispute. Mr. Mallarme owed a total of $2,760.30. This sum included delinquent taxes for three quarters, plus penalty and interest charges as assessed under 53 F.S.M.C. 605. As of the date of trial Mallarme had paid all of this total except for $58.13.
Counsel for plaintiff submitted a written account of attorney's fees incurred to the date of trial. The fees included $815 in attorney's fees at a rate of $75 per hour, and $240 in paralegal
fees at a rate of $50 per hour, for a total of $1,155.
The FSM Social Security Act, Public Law No. 2-74, codified as subtitle II of Title 53 of the FSM Code and amended by Public Law 5-120 (5th Cong., 3rd Reg. Sess. 1988), provides for the assessment of reasonable attorney's fees against a taxpayer who fails to pay any tax or penalty prescribed by subtitle II. The statutory provision, 53 F.S.M.C. 605(4) reads:
In the event that any tax, interest, or penalty due under this subtitle is referred to an attorney or trial counselor for collection, whether or not suit is brought for the collection thereof, the taxpayer shall additionally be liable for reasonable attorney's or trial counselor's fees and costs of collection.
It is undisputed in this case that Mr. Mallarme owed social security taxes to the government, that the matter was referred to an attorney for collection, and that a civil action was brought pursuant to that collection. Mallarme does not challenge the validity of the statutory provision nor its applicability in this matter. However, he argues that the Court has the discretion to deny attorney's fees as unwarranted under the circumstances of this case.
By the plain language of the statute, Mr. Mallarme is liable for reasonable attorney's fees. The Court in applying the statute is ceded discretion in determining the reasonableness of the fees. This particular statutory provision has not been the subject of judicial decision prior to this case. No legislative history exists offering interpretative guidance. I find it useful, therefore, to rely on the structure of section 605 as a whole in deriving an interpretation of the attorney's fees provision consistent with the purpose of the statute. Michelsen v. FSM, 3 FSM Intrm. 416, 422 (Pon. 1988).
Section 605 lists three different classes of violations in decreasing order of severity. Each class carries a different penalty. In addition to these penalties, subsection 605(4) imposes an interest charge and liability for attorney's fees and costs. Clearly, if a taxpayer violates subsection 605(1) through willful attempt to defraud the government by false statement or falsifying records, a full award of attorney's fees would be warranted. Likewise in many cases arising under subsection 605(2), involving willful failure to report employee wages or pay taxes due, a full award of fees may be justified where the taxpayer has no good faith defense. Violation of subsection 605(3), failure to report and pay contributions within ten days of the end of a quarter, may arise from inadvertent neglect or mistake. In such cases a full award of attorney's fees would seem unfair by comparison to the levels of taxpayer culpability in subsections 605(1) and (2).
The facts of the present case do not demonstrate that Mr. Mallarme committed fraud against the government or willfully evaded payment of tax contributions proven to be due. Mallarme rightly disputed that he owed taxes for all of the quarters alleged by the plaintiff. The Social Security Administration notice sent to Mallarme on July 29, 1992 was inaccurate, and the notice of October 29, 1992 was unspecific as to which quarters were delinquent. Mallarme was ultimately able to show that only three quarters were unreported and unpaid. The Social Security Administration therefore bears part of the blame for the protracted duration of this litigation and should not be able to pass along to the taxpayer legal fees that may not have been necessary had better record-keeping and notice procedures been employed.
I find, however, that Mallarme also contributed to the confusion in this case by not coming forward sooner with his tax records in response to the Administration's notices, and by failing to
clarify promptly the correct period of business activity of his two proprietorships, "The Builders" and "Pacific Basin Medical." It is the duty of a taxpayer when confronted with a notice from the Social Security Administration alleging tax delinquency to cooperate in a timely manner to correct the problem, even if he believes the notice is in error.
Obviously total attorney's fees would not be assessed in a case where the Administration fails to prove any tax delinquency by the taxpayer, simply because the matter was referred to an attorney for collection. Such a result would be manifestly unjust and the statutory provision cannot be interpreted to mean such. See Michelsen v. FSM, 3 FSM Intrm. at 426. In this case, plaintiff charged the defendant with tax delinquency for eleven quarters. In fact, defendant only owed tax contributions for three quarters. Based on the foregoing discussion, I find reasonable attorney's fees in this case to be equivalent to three-elevenths (3/11) or 27% of the total fees requested by plaintiff. This conclusion, however, should not be interpreted as establishing a formula for application of section 605(4) in every case. Reasonable attorney's fees in social security cases should in the first instance be negotiated between the parties, and if disputed the trier of fact should determine such fees on a case by case basis.
The defendant, Max Mallarme, is liable for payment of reasonable attorney's fees pursuant to 53 F.S.M.C. 605(4). A reasonable attorney's fee in this case is equal to three-elevenths (3/11, or 27%) of the fees requested by plaintiff, rounded to the nearest dollar. The defendant shall therefore pay to plaintiff's counsel the sum of $312.
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1. Counsel for Mr. Mallarme also received a letter dated April 27, 1992 from plaintiff's attorney stating that as "The Builders" Mr. Mallarme owed tax returns and contributions for two other quarters, and as another proprietorship, "Pacific Basin Medical," he owed returns and contributions for eight quarters. It appears, however, that the letter may have been misdated and actually sent April 27, 1993.