T.C. Memo. 2014-44
UNITED STATES TAX COURT
MARY C. MCCAULEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 956-11. Filed March 13, 2014.
Dolores C. Pino, for petitioner.
Robert M. Romashko, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: The petitioner, Mary C. McCauley, was involved in
an administrative dispute with the IRS regarding her 2006 income-tax liability.
After she resolved the dispute through a compromise agreement, she requested
that the IRS reimburse her for the costs that she contended she incurred during the
dispute. The IRS Office of Appeals denied her request. McCauley now petitions
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[*2] for review of this denial. We have jurisdiction under section 7430(f)(2).1 See
also sec. 301.7430-2(c)(7), Proced. & Admin. Regs. We hold that McCauley is
not entitled to recover any costs because she was not the prevailing party in her
dispute.
FINDINGS OF FACT
Some of the facts in this case have been stipulated. We incorporate those
facts in the Court’s findings of fact. McCauley was a resident of Illinois when she
filed her petition.
In 2006, McCauley received $32,000 in settlement of an employment-
discrimination lawsuit against a former employer. In that lawsuit she was
represented by attorney Dolores Pino. She paid Pino $13,679.50 in 2006 for
handling the lawsuit. Besides the settlement proceeds, McCauley received
$20,116.50 in wages and $14,392.20 in taxable Social Security benefits during
2006.
Assisted by Pino, McCauley filed her federal income-tax return for the 2006
tax year. The return reported a tax liability of $3,249. The taxable income upon
which this tax liability was based reflected the following calculations:
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 in effect at all relevant times.
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[*3] ! Taxable income did not include the $20,116.50 in wages.
(The $20,116.50 was reported as wages on one part of the
return. However, it was omitted from the computations of taxable
income.)
! Taxable income included the $14,392.20 in taxable Social Security
benefits.
! Taxable income included the $32,000 of settlement proceeds.
! Taxable income was reduced by $13,679.50 for the amount
McCauley paid Pino for handling the employment-discrimination
lawsuit. (However, the $13,679.50 appeared on the return in such a
way that it was not apparent that it corresponded to a payment for
attorney’s fees or that it corresponded to any payment at all.)
In September 2007 the IRS sent McCauley a Notice CP11 in which it
recalculated McCauley’s tax liability as $11,076.2 The taxable income upon
which this tax liability was based reflected the following calculations:
2
A CP11 is a notice the IRS uses to inform a taxpayer of an amount due as a
result of mathematical or clerical errors on a return.
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[*4] ! Taxable income included the $20,116.50 in wages.
! Taxable income included the $14,392.20 in taxable Social Security
benefits.
! Taxable income included the $32,000 of settlement proceeds.
! Taxable income was not reduced by $13,679.50.
On September 17, 2007 the IRS assessed the $11,076 tax liability reflected
on the Notice CP11.
McCauley disputed the assessment with the IRS. She was represented by
Pino. McCauley took the position that the $3,249 tax liability reported on her
2006 return was correct and the $11,076 tax liability that the IRS assessed was
wrong. The IRS took the position that the $11,076 assessment was correct.
During her dispute with the IRS McCauley had a hearing with the IRS
Office of Appeals. On January 21, 2009, the Office of Appeals notified McCauley
that it had decided that the $11,076 assessment was correct.
In January 2010, Pino spoke with an IRS examiner. Shortly afterwards, the
IRS reached a compromise agreement with McCauley regarding her 2006 income
tax liability. The compromise agreement was reflected in an amended return that
McCauley submitted on February 2, 2010, and by an abatement of tax by the IRS
on March 15, 2010. On the amended return McCauley calculated her taxable
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[*5] income by including the $20,116.50 in wages. The amended return reported
tax liability of $7,626. The abatement of tax resulted in the abatement of $3,450,
an amount that corresponds to a reduction in McCauley’s taxable income by the
$13,679.50 in attorney’s fees. After the abatement, $7,626 was left unabated. The
parties’ positions and their compromise agreement are illustrated by the following
table:
Compromise
IRS position taken in agreement between
Income items McCauley’s its Notice CP11 and McCauley and IRS
and position taken its Appeals Office reflected in amended
corresponding on her return decision of Jan. 21, return and
tax due (and later) 2009 (and later) abatement of tax
Wages -0- $20,116.50 $20,116.50
Taxable
Social
Security
benefits $14,392.20 14,392.20 14,392.20
Settlement 32,000.00 32,000.00 32,000.00
Attorney’s
fees -13,679.50 -0- -13,679.50
Tax 3,249.00 11,076.00 7,626.00
On April 11, 2010, McCauley mailed the IRS a request for reimbursement
of the costs she allegedly incurred during her dispute. After receiving no response
from the IRS for over six months, McCauley filed a petition with this Court.
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[*6] OPINION
Under section 7430, a taxpayer who has prevailed in an administrative
proceeding with the IRS may be entitled to the reasonable administrative costs
incurred in connection with the proceeding. To be awarded administrative costs,
the taxpayer must prove that she was the “prevailing party” in the administrative
proceeding. Sec. 7430(a), (c)(4); Tax Ct. R. Pract. & Proc. 232(e). The
“prevailing party” is the party who has “substantially prevailed with respect to the
amount in controversy or * * * has substantially prevailed with respect to the most
significant issue or set of issues presented”, sec. 7430(c)(4)(A), and who meets
other requirements.
The “amount in controversy shall include the amount in issue as of the
administrative proceeding date”. Sec. 301.7430-5(d), Proced. & Admin. Regs.
The “administrative proceeding date” is defined as the earlier of (1) the date of the
notice of deficiency or (2) the date the taxpayer received the notice of the decision
of the IRS Office of Appeals. Sec. 301.7430-3(c)(1), Proced. & Admin. Regs.
The IRS did not issue a notice of deficiency to McCauley. Its Office of Appeals
issued a notice of its decision on January 21, 2009. Therefore, the “administrative
proceeding date” is the date that McCauley received this notice, presumably
sometime shortly after its issuance on January 21, 2009.
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[*7] In her dispute with the IRS McCauley took the position that her tax liability
was $3,249. She maintained this position from the time she filed her return in
2007 until the parties reached the compromise agreement around January 2010.
The IRS took the position that McCauley’s tax liability was $11,076. It
maintained this position from the time it issued the CP11 in September 2007 until
the parties reached a compromise agreement around January 2010. The difference
between the two party’s positions--$7,827--is “the amount in issue” or the
“amount in controversy”. Of the $7,827 amount in controversy, McCauley
prevailed as to $3,450 (i.e., the IRS’s $11,076 position minus the $7,626 reflected
in the compromise agreement). Thus, of the $7,827 in controversy, McCauley
prevailed as to only 44% (i.e., $3,450/$7,827). On the basis of that percentage, we
hold that McCauley did not substantially prevail with respect to the amount in
controversy. See Bragg v. Commissioner, 102 T.C. 715, 719-720 (1994)
(taxpayers who had prevailed with respect to about 30% of the amount in
controversy were not prevailing parties); see also Andrews v. Commissioner, T.C.
Memo. 1985-559, 50 T.C.M. (CCH) 1404, 1405-1406 (1985) (taxpayers who
prevailed with respect to about 41% of the amount in controversy were not
prevailing parties).
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[*8] We also hold that McCauley did not substantially prevail with respect to the
most significant issue presented. The two issues presented in her dispute with the
IRS were: (1) whether her taxable income should be reduced by $13,679.50 for
the attorney’s fees for her employment-discrimination lawsuit and (2) whether her
taxable income should include $20,116.50 in wages. We hold that the attorney’s-
fee issue was not the most significant issue. In dollar amount, the attorney’s-fee
issue was worth less than the wage issue. The attorney’s-fee issue did not affect
McCauley’s other tax years. See sec. 301.7430-5(e), Proced. & Admin. Regs.
(“An issue or set of issues constitutes the most significant issue or set of issues
presented if, despite involving a lesser dollar amount in the proceeding than the
other issue or issues, it objectively represents the most significant issue or set of
issues for the taxpayer or the Internal Revenue Service. This may occur because
of the effect of the issue or set of issues on other transactions or other taxable
years of the taxpayer or related parties.”). The attorney’s-fee issue was not a
threshold, or “primary”, issue relative to the wage issue. The two issues were
unrelated. Cf. Huckaby v. United States Dep’t of the Treasury, 804 F.2d 297, 298-
300 (5th Cir. 1986) (in a wrongful-disclosure lawsuit against the IRS, the most
significant issue was whether the IRS was liable for damages, not the amount of
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[*9] damages). Although McCauley prevailed on the attorney’s-fee issue, this was
not the most significant issue presented.
In summary, McCauley did not substantially prevail; therefore, she was not
the prevailing party. Therefore, she is not entitled to an award of any
administrative costs she may have incurred. In reaching our holdings, we have
considered all arguments made by the parties, and to the extent that we have not
discussed them, we find that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for
respondent.