T.C. Memo. 1995-527
UNITED STATES TAX COURT
BARBARA KAHN-LANGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18238-94. Filed November 7, 1995.
Barbara Kahn-Langer, pro se.
Patricia Montero, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This matter is before
the Court on petitioner's Motion for Litigation and
Administrative Costs, pursuant to section 7430 and Rule 231.1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code. All Rule references are to the Tax
(continued...)
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At the time of filing the petition herein, petitioner
resided in Scotts Valley, California.
The underlying claim which gave rise to the present dispute
involved the classification of certain payments received by
petitioner during 1990 from her former husband, Lloyd Leichter
(Leichter), pursuant to a stipulated judgment of divorce. An
attachment to the judgment was signed by the judge on June 4,
1990, and filed by the Superior Court of California, County of
Santa Clara, on June 11, 1990. This four-page document includes
the amounts Leichter agreed to pay to petitioner. Specifically,
it reads:
The previous spousal support award of
$1,600.00/month shall remain in force until and unless
further court order. Additionally, [Leichter] shall
pay to [petitioner] $1,000.00/month in child support
until Tia graduates from high school or July 1, 1989,
whichever occurs last. The amount of [petitioner's]
spousal support shall increase by $1,000.00/month for a
period of twelve years (144 months). This increase
shall not be modifiable nor shall such payment by
[Leichter], or receipt by [petitioner] be used by
[Leichter] as grounds for reduction of spousal support,
nor shall said $1,000.00 amount be includable as income
on any future request for response to modify the amount
of spousal support. The court shall reserve
jurisdiction over the issue of spousal support payable
to the parties.
Attached to the document is a promissory note which obligates
Leichter to pay $108,000 to petitioner in order to equalize their
community property interests "in the form of additional spousal
1
(...continued)
Court Rules of Practice and Procedure.
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support beginning on or about July 1, 1989, and continuing to
each month thereafter for a period of twelve years at the rate of
$1,000.00 a month." The promissory note is not referenced in the
stipulated judgment or attachment thereto. The original note
attached to the judgment was not signed by Leichter. The terms
of the note require payment in full on the earlier of July 1,
2001, or within 60 days from notice of the death of petitioner.
The note also indicates that petitioner "is willing to absorb and
incur the tax liability, if any, associated with spousal support
payments."
Petitioner reported alimony received from her former husband
in the amount of $12,300 on her 1990 Federal income tax return.
Leichter claimed a deduction for alimony paid to petitioner on
his 1990 Federal income tax return in the amount of $24,472.
An initial examination of the divorce decree at the Superior
Court of California revealed that the note attached to the
divorce decree was unsigned. When Leichter was questioned about
the unsigned note, he indicated that he did not recall signing
the note, nor did he believe it to be part of the divorce decree.
Leichter apparently contends that the payments were alimony and
the note was not part of the divorce decree.
At a later date, respondent was presented with a copy of the
promissory note bearing what purports to be Leichter's signature.
The date next to the signature is June 29, 1990. It is not clear
from the record when respondent actually received this
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information. Attached to petitioner's motion for litigation and
administrative costs is a letter dated April 23, 1994, addressed
to respondent's representative. The letter reflects that a
facsimile was sent to respondent on April 22, 1994, which
included a copy of the promissory note and the judgment of
divorce.
In a statutory notice of deficiency, dated September 30,
1994, respondent determined that petitioner failed to report
alimony income in the amount of $12,152. Respondent also
determined a penalty pursuant to section 6662(a) in the amount of
$359.20. Petitioner filed a petition with the Court seeking a
redetermination of the deficiency on October 6, 1994. Respondent
filed her answer on November 30, 1994. The parties, on June 9,
1995, filed a Stipulation of Settlement which reflected their
agreement to all issues in the case. The document reflects no
deficiency or "addition to tax" pursuant to "section 6662" for
1990.2 Petitioner requests this Court to award her reasonable
administrative and litigation costs in the amount of $2,626.
In general, section 7430(a) allows a taxpayer who is a
prevailing party in a civil tax proceeding to recover reasonable
administrative and litigation costs incurred in such proceeding.
2
Initially this document was entered as a stipulated
decision on Mar. 31, 1995. By order dated June 9, 1995, the
Court vacated the decision and filed said document as a
Stipulation of Settlement in order to permit the filing of
petitioner's motion for litigation and administrative costs.
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Petitioner bears the burden of proving that she is entitled to
the claimed costs. Rule 232(e); Rutana v. Commissioner, 88 T.C.
1329, 1332 (1987). To achieve this end, petitioner must
demonstrate (1) that she has exhausted the administrative
remedies available to her within the Internal Revenue Service
(IRS), sec. 7430(b)(1), (2) that she is the prevailing party,
sec. 7430(a), and (3) that she did not unreasonably protract the
proceedings, sec. 7430(b)(4). Respondent concedes that
petitioner exhausted her administrative remedies and did not
unreasonably protract the proceedings. Therefore, to be awarded
reasonable administrative and litigation costs, petitioner must
prove that she is the prevailing party.
A prevailing party is one who (1) establishes that
respondent's position was not substantially justified; (2)
substantially prevailed with respect to the amount in contro-
versy, or with respect to the most significant issue or set of
issues presented; and (3) has a net worth which does not exceed
$2 million at the time the civil tax proceeding commences. Sec.
7430(c)(4).
Respondent argues that petitioner has not demonstrated that
she is a prevailing party within the meaning of section
7430(c)(4)(A). Specifically, respondent contends that petitioner
has not satisfied the net worth requirements pursuant to Rule
231, nor has she demonstrated that respondent's position was not
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substantially justified.3 Petitioner argues that respondent's
position was not substantially justified because the payments she
received were not alimony within the meaning of section 71.
Petitioner asserts that the payments were not alimony because
they were made in accordance with the terms of a promissory note
which provided that the payments would continue after her death.
First we must determine whether petitioner has met her
burden of proving that respondent's position in the civil
proceeding was not substantially justified. For purposes of
administrative costs, respondent's position is measured as of the
earlier of the date of the taxpayer's receipt of the IRS Office
of Appeals notice of decision or the date of the notice of
deficiency. Sec. 7430(c)(7)(B). Since there was no notice of
decision from the IRS Office of Appeals, we must look to the date
of the notice of deficiency. Id. The notice of deficiency in
this case is dated September 30, 1994. Thus, we will consider
respondent's position as of this date in determining whether we
will award petitioner administrative costs.
For purposes of litigation costs in a judicial proceeding,
"the Commissioner initially takes a position on the date she
files her answer in response to the petition." Lockett v.
Commissioner, T.C. Memo. 1994-144 (citing Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,
3
Respondent concedes that petitioner substantially
prevailed in the litigation.
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revg. in part on other grounds and remanding T.C. Memo. 1991-
144); Han v. Commissioner, T.C. Memo 1993-386. Respondent filed
her answer on November 30, 1994. Thus, we will consider
respondent's position as of this date in determining whether to
award petitioner litigation costs. Respondent's position, namely
that petitioner failed to recognize certain payments received
from her former husband as alimony, did not change between
September 30 and November 30, 1994.
In determining whether respondent's position was
substantially justified on each of these dates, we will consider
the basis of respondent's position and the manner in which
respondent maintained that position. Wasie v. Commissioner, 86
T.C. 962, 969 (1986). Factors which may be considered include:
(1) whether the government used the costs and expenses
of litigation against its position to extract
concessions from the taxpayer that were not justified
under the circumstances of the case, (2) whether the
government pursued the litigation against the taxpayer
for purposes of harassment or embarrassment, or out of
political motivation, and (3) such other factors as the
Court finds relevant. [Sher v. Commissioner, 89 T.C.
79, 85 (1987) (quoting H. Rept. 97-404, at 12 (1981)),
affd. 861 F.2d 131 (5th Cir. 1988).]
A position is substantially justified if the position is
"justified to a degree that could satisfy a reasonable person".
Pierce v. Underwood, 487 U.S. 552, 565 (1988). Additionally, the
position must have a reasonable basis both in law and in fact.
Id.
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We first examine the basis for respondent's position in the
instant case. Respondent based the deficiency on several
grounds: (1) Inconsistent positions were taken on petitioner's
and Leichter's Federal income tax returns with respect to the
same payments; (2) the promissory note which extended payments
beyond the death of petitioner was not incorporated into the
divorce decree; and (3) the original promissory note which is
part of the records of the Superior Court of California was not
signed.
In general, section 71 mandates the inclusion of alimony in
the recipient's gross income, and section 215 allows the payor to
deduct the same from gross income. Secs. 71(a), 215(a),
62(a)(10). Section 215(b) defines an "alimony or separate
maintenance payment" as a payment defined in section 71(b)
includable in the gross income of the recipient under section
71.4 Sec. 215(b). Generally, alimony includes payments between
spouses or former spouses, pursuant to a written instrument or
4
Sec. 215 provides as follows:
SEC. 215(a). General Rule.--In the case of an
individual, there shall be allowed as a deduction an
amount equal to the alimony or separate maintenance
payments paid during such individual's taxable year.
(b) Alimony or Separate Maintenance Payments
Defined.--For purposes of this section, the term
"alimony or separate maintenance payment" means any
alimony or separate maintenance payment (as defined in
section 71(b)) which is includible in the gross income
of the recipient under section 71.
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decree of divorce, that cease after the death of the payee
spouse. Sec. 71(b).
Petitioner argues that, because the note obligates Leichter
to make payments beyond the death of petitioner, it is clear that
these payments were not alimony. Petitioner concludes,
therefore, that respondent's position was unreasonable.
Respondent contends that her position was reasonable under the
circumstances.
In this case, respondent acted reasonably in raising the
issue of whether the parties intended the payments to be alimony.
The fact that the attachment to the judgment of divorce did not
incorporate the promissory note by reference, coupled with
respondent's uncontested assertion that the original note was
unsigned, and that the parties had taken inconsistent positions
on their returns, reasonably led respondent to question the
nature of the payments.
Petitioner cites Cunningham v. Commissioner, T.C. Memo.
1994-474, and Stokes v. Commissioner, T.C. Memo. 1994-456, for
the proposition that payments made to a former spouse that extend
beyond the former spouse's death are not alimony payments, and,
thus, are not deductible under section 215. Section 71(b)(1)(D)
provides that an alimony payment is--
any payment in cash if * * * there is no liability to
make any such payment for any period after the death of
the payee spouse and there is no liability to make any
payment (in cash or property) as a substitute for such
payments after the death of the payee spouse.
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Although petitioner is correct that payments which continue after
the recipient's death are not alimony, she does not address the
reasonableness of respondent's position considering these facts
and circumstances.
Petitioner has not demonstrated that respondent's position
was not substantially justified. Petitioner has not proved that
respondent's position lacked a reasonable basis in fact or law at
the time the notice of deficiency was issued or the answer was
filed, in light of the information then available to respondent.
In fact, the record fails to detail the events that occurred
which led to respondent's eventual concession of this case.
Consequently, petitioner is not a prevailing party as
defined in section 7430(c)(4). As a result of this holding, we
need not address the question of whether petitioner has satisfied
the other requirements of section 7430. Petitioner is not
entitled to an award for reasonable administrative and litigation
costs.
To reflect the foregoing,
An appropriate order and
decision will be entered.