T.C. Memo. 1997-389
UNITED STATES TAX COURT
GLENN L. WITTSTADT, JR. AND LYNNE M. WITTSTADT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7123-93. Filed August 25, 1997.
Robert G. Cassilly, for petitioners.
Alan R. Peregoy, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Robert N. Armen, Jr., pursuant to the provisions of section
7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
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Rules 180, 181, and 183.1 The Court agrees with and adopts
the Opinion of the Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
ARMEN, Special Trial Judge: This case is before the Court
on petitioners' Motion for Costs, as amended, filed pursuant to
section 7430 and Rule 231.2 Petitioners seek to recover
approximately $16,000 incurred in resisting respondent's
deficiency determinations for the taxable year 1989.
After concessions by respondent,3 the issues for decision
are as follows:
(1) Whether respondent's position in the proceedings was
substantially justified; and, if not,
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for 1989, the taxable year
in issue. However, all references to section 7430 are to such
section in effect at the time that the petition was filed.
Unless otherwise indicated, all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
Also pending before the Court is petitioners' Motion
for Entry of Decision. However, at the hearing on that motion,
the parties agreed that there is an overpayment in petitioners'
Federal income tax for 1989 in the amount of $50,808.78, which
amount, as well as interest thereon, has been refunded to
petitioners. Accordingly, we need not address petitioners'
Motion for Entry of Decision in this memorandum opinion.
3
Respondent concedes: (1) Petitioners exhausted their
administrative remedies, see sec. 7430(b)(1); (2) petitioners did
not unreasonably protract the court proceeding, see sec.
7430(b)(4); (3) petitioners substantially prevailed in the court
proceeding, see sec. 7430(c)(4)(A)(ii); and (4) petitioners
satisfy the applicable net worth requirement, see sec.
7430(c)(4)(A)(iii).
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(2) whether the attorney's fees and other costs that
petitioners seek to recover are reasonable in amount.4
We consider these issues in the context of a case wherein
decision was originally entered essentially in respondent's favor
pursuant to a memorandum opinion of this Court, but such decision
was subsequently reversed on appeal.
Neither party requested an evidentiary hearing, and the
Court concludes that such a hearing is not necessary for the
proper disposition of petitioners' motion. Rule 232(a)(3). We
therefore decide the matter before us based on the record that
has been developed to date.
I. Background
Glenn L. Wittstadt, Jr. (petitioner) and Lynne M. Wittstadt
resided in Edgewood, Maryland, at the time that their petition
was filed with the Court.
A. The Notice of Deficiency
By notice of deficiency dated March 11, 1993, respondent
determined a deficiency in petitioners' Federal income tax for
the taxable year 1989, as well as deficiencies in petitioners'
Federal excise taxes under sections 4973 and 4980A, in the total
amount of $89,740.84. The linchpin for the deficiencies was
respondent's determination that a distribution (the so-called
4
Respondent concedes that all but $150 of the costs
incurred by petitioners constitute "reasonable litigation costs"
within the meaning of sec. 7430(c)(1).
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Transfer Refund) that was received by petitioner from the
Maryland State Teachers' Retirement System (the Retirement
System) did not qualify for tax-free rollover treatment under
section 402(a)(5). In turn, this determination was premised on
respondent's ultimate determination that the Transfer Refund was
not made "on account of" petitioner's separation from the service
of the Baltimore County Public Schools; i.e., petitioner's
retirement as a teacher, but rather was made "on account of"
petitioner's election to transfer from the Retirement System to
the Maryland State Teachers' Pension System (the Pension System).
B. The Parties' Pleadings
On April 9, 1993, petitioners filed a timely petition (the
Petition) in which they contested the deficiencies determined by
respondent. In the Petition, which they filed pro se,
petitioners alleged, in part, as follows:
The issue in this case was whether my [Transfer
Refund] distribution met the IRS requirements for a tax
free roll-over or not * * * .
The December 4, 1992 final appeal decision letter
from the local IRS Appeals Division states that [the
Transfer Refund] did not [qualify for tax-free rollover
treatment] because the distribution WAS NOT received
because of "Separation from the job" (retirement) as
required; but because I signed an "election form to
transfer participation from the old ... retirement fund
to the new ... retirement fund".
* * * * * * *
Following the June 30, 1989 separation
[petitioner's final day of employment] the State had
only one, single, required course of action, namely to
make the distribution to me on or after July 1, 1989,
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as requested and contracted for on the effective
documents, and that was subsequently carried out. The
fact that the amount and nature of the distribution was
the result of a choice had nothing to do with when it
had to be paid and was, i.e. after retirement as
requested and contracted for, thus satisfying the roll-
over requirement.
On June 10, 1993, respondent filed an answer (the Answer) to
the Petition. In the Answer, respondent admitted the first two
of the above-quoted paragraphs in the Petition and denied the
third.
C. Petitioners' Motion for Summary Judgment
On January 31, 1994, petitioners, again acting pro se, filed
a motion for summary judgment. In their motion, petitioners
argued that the Transfer Refund was made on account of
petitioner's retirement and not on account of petitioner's
election to transfer from the Retirement System to the Pension
System. The penultimate sentence of petitioners' motion stated
as follows: "But for his retirement, Mr. Wittstadt would not
have elected to receive the lump-sum payment and no such
distribution would have been made." Petitioners also alleged
that petitioner's election to transfer from the Retirement System
to the Pension System was invalid under Maryland State law.
On March 23, 1994, a hearing was conducted in Washington,
D.C., on petitioners' motion for summary judgment. At that time,
the parties indicated that they were attempting to obtain facts
and documents from the Maryland State Retirement Agency.
Respondent's counsel stated, in part, as follows:
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I have had conversations with the assistant
attorney general of the State of Maryland concerning
what their testimony and official records would be.
They indicate to me merely that there is disputed facts
to the extent that their records do not coincide with
allegations of fact that Mr. Wittstadt has made.
And, therefore, I think, ultimately if Mr.
Wittstadt would waive his disclosure privilege with the
State of Maryland, the State would be able to provide
an affidavit that would show that material facts are in
dispute in this case.
The Court agreed to continue petitioners' motion for summary
judgment for further hearing. In agreeing to do so, the Court
stated, in part, as follows:
What the Court would expect is that, to the extent
possible, the parties would stipulate or agree to facts
not reasonably in dispute, and indicate so you can
highlight to the Court what facts are left in dispute,
and whether or not to support -- Respondent seems to be
saying that he believes that summary judgment is not
appropriate here because there may be a dispute on
facts. But it would be certainly helpful to have a
record in which the Court can decide that by
stipulation.
On April 20, 1994, a further hearing was conducted in
Washington, D.C., on petitioners' motion for summary judgment.5
However, contrary to the Court's directive expressed at the prior
hearing, no executed stipulations were filed by the parties. In
this regard, respondent's counsel acknowledged that information
had been obtained from the Maryland State Retirement Agency;
respondent's counsel stated that he had prepared stipulations of
5
We note that at no time did respondent ever file any
cross-motion for summary judgment. As will be discussed infra in
the text above, respondent thought that there were factual issues
in dispute.
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agreed and unagreed facts, but that petitioners had declined to
execute such stipulations. Petitioner confirmed this
representation, indicating that he thought such stipulations were
irrelevant to his motion.
Respondent's counsel then identified what he considered to
be two disputed factual matters: First, the effective date of
petitioner's election to transfer from the Retirement System to
the Pension System; and second, the reason why the Transfer
Refund was paid to petitioner.
Regarding the first disputed factual matter, respondent took
the position that the effective date of petitioner's election to
transfer from the Retirement System to the Pension System was
June 1, 1989, a date that preceded the effective date of
petitioner's retirement. In contrast, petitioner took the
position that the effective date of his election was July 1,
1989, a date that followed the final day of petitioner's
employment.
The second disputed matter involved causation; i.e., what
caused the State of Maryland to make the Transfer Refund to
petitioner. In this regard, respondent took the position that
the Maryland made the Transfer Refund because of petitioner's
election to transfer from the Retirement System to the Pension
System. In contrast, petitioner took the position that Maryland
made the Transfer Refund because of petitioner's retirement.
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As previously indicated, petitioner took the position that
the effective date of his election to transfer from the
Retirement System to the Pension System came after the final day
of his employment. Petitioner's position in respect of this
issue was consequential for two reasons: First, because it
facilitated petitioners' principal argument that the Transfer
Refund was made because of petitioner's retirement; and second,
because it facilitated petitioners' ancillary argument that the
Transfer Refund was not made because of petitioner's election to
transfer from the Retirement System to the Pension System because
such election was invalid under Maryland State law.
At the conclusion of the hearing, the Court denied
petitioners' motion. The Court took this action essentially for
two reasons: First, and principally, because the record was so
incomplete so as to preclude a rational disposition of the case;
and second, because factual issues appeared to be in dispute.
Near the end of the hearing, the following colloquy took place
between the Court and petitioner:
THE COURT: * * * Mr. Wittstadt, at this point, I
am not clear what your position is with respect to the
stipulation of facts. But when this case was continued
last time, and as I understand it from respondent's
counsel that there are some documents, the Court does
not now have those documents. Without those documents,
I couldn't come close--let the Court finish--couldn't
come close to ruling in your favor on this motion.
A motion for summary judgment requires that there
be no genuine material issue of fact in dispute. So I
don't have any facts or certainly anywhere near
sufficient facts to rule in your favor. Even if you do
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stipulate, respondent's counsel seems to be saying that
there are a couple of areas of factual matters that are
in dispute.
* * * * * * *
What would you like to do with this case?
PETITIONER: In other words, we can't do it by
motion?
THE COURT: It sure doesn't look like it. I think
you understand why, that there are matters here in
dispute and respondent is saying there are matters in
dispute. You don't seem to be disagreeing with that,
that there are some matters which require some
testimony.
If that is the case, it's clear that the Court
cannot rule in your favor on the summary judgment
motion. You can't get a dispositive answer, which is
what you want. So the next step is trial.
D. Entry of Appearance by Petitioners' Counsel
On July 18, 1994, petitioners' counsel entered his
appearance in this case. On the following day, petitioners, by
counsel, commenced formal discovery against respondent by serving
a request for production of documents.
E. The Hylton Case
On January 23, 1995, the Court filed its memorandum opinion
in Hylton v. Commissioner, T.C. Memo. 1995-27. That case, which
was decided after a trial at which a representative of the
Maryland State Retirement Agency testified and 30 exhibits were
offered into evidence,6 presented facts strikingly similar to
those involved in the present case. Thus, in Hylton, the
6
The parties stipulated 10 exhibits; the remaining 20
exhibits were offered during the course of the trial, most of
which were received into evidence.
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taxpayer, a Maryland public school teacher, elected to transfer
from the Retirement System to the Pension System, effective
January 1, 1990, and received thereafter a Transfer Refund. In
May 1990, the taxpayer applied for retirement and retired in
fact, effective July 1, 1990. Hylton concluded as follows:
Petitioners have shown that petitioner's election
to transfer to the Pension System, due to which
election he received the Transfer Refund, was related
to his retirement planning. In other words, they have
demonstrated that the decision to retire was a "link in
the chain of causalities" leading to the receipt of the
Transfer Refund. [Citation omitted.] However, we view
petitioner's separation from service as no more than a
"mere link in the chain of causalities" leading to the
receipt of the Transfer Refund. [Citation omitted.]
Accordingly, we hold that petitioner did not
receive the Transfer Refund on account of his
retirement. Rather, he received the Transfer Refund
because of his election to transfer from the Retirement
System to the Pension System, an election that, under
Maryland law, lacked the requisite connection to
petitioner's separation from service.
In reaching the foregoing conclusion, we relied heavily on
Gunnison v. Commissioner, 54 T.C. 1766 (1970), affd. 461 F.2d 496
(7th Cir. 1972), where we considered the meaning of the phrase
"on account of" in an earlier version of the operative statute
and construed it narrowly. Id. at 1773.
Hylton was never appealed, and the decision in that case
became final on April 25, 1995. See sec. 7481(a)(1), 7483; cf.
Fed. R. App. P. 13(a).
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F. The Notice of Trial
On February 1, 1995, the Court calendared the present case
for trial at a Special Session of the Court scheduled to commence
on April 24, 1995, in Baltimore, Maryland.
G. Progeny of the Hylton Case
On March 6, 1995, the Court filed Brown v. Commissioner,
T.C. Memo. 1995-93.7 That case, which was decided on the basis
of a fully-stipulated record, presented facts virtually
indistinguishable from those in the present case. Thus, in
Brown, the taxpayer, a Maryland public school teacher, elected to
transfer from the Retirement System to the Pension System,
effective June 1, 1989. The taxpayer also applied to retire,
effective July 1, 1989. Thereafter, the taxpayer received a
Transfer Refund. Applying the same analysis as in Hylton v.
Commissioner, supra, we held in Brown that the taxpayer did not
receive the Transfer Refund on account of his retirement, but
rather on account of his election to transfer from the Retirement
System to the Pension System.
7
Brown v. Commissioner, T.C. Memo. 1995-93 was
ultimately reversed without published opinion per curiam, 97 F.3d
1446 (4th Cir. 1996), on the basis of Adler v. Commissioner, 86
F.3d 378 (4th Cir. 1996), vacating and remanding T.C. Memo. 1995-
148. See infra.
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On March 8, 1995, the Court filed its memorandum opinion in
Dorsey v. Commissioner, T.C. Memo. 1995-97.8 Once again, we
relied heavily on Hylton v. Commissioner, supra, in holding that
the taxpayer's Transfer Refund was not received on account of the
taxpayer's retirement, but rather on account of the taxpayer's
election to transfer from the Retirement System to the Pension
System.
On April 4, 1995, the Court filed Adler v. Commissioner,
T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir. 1996). That
case, which was decided after a trial at which a representative
of the Maryland State Retirement Agency testified, presented
facts virtually indistinguishable from those in the present case.
Thus, in Adler, the taxpayer, a Maryland State employee, elected
to transfer from the Retirement System to the Pension System,
effective June 1, 1990. The taxpayer also applied to retire,
effective July 1, 1990. Thereafter, the taxpayer received a
Transfer Refund. Applying the same analysis as in Hylton v.
Commissioner, supra, we held in Adler that the taxpayer did not
receive the Transfer Refund on account of his retirement, but
rather on account of his election to transfer from the Retirement
System to the Pension System.
8
The taxpayer's appeal in Dorsey was ultimately
dismissed. Dorsey v. Commissioner, 91 F.3d 129 (4th Cir. 1996).
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H. The Trial
On April 26, 1995, the present case was called for trial in
Baltimore, Maryland. At that time the Court filed the parties'
stipulation of facts, which included some 16 exhibits. The Court
also filed the parties' trial memoranda. Petitioners' trial
memorandum estimated trial time at 6 hours and stated that
petitioners expected to call 3 witnesses, including a
representative of the Maryland State Retirement Agency.
As it turned out, the trial of this case lasted less than 2
hours, and the only witness who was called to testify was
petitioner, who was examined and cross-examined.
A principal thrust, if not the principal thrust, of
petitioners' presentation at trial (and on brief) was that the
Transfer Refund was not made pursuant to Maryland State law
(because the Transfer Refund would have been invalid if made
pursuant to Maryland State law), but rather was made pursuant to
an administrative policy of the Maryland State Retirement Agency,
which administrative policy required petitioner to retire in
order to receive the Transfer Refund.9
9
Thus, on brief, petitioners argued as follows:
Petitioner's election to receive a [Transfer
Refund] was an election made pursuant to the retirement
policy legally established by the Board and was not
made pursuant to the statutory transfer option in [Md.
Ann. Code, art. 73B] Section 83(8). In order to elect
the retirement option as established by the Board's
policy it was necessary for Petitioner Glenn L.
(continued...)
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After the conclusion of trial, the Court directed the
parties to file seriatim briefs. See Rule 151(b). Petitioners'
opening brief includes 8 pages of proposed findings of fact. See
Rule 151(e)(3). Respondent's answering brief includes 5 pages of
objections to petitioners' proposed findings of fact and 4 pages
of respondent's proposed findings of fact. Id. Petitioners'
reply brief includes 4-½ pages of objections to respondent's
proposed findings of fact. Id.
I. The Memorandum Opinion
In T.C. Memo. 1995-492, filed October 11, 1995, the Court
decided the present case. In our memorandum opinion, we rejected
petitioners' argument that petitioner's Transfer Refund had not
been received pursuant to Maryland State law but rather pursuant
to some administrative policy. Regardless, we went on to hold
that the Transfer Refund was received on account of petitioner's
election to transfer from the Retirement System to the Pension
System and not on account of petitioner's retirement. In so
holding, we relied heavily on Hylton v. Commissioner, T.C. Memo.
1995-27, as well as a number of other "Transfer Refund cases"
9
(...continued)
Wittstadt to have retired. Because Petitioner's
retirement was a necessary condition precedent to his
participation in the policy distribution option, the
distribution by the Board to Petitioner was made "on
account of" Petitioner Glenn L. Wittstadt's "separation
from service," as those terms are used in I.R.C.
Section 402(a)(5)(D). Consequently, the distribution
to Petitioner qualified for tax free treatment as
provided for in Section 402(a)(5)(D).
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that we had previously decided, specifically including Adler v.
Commissioner, T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir.
1996).
J. Appeal, Assessment, and Collection
Following a Rule 155 computation, the Decision in the
present case was entered on January 31, 1996. On February 20,
1996, petitioners filed a notice of appeal. Petitioners did not,
however, file a bond to stay assessment and collection. See sec.
7485(a). Accordingly, on May 21, 1996, respondent assessed the
deficiencies in income and excise taxes as redetermined in our
Decision.10
Subsequently, petitioners made two substantial payments in
partial satisfaction of the foregoing assessment. Thereafter, in
response to a "final notice" dated July 29, 1996, petitioners
entered into an installment payment agreement with respondent on
August 20, 1996. See sec. 6159. Petitioners ultimately made the
following payments on the indicated dates:
Date Amount
6/5/96 $25,000
7/16/96 25,000
9/10/96 243
10/7/96 286
11/7/96 286
10
Respondent also assessed interest. See sec. 6601(a),
(e)(1).
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On October 22, 1996, respondent filed a notice of Federal
tax lien in the county of petitioners' residence. Also, by
notice dated December 25, 1996, respondent reminded petitioners
that their next payment pursuant to the installment payment
agreement was due on January 8, 1997.
K. The Adler Case on Appeal
On June 21, 1996, the Court of Appeals for the Fourth
Circuit decided Adler v. Commissioner, 86 F.3d 378, which vacated
and remanded our decision in T.C. Memo. 1995-148. In Adler v.
Commissioner, the Court of Appeals agreed that the phrase "on
account of" requires "a causal connection between the employee's
separation from service and the distribution from the qualified
plan." 86 F.3d at 380. However, the Court of Appeals construed
the phrase "on account of" to mean "incident to" and concluded
that the requisite degree of causality required by the operative
statute had been satisfied. In so holding, the Court of Appeals
stated: "As the purpose of the statute [section 402] is to
protect and encourage retirement savings, it is plain that a
distribution to an employee that occurs incident to his
retirement should be entitled to rollover treatment." 86 F.3d at
381.
On September 10, 1996, the Solicitor General of the United
States decided that a petition for a writ of certiorari would not
be filed in respect of Adler v. Commissioner, 86 F.3d 378. Cf.
28 U.S.C. sec. 2101(c)(1994).
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L. Reversal and Subsequent Developments
On or about November 8, 1996, and after some prodding by
petitioners, respondent filed a motion with the Court of Appeals
asking that the Tax Court's Decision entered on January 31, 1996,
be reversed on the basis of Adler v. Commissioner, 86 F.3d 378
(4th Cir. 1996). Shortly thereafter, on November 14, 1996, the
Court of Appeals issued an order granting respondent's motion and
reversing our Decision.
No later than November 22, 1996, respondent's counsel
undertook action to suspend any further collection in respect of
the May 1996 assessment against petitioners, pending abatement of
such assessment and the refund of amounts previously paid.
Respondent's counsel specifically advised respondent's problem
resolution officer for the Delaware-Maryland district that "Mr.
Wittstadt no longer owes the deficiency for 1989" and directed
the officer to "take whatever steps [are] necessary to terminate
the required payment agreement." Nevertheless, during the fall
of 1996, petitioners incurred costs in trying to have collection
terminated.
On January 9, 1997, the record in this case was returned by
the Court of Appeals and received by this Court. Thereafter, by
Order dated January 28, 1997, the Court vacated the Decision
entered January 31, 1996, and directed the parties either to
furnish an agreed form of decision suitable for entry of decision
by the Court or to move for such relief as they thought might be
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warranted under the circumstances then present. Petitioners then
filed their motion for costs, as well as their motion for entry
of decision.11
II. Discussion
We apply section 7430 as amended by the Technical and
Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec.
6239(a), 102 Stat. 3342, 3743-3746.12
A. Requirements for a Judgment under Section 7430
Under section 7430(a), a judgment for litigation costs
incurred in connection with a court proceeding may only be
awarded if a taxpayer: (1) Is the "prevailing party"; (2) has
exhausted his or her administrative remedies within the IRS; and
(3) did not unreasonably protract the court proceeding. Sec.
7430(a), (b)(1), (4). A taxpayer must satisfy each of these
three requirements in order to be entitled to a judgment under
section 7430. Rule 232(e).
11
Respondent contends that petitioners' motion for costs
was filed out of time and should be "dismissed" for that reason.
We reject respondent's contention and do not consider it further.
12
Technical and Miscellaneous Revenue Act of 1988 (TAMRA),
Pub. L. 100-647, sec. 6239(a), 102 Stat. 3342, 3743-3746 is
generally applicable to proceedings commenced after Nov. 10,
1988. TAMRA sec. 6239(d), 102 Stat. 3746. Congress amended sec.
7430 most recently in the Taxpayer Bill of Rights 2 (TBOR2), Pub.
L. 104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996).
However, the amendments made by TBOR2 apply only in the case of
proceedings commenced after July 30, 1996. TBOR2 secs. 701(d),
702(b), 703(b), and 704(b), 110 Stat. 1463-1464. Inasmuch as the
petition herein was filed on April 9, 1993, the amendments made
by TBOR2 do not apply in the present case. Maggie Management Co.
v. Commissioner, 108 T.C. (June 11, 1997).
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Respondent concedes that petitioners exhausted their
administrative remedies within the IRS. Respondent also concedes
that petitioners did not unreasonably protract the court
proceeding. Accordingly, we must decide whether petitioners
qualify as the "prevailing party" in the court proceeding.
B. Prevailing Party
In order to qualify as the "prevailing party", a taxpayer
must establish: (1) The position of the United States in the
proceeding was not substantially justified; (2) the taxpayer has
substantially prevailed with respect to the amount in controversy
or the most significant issue or set of issues presented; and (3)
the taxpayer satisfies the applicable net worth requirement.
Sec. 7430(c)(4)(A).
Respondent concedes that petitioners substantially prevailed
within the meaning of section 7430(c)(4)(A)(ii). Respondent also
concedes that petitioners satisfy the applicable net worth
requirement. However, respondent contends that the position
taken by respondent in the court proceeding was substantially
justified.
Petitioners bear the burden of proving that respondent's
position in the court proceeding was not substantially justified.
Rule 232(e); Dixson Corp. v. Commissioner, 94 T.C. 708, 714-715
(1990); Gantner v. Commissioner, 92 T.C. 192, 197 (1989), affd.
905 F.2d 241 (8th Cir. 1990). Accordingly, we must decide
whether petitioners have carried their burden of proving that
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respondent's position in the court proceeding was not
substantially justified.
C. Respondent's Position in the Court Proceeding
Whether respondent's position was not substantially
justified is a question of fact. We resolve such issue by the
application of a reasonableness standard. See Pierce v.
Underwood, 487 U.S. 552, 565 (1988) (construing similar language
in the Equal Access to Justice Act (EAJA), 28 U.S.C. sec. 2412
(1988)); see also Maggie Management Co. v. Commissioner, 108 T.C.
, , (June 11, 1997) (slip op. at 18-19); Sokol v.
Commissioner, 92 T.C. 760, 763 n.7 (1989); Sher v. Commissioner,
89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988).
The position of the United States that must be examined
against the reasonableness standard is the position taken by the
Commissioner in the answer to the petition and thereafter.
Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir. 1991);
Sher v. Commissioner, 861 F.2d at 134-135; Maggie Management Co.
v. Commissioner, supra (slip op. at 19); see sec. 7430(c)(7)(A).
The fact that the Commissioner eventually loses a case does
not, by itself, establish that the Commissioner's position was
unreasonable. Estate of Perry v. Commissioner, 931 F.2d 1044,
1046 (5th Cir. 1991); Swanson v. Commissioner, 106 T.C. 76, 94
(1996); Powers v. Commissioner, 100 T.C. 457, 471 (1993).
In the present case, respondent's position in the court
proceeding was that petitioner's Transfer Refund did not qualify
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for tax-free rollover treatment under section 402(a)(5) because
the Transfer Refund was not made on account of petitioner's
retirement as a teacher, but rather on account of petitioner's
election to transfer from the Retirement System to the Pension
System. Respondent consistently maintained this position
throughout the court proceeding until respondent conceded the
case on November 8, 1996, in the Court of Appeals.
D. Petitioners' Contentions
Petitioners contend that respondent's position was
unreasonable for at least three reasons:
First, petitioners contend that respondent's position was
contrary to congressional intent "to preserve retirement funds".
Second, petitioners contend that respondent should not have
opposed petitioners' motion for summary judgment, but rather
should have permitted the Court to adjudicate the disputed issues
in this case in a summary fashion. If the Court had done so,
then, so the argument goes, petitioners would have been spared
the cost of trial.13
Third, petitioners contend that respondent was unreasonable
in pursuing collection of the assessed deficiencies, at least
after the Court of Appeals decided Adler v. Commissioner, 86 F.3d
378 (4th Cir. 1996).
13
Petitioners acknowledge that if the Court had rendered
summary judgment for respondent (even though respondent never
filed any cross-motion for summary judgment), petitioners would
not have been spared the cost of appeal.
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We consider each of petitioners' contentions in turn.
E. Congressional Intent
Petitioners contend that respondent's position in the court
proceeding was not substantially justified because respondent's
position "is in conflict with stated Congressional intent." In
this regard, petitioners rely on the statement made by the Court
of Appeals in reversing Adler v. Commissioner, T.C. Memo. 1995-
148, that "As the purpose of the statute [section 402] is to
protect and encourage retirement savings, it is plain that a
distribution to an employee that occurs incident to his
retirement should be entitled to rollover treatment." Adler v.
Commissioner, 86 F.3d at 381.
Petitioners' contention is tantamount to arguing that
respondent's position was unreasonable because respondent lost
the case. However, as previously stated, the fact that the
Commissioner eventually loses a case does not, by itself,
establish that the Commissioner's position was unreasonable.
Estate of Perry v. Commissioner, supra; Swanson v. Commissioner,
supra; Powers v. Commissioner, supra.
Further, we recall that respondent did not lose the present
case in this Court. Rather, respondent ultimately lost the case
on appeal. Under these circumstances, a taxpayer ordinarily has
a heavy burden in contending that respondent's position was
unreasonable. The legislative history of section 7430 states
that "when a taxpayer loses in the trial court and obtains a
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reversal of that decision in the appellate court, the appellate
court would not normally award attorney's fees to the taxpayer
since the trial court, by definition, had found the government's
position to be reasonable." H. Rept. 97-404, 15 (1981). See
Staff of Joint Comm. on Taxation, General Explanation of the
Revenue Provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 (J. Comm. Print 1982) 450; 127 Cong. Rec. S-32078
(1981); Auto-Ordnance Corp. v. United States, 14 Cl. Ct. 295, 300
(1988); see also H. Conf. Rept. 97-760, 686-687 (1982).
Further, respondent's position was consistent with the
holding of this Court as expressed in four cases with similar, if
not indistinguishable, facts that had been decided prior to the
trial of the present case. Thus, in Hylton v. Commissioner, T.C.
Memo. 1995-27, Brown v. Commissioner, T.C. Memo. 1995-93, Dorsey
v. Commissioner, T.C. Memo. 1995-97, and Adler v. Commissioner,
T.C. Memo. 1995-148, this Court held that a Transfer Refund was
received not on account of retirement, but rather on account of
the taxpayer's election to transfer from the Retirement System to
the Pension System. Indeed, the decision in the first of the
foregoing cases, Hylton v. Commissioner, supra, was final at the
time of trial of the present case.
Finally, in view of the fact that a linchpin for our
decision in Hylton v. Commissioner, supra, was Gunnison v.
Commissioner, 54 T.C. 1766 (1970), affd. 461 F.2d 496 (7th Cir.
1972), a case in which we construed narrowly the phrase "on
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account of" in an earlier version of the operative statute, we
think that respondent's position was reasonable, both at the time
that the notice of deficiency was issued in March 1993 and at the
time that the Answer was filed in June 1993. See Pierce v.
Underwood, 487 U.S. 552, 565 (1988)(the Commissioner's position
must have a reasonable basis in law).
In view of the foregoing, we reject petitioners' first
contention.
F. Petitioners' Motion for Summary Judgment
Petitioners also contend that respondent was unreasonable in
"refus[ing] to submit the case for decision by way of summary
judgment". We disagree.
Petitioners' contention overlooks a number of matters.
First, the Court denied petitioners' motion for summary judgment
principally because of a record so incomplete that a rational
disposition of the case was not possible. Because petitioners
were the moving party, petitioners bore responsibility for
ensuring that the record provided a basis for their motion.
Second, the Court also denied petitioners' motion for
summary judgment because genuine issues of material fact appeared
to be in dispute. Here we recall that in an effort to more
clearly determine this matter, the Court had directed the parties
to stipulate facts, and the Court even continued the original
hearing on petitioners' motion for that purpose. Respondent's
counsel complied with this directive by preparing stipulations of
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agreed and unagreed facts; however, petitioners declined to
execute either stipulation or to otherwise cooperate in the
process.
Further, petitioners had raised matters that clearly
implicated factual issues. Thus, petitioners had questioned the
effective date of petitioner's election to transfer from the
Retirement System to the Pension System; petitioners had
challenged the validity of that election; and petitioners had
raised the fundamental issue of causation; i.e., the reason why
the Transfer Refund had been paid. Indeed, petitioners alleged
that "But for his retirement, Mr. Wittstadt would not have
elected to receive the lump-sum payment and no such distribution
would have been made."
Third, the Court did not deny petitioners' motion with
prejudice. Thus, petitioners were free to cure the defects as
identified by the Court at the hearing on April 20, 1994, and
refile their motion. However, they chose not to do so.14
Fourth, the initial Transfer Refund case, Hylton v.
Commissioner, T.C. Memo. 1995-27, was decided after a trial at
14
In addition, submission of the case by the parties on a
fully stipulated basis pursuant to Rule 122 provided an
alternative to trial. However, the record is silent regarding
any effort by petitioners to encourage respondent to submit the
case on that basis. We find this curious in view of petitioners'
contention that there were no genuine issues of material fact in
this case. We note that Brown v. Commissioner, T.C. Memo. 1995-
93, revd. without published opinion per curiam 97 F.3d 1446 (4th
Cir. 1996), was decided by this Court on a fully stipulated
basis.
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which a representative of the Maryland State Retirement Agency
testified and at which numerous exhibits were offered in evidence
at trial. Moreover, the Transfer Refund case that led to a
published opinion by the Court of Appeals, Adler v. Commissioner,
T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir. 1996), was
decided by this Court after a trial.
Fifth, the decision in Hylton v. Commissioner, supra, became
final before the trial of the present case. If petitioners
regarded their case as presenting nothing other than a pure issue
of law, they could have agreed to entry of decision on the basis
of Hylton and then appealed. Instead, petitioners went forward
at trial on the theory that the Transfer Refund was not made
pursuant to Maryland State law, but rather pursuant to an
administrative policy that required petitioner to retire in order
to receive the Transfer Refund. Petitioners' strategy was
obviously to present a theory that might serve to distinguish
their case from Hylton, Brown, Dorsey, and Adler and thereby
avoid the need to appeal. However, the fact that petitioners'
strategy was unsuccessful does not mean that respondent's
position was unreasonable.
Finally, we do not think that respondent was under any
obligation to move for summary judgment. Indeed, respondent
thought that there were genuine issues of material fact. And the
reasonableness of respondent's view as to the existence of
disputed factual issues is demonstrated, if by no other fact, by
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petitioners' theory at trial regarding an alleged administrative
policy that required petitioner to retire in order to receive the
Transfer Refund.15 Accordingly, we do not comprehend how
decision in this case could have been entered pursuant to any
motion for summary judgment.
In view of the foregoing, we reject petitioners' second
contention.
G. Respondent's Collection Activity
Finally, petitioners contend that respondent was
unreasonable in pursuing collection of the assessed deficiencies,
at least after the Court of Appeals decided Adler v.
Commissioner, 86 F.3d 378 (4th Cir. 1996).
We begin by recalling that petitioners did not file a bond
to stay assessment and collection when they filed their notice of
appeal. Accordingly, respondent was permitted, by law, to assess
and collect the deficiencies in income and excise taxes as
15
The pages of objections in each party's post-trial
brief to the other party's proposed findings of fact demonstrate
the parties' perception that more than a pure issue of law was
involved in this case.
We also note that the day after petitioners' counsel entered
his appearance in this case, petitioners commenced formal
discovery against respondent. Again, such action demonstrates
petitioners' perception that more than a pure issue of law was
involved in this case.
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redetermined in our Decision, see sec. 7485(a),16 and respondent
was not unreasonable to have done so.
On June 21, 1996, the Court of Appeals decided Adler v.
Commissioner, supra. Petitioners contend that it was
unreasonable for respondent to pursue further collection after
that date. In contrast, we conclude that it was unreasonable for
respondent to pursue further collection after October 1, 1996.17
16
Sec. 7485 provides, in relevant part, as follows:
SEC. 7485 BOND TO STAY ASSESSMENT AND COLLECTION.
(a) Upon Notice of Appeal.--Notwithstanding any
provision of law imposing restrictions on the
assessment and collection of deficiencies, the review
under section 7483 shall not operate as a stay of
assessment or collection of any portion of the amount
of the deficiency determined by the Tax Court unless a
notice of appeal in respect of such portion is duly
filed by the taxpayer, and then only if the taxpayer--
(1) on or before the time his notice of
appeal is filed has filed with the Tax Court a
bond in a sum fixed by the Tax Court not exceeding
double the amount of the portion of the deficiency
in respect of which the notice of appeal is filed,
and with surety approved by the Tax Court,
conditioned upon the payment of the deficiency as
finally determined, together with any interest,
additional amounts, or additions to the tax
provided for by law * * *
17
We need not decide whether it was unreasonable for
respondent to pursue further collection between June 21, 1996,
and Oct. 1, 1996, because that issue appears to be moot. In this
regard, we note that during such period petitioners did not incur
any attorney's fees and that the only cost in respect of which
petitioners seek reimbursement appears to represent a $65 payment
for Westlaw service related to petitioners' reply brief filed in
the Court of Appeals before Adler v. Commissioner, 86 F.3d 378
(4th Cir. 1996), was decided. Cf. Estate of Perry v.
(continued...)
- 29 -
After the Court of Appeals decided Adler v. Commissioner,
supra, respondent had a 45-day period to petition the Court of
Appeals for rehearing or rehearing en banc, see Fed. R. App. P.
35(c), 40(a), and a 90-day period to petition the Supreme Court
to file a petition for a writ of certiorari, see 28 U.S.C. sec.
2101(c)(1994). On September 10, 1996, the Solicitor General
decided that a petition for a writ of certiorari would not be
filed in Adler v. Commissioner, supra.
We think that by the end of September 1996, respondent
should have concluded that the decision of the Court of Appeals
in Adler would control the disposition of the present case and
respondent should have terminated collection against petitioners.
Nevertheless, on October 22, 1996, respondent filed a notice of
Federal tax lien in the county of petitioners' residence.
Moreover, by notice dated December 25, 1996, a date more than a
month after the Court of Appeals had reversed our Decision in the
present case, respondent reminded petitioners that their next
payment pursuant to the installment payment agreement was due on
January 8, 1997. During this period, petitioners incurred costs
in trying to persuade respondent to terminate collection that
should have terminated earlier.
17
(...continued)
Commissioner, 931 F.2d 1044 (5th Cir. 1991); Keasler v. United
States, 766 F.2d 1227 (8th Cir. 1985).
- 30 -
In view of the foregoing, we hold that it was unreasonable
for respondent to pursue further collection after October 1,
1996.
H. Amount of Recoverable Costs
Finally, we turn to the matter concerning the amount of
recoverable costs. Here we observe that respondent concedes that
all but $150 of the costs incurred by petitioners constitutes
"reasonable litigation costs" within the meaning of sec.
7430(c)(1).18 The disputed $150 amount, however, does not
pertain to any cost incurred after September 1996. Accordingly,
we conclude that the costs incurred for the months of October
1996 through February 1997, as enumerated in petitioners'
counsel's single invoice for those months, are recoverable by
petitioners.19
III. Conclusion
Based on the foregoing, we hold that respondent's position
in the court proceeding was not unreasonable through September
1996, but that respondent acted unreasonably thereafter by not
18
See supra note 4. Further, we note that respondent
neither cites nor relies upon either sec. 301.7430-3(a)(4),
Proced. & Admin. Regs., or sec. 301.7430-3(b), Proced. & Admin.
Regs. Accordingly, no consideration is given to the possible
effect of those provisions of the regulation. Cf. Lavallee v.
Commissioner, T.C. Memo. 1997-183 at n.14; Ball v. Commissioner,
T.C. Memo. 1995-520; see also Gustafson v. Commissioner, 97 T.C.
85, 93 (1991).
19
The total amount for "services and expenses" according
to such invoice is $976.75.
- 31 -
terminating collection. Accordingly, we shall award costs to
petitioners in the amount of $976.75.
To reflect the foregoing, as well as the agreed disposition
of petitioners' Motion for Entry of Decision,20
An appropriate order and
decision will be entered (1)
granting petitioners' Motion
for Costs, as amended, to the
extent indicated; and (2)
granting petitioners' Motion
for Entry of Decision, in the
amount of the agreed
overpayment.
20
See supra note 2.