T.C. Memo. 1999-6
UNITED STATES TAX COURT
CAROLYN B. COOPER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13858-97. Filed January 14, 1999.
Bruce Elwyn Gardner, for petitioner.
Wendy L. Wojewodzki, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: This case is before the Court
pursuant to petitioner's amended motion for award of reasonable
litigation costs under section 7430 and Rules 230 through 232.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue. However,
all references to section 7430 are to such section as in effect
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at the time the petition was filed. All Rule references are to
the Tax Court Rules of Practice and Procedure.
The issue for decision is whether petitioner is the
prevailing party within the meaning of section 7430(c)(4).
In a letter dated June 14, 1996, the District Director
(District Director) of the Internal Revenue Service (Service),
Baltimore, Maryland, informed petitioner that the Service was
examining petitioner's 1993 Federal income tax return. The
letter also informed petitioner that if she would like the
Service to consider her case further, she should send to the
Service readable copies of the records that she used to prepare
that portion of her return with respect to contributions and
miscellaneous deductions claimed on Schedule A, and the cost of
goods sold and all expenses claimed on Schedule C.
In a letter dated July 12, 1996, petitioner acknowledged
respondent's letter, and requested that respondent forward to her
a copy of her 1993 Schedule C because she was unable to locate
her copy. Petitioner said she enclosed corroborating exhibits
for her contributions and miscellaneous deductions. Petitioner
further stated that she included with the letter the only 2
months of receipts she had in support of her cost of goods sold
deduction and asked respondent to multiply the average to come up
with a 7-month total. Petitioner concluded her letter by stating
that "we are confident that upon receipt of your copied Schedule
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C, we will provide sufficient documentation to essentially permit
you to accept my 1993 form 1040, as filed."
In a letter dated August 21, 1996, petitioner submitted to
respondent a second set of documents to substantiate her claimed
1993 deductions for what she now referred to as an 8-month year.
Petitioner advised respondent that "most of [her] original
documents have been displaced or destroyed." She asked
respondent to "extrapolate" and make estimates. She stated that
she only had 2 months of electric and gas invoices and
substantiation of these expenses would be forthcoming upon
receipt of copies of statements from the respective utility
companies.
In a letter dated November 25, 1996, petitioner stated that
she enclosed a copy of a Form 872, Consent to Extend the Time to
Assess Tax, so that she could obtain additional information.
In a letter dated January 6, 1997, the District Director
informed petitioner that the period of time in which the Service
might assess tax for the tax period ended December 31, 1993, had
been extended to April 15, 1998.
On April 24, 1997, respondent mailed a notice of deficiency
to petitioner. In the notice, respondent determined a deficiency
in the amount of $5,495 in petitioner's 1993 Federal income tax.
The deficiency was based on disallowance of itemized deductions,
the cost of goods sold, and Schedule C expenses. The notice of
deficiency stated that the miscellaneous deduction was disallowed
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because of lack of substantiation, the charitable deduction had
been adjusted to the amount verified, the cost of goods sold was
allowed to the extent shown, and the Schedule C deductions were
allowed as verified.
On June 30, 1997, petitioner filed a petition with this
Court. Petitioner resided in Forestville, Maryland, at the time
her petition was filed. On August 12, 1997, respondent's answer
was filed.
In a letter dated February 5, 1998, an Appeals officer for
the Service informed petitioner that a conference had been
scheduled for February 13, 1998, for the purpose of attempting to
settle without trial the issues in her case pending before the
Court. The parties entered into a settlement stipulation, filed
on April 13, 1998, which reflected an overpayment of $600 by
petitioner for taxable year 1993. On April 14, 1998, this Court
entered a stipulated decision pursuant to the settlement
stipulation.
Petitioner thereafter filed with the Court a motion seeking
an award of litigation costs in the amount of $10,720.40.
Petitioner later increased this amount to $15,486.35 to correct a
mathematical error and to adjust for the purportedly additional
hours petitioner's attorney spent on this case to date. In
petitioner's motion for leave to amend motion for an award of
reasonable litigation costs, petitioner expressly stated that the
motion was for an award of attorney's fees and does not include
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administrative costs. Under the circumstances, we shall consider
the amended motion only as a motion for an award of reasonable
litigation costs. The stipulated decision was vacated, and the
decision document was filed as a stipulation of settlement on
April 27, 1998.
Neither party requested an evidentiary hearing, and the
Court concludes that such a hearing is not necessary for the
proper disposition of petitioner's amended motion. Rule
232(a)(2). We therefore decide the matter before us based on the
record.
Under section 7430(a), a judgment for litigation costs
incurred in connection with a court proceeding may be awarded
only if a taxpayer is the "prevailing party", has exhausted his
or her administrative remedies within the Service, and did not
unreasonably protract the court proceeding. Sec. 7430(a) and
(b)(1), (3). The taxpayer also must prove that the court costs
are reasonable. Sec. 7430(c)(1). The taxpayer must
substantially prevail with respect to either the amount in
controversy or the most significant issue or set of issues
presented and satisfy the applicable net worth requirement. Sec.
7430(c)(4)(A). A taxpayer must satisfy each of the respective
requirements in order to be entitled to an award of litigation
costs under section 7430. Rule 232(e); Minahan v. Commissioner,
88 T.C. 492, 497 (1987).
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There is an exception. Petitioner will in any event fail to
qualify as the prevailing party if respondent establishes that
the United States' position in the court proceeding was
substantially justified. Sec. 7430(c)(4)(B). We apply section
7430, as amended by the Taxpayer Bill of Rights 2 (TBOR 2), Pub.
L. 104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996),
which requires the United States to establish that the position
of the United States in such proceedings was substantially
justified. These amendments to section 7430 are effective with
respect to proceedings commenced after July 30, 1996. TBOR 2
secs. 701(d), 702(b), 703(b), and 704(b), 110 Stat. 1463-1464.
Because the petition in this case was filed on June 30, 1997,
section 7430 as amended by TBOR 2 applies. Maggie Management Co.
v. Commissioner, 108 T.C. 430, 437-441 (1997).
Respondent argues that petitioner is not the prevailing
party because the position of the United States was substantially
justified and the costs claimed are not reasonable. Respondent
concedes that petitioner has satisfied the other requirements of
section 7430.
The United States' position is substantially justified if it
is justified to a degree that could satisfy a reasonable person
and has a reasonable basis in both fact and law. Pierce v.
Underwood, 487 U.S. 552, 565 (1988) (interpreting similar
language in the Equal Access to Justice Act, 28 U.S.C. sec. 2412
(1988)); Maggie Management Co. v. Commissioner, supra at 443. A
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position has a reasonable basis in fact if there is such relevant
evidence as a reasonable mind might accept as adequate to support
a conclusion. Pierce v. Underwood, supra at 564-565. The
determination of reasonableness is based on those "available
facts which formed the basis for the position taken * * * during
the litigation, as well as upon any legal precedents related to
the case." Maggie Management Co. v. Commissioner, supra at 443.
Although this Court may determine the reasonableness of
respondent's position with respect to each adjustment in the
notice of deficiency independently, both parties make their
respective arguments for all of the adjustments in the notice of
deficiency collectively. Thus, we need not determine whether to
apportion the award between those adjustments for which
respondent was, and those adjustments for which respondent was
not, substantially justified. Cf. Swanson v. Commissioner, 106
T.C. 76, 87-92 (1996).
The fact that respondent eventually loses or concedes a case
does not by itself establish that the position taken is
unreasonable. Swanson v. Commissioner, supra at 94. However, it
is a factor that remains to be considered. Estate of Perry v.
Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991).
To decide whether respondent's position was substantially
justified, the Court must first identify the point in time at
which respondent is considered to have taken a position and then
decide whether the position taken from that date forward was
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substantially justified. Because petitioner's amended motion is
only for litigation costs, and not administrative costs, we look
to respondent's position in the proceeding in this Court which is
set forth in the answer filed on August 12, 1997. Sec.
7430(c)(7)(A).
Petitioner contends that respondent's positions in the
answer and trial memorandum were not substantially justified or
were unreasonable based on the facts or the law. With respect to
the answer, petitioner generally contends that respondent failed
to exercise due diligence in answering the petition by ignoring
documents in respondent's possession. With respect to the trial
memorandum, petitioner contends that respondent's position was
based on a failure to review the documents in a timely manner.
Respondent contends that despite the many requests for
documents, petitioner failed to substantiate the greater portion
of her claimed deductions until shortly before the calendar call
on April 13, 1998. Respondent further contends that respondent
exercised due diligence in answering the petition, did not ignore
any documents in respondent's possession, and allowed
petitioner's deductions to the extent that they were
substantiated as evidenced in the notice of deficiency.
On this record, we conclude that respondent's position was
substantially justified. We find that "It was reasonable for
respondent not to concede the adjustments until [respondent] had
received and verified adequate substantiation for the items in
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question." Simpson Financial Services, Inc. v. Commissioner,
T.C. Memo. 1996-317. We have stated on many occasions that
deductions are strictly a matter of legislative grace. INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice
Co. v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers must
substantiate any deductions claimed through sufficient records.
Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per
curiam 540 F.2d 821 (5th Cir. 1976).
Respondent's position was based on the examination of
petitioner's return. In the notice of deficiency issued to
petitioner following the examination, respondent allowed $5,919
of the claimed $23,276 in deductions. The difference of $17,357
was disallowed because of petitioner's failure to substantiate
the remaining items on her return.
This was only a substantiation case. Although petitioner
repeatedly stated in her petition that she had additional
documents or adequate evidence to substantiate the claimed
deductions, there is no evidence in the record that suggests that
the necessary documents were available to respondent until
approximately 7 months after respondent filed the answer. Prior
to the issuance of the notice of deficiency, petitioner admitted
in her August 21, 1996 letter to respondent that "most of my
original expenditure documents have been misplaced or destroyed
* * * . Therefore, I must rely on your reasonable judgment by
extrapolating from documents enclosed and professional
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discretion." We find it difficult to require respondent to
concede a case when documents are missing. Moreover,
notwithstanding petitioner's allegations, there is no evidence,
nor does petitioner point to any particular instance, in which
respondent ignored documents in respondent's possession.
At the February 13, 1998 meeting, petitioner provided
documents to respondent's Appeals officer. However, at that
meeting the Appeals officer determined that additional documents
were needed. Another meeting was scheduled for March 9, 1998,
but was apparently rescheduled at petitioner's counsel's request
until March 17, 1998. Petitioner finally provided the additional
substantiation at the March 17, 1998 meeting. After respondent's
Appeals officer had an opportunity to review those additional
documents, respondent promptly conceded all of the issues in the
notice of deficiency on or before April 10, 1998.
Prior to respondent's concessions of all of the issues in
the notice of deficiency, respondent submitted to the Court a
trial memorandum pursuant to the Court's standing pre-trial
order. Petitioner argues that because respondent took the
position in the trial memorandum that petitioner's claimed
deductions were insufficiently substantiated despite having all
of the substantiation documents, respondent's position was
substantially unjustified in the trial memorandum. In essence,
petitioner contends that respondent failed to review those
documents in a timely manner.
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We disagree. As we stated above, petitioner finally
submitted all of the requested documents to respondent's Appeals
officer on March 17, 1998. On or before April 10, 1998,
respondent conceded all of the issues in the notice of
deficiency, and the signed stipulation was filed with the Court
on April 13, 1998. In our view, respondent timely reviewed the
documents submitted by petitioner. Due to the delay by
petitioner in providing adequate documentation, we are persuaded
that respondent's Appeals officer was unable to review the
documents prior to the submission of the trial memorandum.
Thus, we are satisfied that respondent exercised due
diligence in answering the petition, did not ignore documents in
respondent's possession, and reviewed the documents in a timely
manner. We note that within 8 months after respondent's answer,
the parties entered into a stipulation of settlement. The case
would have been resolved earlier if petitioner had provided
respondent with the necessary documents.
Because respondent had a reasonable basis in fact and law
for the positions taken in the answer and the trial memorandum,
we hold that respondent's position was substantially justified,
and therefore petitioner was not the prevailing party within the
meaning of section 7430(c)(4). Thus, we need not address the
issue of whether petitioner's claim for litigation costs was
reasonable.
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To reflect the foregoing,
An appropriate order
and decision will be entered.