T.C. Memo. 1999-8
UNITED STATES TAX COURT
GARRY F. BETTENCOURT AND PHYLLIS C. BETTENCOURT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 7950-96, 17884-96. Filed January 19, 1999.
Donald H. Read, for petitioners.
Daniel J. Parent, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: These cases are before the
Court on petitioners' motions for litigation and administrative
costs pursuant to section 7430 and Rules 230, 231 and 232,1 filed
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the years 1993 and
1994. All Rule references are to the Tax Court Rules of Practice
and Procedure.
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May 1, 1997, and October 6, 1997, respectively. Neither party
requested a hearing, and we conclude that a hearing is not
necessary. Rule 232(a). We decide petitioners' motions on the
bases of the motions, the memoranda of law, and the declarations
submitted by the parties.
On their 1993 joint Federal income tax return, petitioners
deducted $55,200 as alimony payments. On their 1994 joint
Federal income tax return, they deducted $27,000 as alimony
payments.
On March 13, 1995, respondent wrote to petitioners to inform
them that their 1993 return was under examination and requested
that they substantiate the claimed alimony deductions and various
claimed employee business expenses.
In April 1995, petitioners met with respondent's tax
auditor. On May 5, 1995, petitioners submitted to respondent
documents substantiating the claimed employee business expenses
and those expenses were allowed by respondent. On May 5, 1995,
petitioners also provided to respondent documents to support the
claimed alimony deduction. Those documents included a copy of a
judgment (hereinafter the judgment) dissolving the marriage
between petitioner Garry F. Bettencourt (petitioner) and his
former spouse, Kim T. Bettencourt, filed in the Superior Court of
California, County of Contra Costa (the court) on June 18, 1987.
At the same time, there were also provided to respondent a Wage
and Earnings Assignment Order re Spousal or Family Support filed
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with the Superior Court on August 30, 1991, "Child Support Paid
by Garry Bettencourt" summaries for the year 1993, and wage stubs
showing amounts paid to petitioner by Medallion Mortgage Company
during 1993.
On May 18, 1995, respondent sent petitioners a 30-day letter
proposing to disallow the claimed alimony deduction.
In response to the 30-day letter, on June 3, 1995,
petitioners' counsel, Mr. Read, mailed to respondent a five page
letter protesting respondent's proposed income tax examination
changes. He forwarded with his letter a power of attorney, Form
2848, and requested that petitioners' return be accepted as
filed. In the event that respondent would not accept the return
as filed, Mr. Read requested that his letter be treated as a
formal protest and that the matter be referred to the Appeals
Office for hearing. By letter dated June 14, 1995, Mr. Read sent
to respondent an original Form 2848, signed by petitioners.
On June 27, 1995, respondent sent Mr. Read a letter
proposing the same adjustments to petitioners' 1993 return as
were proposed in the May 18, 1995, 30-day letter.
During the summer months of 1995, correspondence was
exchanged between Mr. Read and respondent through which
respondent sought additional information about the alimony issue.
A statutory notice of deficiency for 1993 was mailed to
petitioners on February 7, 1996. Petitioners filed their
petition in docket No. 7950-96 with the Court on April 26, 1996,
and respondent filed an answer on May 21, 1996; the case was then
referred to respondent's Appeals Office.
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In a letter to Mr. Read dated July 12, 1996, from
respondent's Appeals Office, respondent informed Mr. Read that it
was thought that the case might be resolved by mail. The letter
further read:
I have a copy of the June 18, 1987 decree issued
by Judge Libbey. However, the administrative file did
not contain copies of the March 8, 1989 and/or December
22, 1989 modifications as described in your letter of
June 3, 1995. Please submit complete copies of these
orders as well as any subsequent to the 1989 order
(sic). Once I receive the orders, I will call you to
discuss my findings.
A letter dated August 6, 1996, from Mr. Read to respondent's
Appeals Office reads, in part:
Thank you for your letter of July 12, 1996. I am
pleased to learn that you believe this case can be
settled by mail. I would have responded sooner, but I
have been on vacation.
I enclose copies of the March 18, 1989 and
December 22, 1989 orders you requested. I know of no
other orders affecting support that were issued between
the December 22, 1989 order and the end of tax year
1993.
In a letter to Mr. Read dated August 13, 1996, respondent's
Appeals Office forwarded to Mr. Read a proposed stipulation-
decision document in which respondent conceded the case for the
year 1993.
In a letter pertaining to their 1994 tax year, respondent
forwarded to petitioners a report of examination which disallowed
the alimony deduction claimed on their 1994 joint Federal income
tax return. Respondent's disallowance of the 1994 claimed
alimony deduction mirrored respondent's 1993 disallowance of the
similarly claimed alimony deduction.
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By letter dated April 11, 1996, respondent asked petitioners
to respond to the proposed disallowance of the alimony deductions
claimed by petitioners on their 1994 return.
In a letter to respondent dated April 30, 1996, Mr. Read
invited respondent's attention to his arguments previously made
regarding the identical alimony issue raised regarding
petitioners' 1993 tax year and cited to respondent this Court's
then recent opinion in Ambrose v. Commissioner, T.C. Memo. 1996-
128.
A statutory notice of deficiency for 1994 was mailed to
petitioners on May 23, 1996. In response, petitioners timely
filed a petition in this Court at docket No. 17884-96, on August
19, 1996. A Stipulation of Settled Issues was filed on April 4,
1997, in which respondent conceded the case.
Discussion
A taxpayer who substantially prevails in an administrative
or court proceeding may be awarded reasonable costs incurred in
those proceedings. Sec. 7430(a). To be a "prevailing party", a
taxpayer must show that: (1) The position of the United States
in the proceeding was not substantially justified,2 (2) the
taxpayer substantially prevailed with respect to either the
amount in controversy or the most significant issue or issues
2
Because the petition in docket No. 17884-96 was filed
after July 30, 1996, in that case the burden is on respondent to
show that the Government's position was substantially justified.
Taxpayer Bill of Rights 2 (TBR2), Pub. L. 104-168, secs. 701-704,
110 Stat. 1452, 1463-1464 (1996). See Maggie Management Co. v.
Commissioner, 108 T.C. 430 (1997). Our holding, however, does
not depend on which party has the burden.
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presented, and (3) the taxpayer met the net worth requirements of
28 U.S.C., sec. 2412(d)(2)(B) (1994), on the date the petition
was filed. Sec. 7430(c)(4)(A). The taxpayer must also show that
all administrative remedies have been exhausted (to obtain a
judgment for litigation costs), section 7430(b)(1), that the
taxpayer has not unreasonably protracted the administrative or
judicial proceedings, section 7430(b)(4), redesignated as (b)(3)
by the 1996 Act, and that the costs claimed are reasonable in
amount, section 7430(c)(1) and (2). These requirements are in
the conjunctive and each must be met in order for the Court to
determine that administrative or litigation costs should be
awarded pursuant to section 7430. Minahan v. Commissioner, 88
T.C. 492 (1987); Renner v. Commissioner, T.C. Memo. 1994-372.
Petitioners contend that they have substantially prevailed
with respect to the amounts in controversy and on the most
significant issue in these cases. They further contend that they
have met the net worth requirements of 28 U.S.C., sec.
2412(d)(2)(B), that they have exhausted the administrative
proceedings available to them within the Internal Revenue
Service, and that they have not unreasonably protracted the
administrative or court proceedings. They also argue that the
costs claimed are reasonable.
Respondent agrees that petitioners have substantially
prevailed, that they meet the net worth requirements of 28
U.S.C., sec. 2412(d)(2)(B), and that they have not unreasonably
protracted the administrative and court proceedings. Respondent
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does not agree that his position was not substantially justified,
he does not agree that petitioners exhausted the administrative
remedies available to them within the Internal Revenue Service,
and he does not agree that the costs claimed are reasonable.
We first consider whether respondent's position in each case
was substantially justified. For the reasons stated, infra, we
find that it was.
Whether respondent's position was substantially justified
depends on whether respondent's position and actions were
reasonable in light of the facts of the case and applicable
precedents. Bragg v. Commissioner, 102 T.C. 715, 716 (1994);
Powers v. Commissioner, 100 T.C. 457, 470-471 (1993), affd. in
part and revd. and remanded in part 43 F.3d 172 (5th Cir. 1995).
The fact that respondent concedes the case is not necessarily
indicative that a position is not substantially justified. Price
v. Commissioner, 102 T.C. 660, 662-665 (1994), affd. without
published opinion sub nom. TSA/THE Stanford Associates, Inc. v.
Commissioner, 77 F.3d 490 (9th Cir. 1996). A position is
"substantially justified" when it is "justified to a degree that
could satisfy a reasonable person." Pierce v. Underwood, 487
U.S. 552, 565 (1988).
Respondent's disallowance of the alimony claimed by
petitioners on their 1993 and 1994 returns was predicated upon
the provisions of the judgment entered by the court in 1987,
dissolving the marriage of petitioner and his former wife, Kim T.
Bettencourt. That judgment provided that the legal care, custody
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and control of the two minor children born of the marriage,
Brandon and Lisa Ann, were awarded to both parents. Physical
custody of the children was to be shared by the parents but the
primary residence of the children was to be with their mother.
The judgment further provided that petitioner was to pay to
Kim T. Bettencourt as and for unallocated family support the sum
of $5,000 per month, commencing with the payment due and owing
May 1, 1987, and continuing thereafter until the death of either
party, Kim T. Bettencourt's remarriage, further order of the
court, or June 1, 1994. The judgment further provided:
Said family support shall be modifiable (and subject to
allocation between spousal support and child support)
upon motion of either party. Said jurisdiction to
modify shall include the jurisdiction to extend the
period of family support payments (or spousal support
payments) beyond June 1, 1994, conditioned upon
Petitioner carrying the burden of demonstrating why she
has not become self-supporting and why she is in need
of extended support from respondent.
On August 30, 1991, there was filed with the Court a Wage
and Earnings Assignment Order addressed to petitioner's employer,
Allied Capitol Mortgage Corporation, ordering petitioner's
employer to pay to Kim T. Bettencourt from petitioner's earnings,
$4,600 per month current spousal or family support.
On May 5, 1995, petitioners submitted to respondent's tax
auditor a schedule of payments made to Kim T. Bettencourt during
1993. That schedule is titled: "Child Support Paid by Garry
Bettencourt."
On their 1993 return, petitioners claimed an alimony
deduction of $55,200. On their 1994 return, they claimed an
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alimony deduction of $27,600. On their 1994 return, petitioners
also claimed dependency exemptions for petitioner's minor
children and reported on the return that the children lived with
petitioners during the entire year 1994. Respondent's tax
auditor had at hand petitioners' 1993 and 1994 returns, and it
appeared that there was a reduction in support payments made to
Kim T. Bettencourt in 1994.
On July 12, 1996, respondent's Appeals officer requested
that petitioners submit additional information. On August 8,
1996, petitioners' counsel, Mr. Read, for the first time provided
to respondent's Appeals officer the court orders dated March 8,
1989 and December 22, 1989. Mr. Read also represented to
respondent's Appeals officer that, to his knowledge, the court
issued no other orders through 1993. Based upon the information
provided by Mr. Read subsequent to the issuance of the notice of
deficiency in docket No. 7950-96, respondent's Appeals officer
determined that petitioner and Kim T. Bettencourt had not
petitioned the Court to allocate the family support payments
between child support payments and spousal support and agreed
with petitioners that their claimed alimony deductions were
allowable.
On the basis of the facts contained in the record, we find
and hold that respondent was diligent in examining petitioners'
1993 and 1994 returns, and that at all relevant times
respondent's position in the administrative and litigation
proceedings was substantially justified.
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Because the provisions of section 7430 are conjunctive,
Minahan v. Commissioner, 88 T.C. at 497, and because we hold that
respondent's position in these cases was substantially justified,
we will deny petitioners' motions. We, therefore, need not
address respondent's other objections to the motions.
Appropriate orders and
decisions will be entered.