T.C. Memo. 1999-55
UNITED STATES TAX COURT
DARL N. AND BONNIE S. MILLER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4420-97. Filed February 26, 1999.
David P. Leeper, for petitioners.
Gerald L. Brantley, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: This case is before the Court on
petitioners' motion for award of reasonable litigation costs
pursuant to section 7430 and Rules 230, 231, and 232,1 filed
October 1, 1997. Petitioners did not request a hearing. In his
notice of objection to petitioners' motion for costs, filed by
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year 1993. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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respondent on January 5, 1998, respondent requested a hearing in
this matter. We conclude that a hearing is not necessary. We
decide petitioners' motion based on the record. The record
consists of petitioners' motion for costs with attached affidavits,
respondent's notice of objection to petitioners' motion for costs,
and the uncontroverted statements by the parties as contained in
the aforementioned documents.
On their 1993 joint Federal income tax return,
petitioners claimed, inter alia, itemized deductions of
$36,594, an advertising deduction on Schedule C2 of $43,362
and other Schedule C expenses in the amount of $100,362. The
$100,362 claimed expenses consist of:
1. Credit Reports #6064 $28,610
2. Business Development #6073 20,932
3. Loan Costs #6067 24,706
4. Contract Labor #6068 13,228
5. Costs of Funds #6079 12,886
100,362
Upon audit of petitioners' 1993 return, respondent
determined the following adjustments as stated in the
statutory notice of deficiency:
Because petitioners' adjusted gross income for 1993
exceeded $100,000 respondent reduced petitioners' itemized
deductions in the amount of $624.
The amount claimed by petitioners as advertising expense
on Schedule C2 of their return in the amount of $43,362 was
reduced in the amount of $2,925 because it was determined that
the $2,925 was either a personal expense and/or was not an
ordinary and necessary business expense.
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The amount claimed by petitioners as a credits report
deduction on Schedule C2 of their return in the amount of
$28,610 was reduced to the amount of $25,283 because the
amounts disallowed were determined to be nondeductible and/or
personal in nature.
The amount claimed by petitioners for business
development on Schedule C2 of their return in the amount of
$20,932 was disallowed because that amount was determined to
be a personal expenditure.
The amount claimed by petitioners as cost of loans on
Schedule C2 of their return, in the amount of $24,706 was
reduced to $8,579. The amount disallowed ($16,127) was
determined to be nondeductible and/or personal in nature.
The amount claimed by petitioners for contract labor on
Schedule C2 of their return, in the amount of $13,228 was
reduced to $11,920 because the amount disallowed ($1,308) was
determined to be personal in nature.
The amount claimed by petitioners for costs of funds on
Schedule C2 of their return in the amount of $12,886 was
disallowed because the amount claimed was determined to be
loan payments and/or other nondeductible items.
In a report dated October 25, 1996, respondent's
examining agent noted that petitioners' accountant had
prepared a general ledger for 1993 from information provided
by petitioners. Upon examining the various accounts contained
in the ledger, the examining agent opined that a number of
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items in the ledger appeared to be nondeductible and/or
personal in nature. Petitioner was reluctant to provide any
information beyond what was contained in the ledger on the
ground that, since the items appeared in a ledger, they were
necessarily correct and further verification should be
unnecessary. Petitioners would not sign a Form 872 to extend
the statute of limitations, and the case was forwarded for the
issuance of a statutory notice of deficiency.
The notice of deficiency was mailed to petitioners on
December 12, 1996. The petition, consisting of seventy-seven
(77) paragraphs, most of which alleged "evidentiary facts",
was filed on March 7, 1997. Respondent's answer was filed on
March 31, 1997.
By letter dated June 20, 1997, to petitioners' attorney,
David P. Leeper, respondent's appeals officer informed Mr.
Leeper as follows:
Dear Mr. Leeper:
I have reviewed the examiner's workpapers that
were prepared in connection with the examination of
the Millers' tax returns for 1993. Based on these
workpapers, many of the expenses disallowed were for
lack of substantiation by the taxpayer.
The following information is need [sic] to help
resolve these issues at our scheduled appeals
conference:
1. A list of the recipients of the
various statuettes deducted as advertising
expense. This list should include the
location and approximate dates the items
were placed.
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2. Copies of invoices for credit reports
from SARMA and any other reporting
services that total $25,283 for 1993.
3. Invoices to substantiate Business
Development expense of $20,932 less the
$5,000 loan payment that the taxpayer
included in this account. The examiner
has allowed 60% based on an estimate
because the taxpayer did not provide
substantiation during the examination.
Since this is not acceptable to the
taxpayer, the full amount needs to be
verified.
4. Invoices for $1,417.84 from American
Express and $1,000 from Centurion deducted
as a cost of loans.
5. Invoices from The Platinum Card for
$760.47 and $348.00 that was deducted as
labor costs.
6. Invoices or other substantiation for
the $7,296.29 deducted as cost of funds.
Thanks for your cooperation.
By letter dated July 9, 1997, Mr. Leeper responded to the
appeals officer's letter of June 20, 1997, and provided to
respondent the requested documentation, including those
invoices showing payments to "Sarma".
On July 22, 1997, within 2 weeks from having received the
substantiation from Mr. Leeper that was requested by
respondent, the appeals officer forwarded to Mr. Leeper a
proposed stipulation and decision document. On October 1,
1997, the parties filed a stipulation of settlement in this
case.
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Discussion
A taxpayer who substantially prevails in an
administrative or court proceeding may be awarded reasonable
costs incurred in those proceedings. Sec. 7430(a). In order
to determine that the taxpayer was a "prevailing party", it
must be shown 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
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
2
Because the petition was filed after July 30, 1996, the
burden is on respondent to show that the Government's position
was substantially justified. Taxpayer Bill of Rights 2, 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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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 denies that petitioners have substantially
prevailed with respect to the amounts in controversy and on
the most significant issue in this case. Respondent admits
that petitioner, Darl N. Miller, meets the net worth
requirements but denies that petitioner Bonnie S. Miller has
shown that she meets the net worth requirements. Respondent
alleges that because petitioners failed to provide relevant
information to the examining agent so that a 30-day letter
could be issued, petitioners failed to exhaust their
administrative remedies. Respondent further alleges that by
failing to submit relevant information requested by the
examining agent at the administrative level, before the
issuance of the statutory notice of deficiency, petitioners
unreasonably protracted the proceedings in this case.
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Finally, respondent does not agree that the claimed costs are
reasonable.
We first consider whether respondent's position in this
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 a part of 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).
The principal issue in this case is one of
substantiation. At the administrative level, petitioners were
reluctant to provide to respondent's examining agent
substantiation of their claimed expenses other than the ledger
prepared by their accountant based upon unsubstantiated
information they had provided to him.
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The petition was filed in this case on March 7, 1997; the
answer was filed on March 31, 1997. By letter dated June 20,
1997, respondent's appeals officer requested of petitioners'
counsel, Mr. Leeper, various documents to substantiate various
claimed deductions that had not previously been provided to
respondent.
Mr. Leeper provided the requested substantiating
documentation to respondent's appeals officer on July 9, 1997.
On July 22, 1997, within 2 weeks from having received
from Mr. Leeper the requested substantiating documentation,
respondent forwarded to Mr. Leeper a proposed settlement of
the case.
On the basis of the facts contained in the record, we
find and hold that at all relevant times respondent's position
in the administrative and litigation proceedings in this case
was substantially justified.
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 this case was at all relevant
times substantially justified, we will deny petitioners'
motion. We, therefore, need not address respondent's other
objections to the motion.
An appropriate order and
decision will be entered.