T.C. Memo. 1999-109
UNITED STATES TAX COURT
W. GREGORY AND PATRICIA L. RYAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1274-96. Filed April 2, 1999.
Daniel P. McGlinn, Russell A. Kries, and Matthew S.
DePerno, for petitioners.
Alexandra E. Nicholaides, for respondent.
MEMORANDUM OPINION
DEAN, Special Trial Judge: This matter is before the Court
on a Motion for Litigation Costs filed by W. Gregory Ryan and
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Patricia L. Ryan, pursuant to section 7430 and Rule 231.1 The
issues for decision are (1) whether petitioners should be awarded
reasonable litigation costs pursuant to section 7430, and if so,
(2) whether the amount of litigation costs requested by
petitioners is reasonable, and (3) whether petitioners have
unreasonably protracted the litigation.
At the time the petition was filed in this case, petitioners
resided in Schofield, Wisconsin.
The underlying claim which gave rise to the present dispute
involved the classification of certain payments made by Gregory
Ryan (petitioner) to his former wife, Frances Ryan, pursuant to a
Judgment of Divorce. The Judgment of Divorce was granted by the
Circuit Court for the County of Kalamazoo, Michigan (trial
court), and provided for permanent alimony payable to Frances
Ryan as follows:
IT IS FURTHER ORDERED AND ADJUDGED that the
Plaintiff, W. GREGORY RYAN, shall pay to the Defendant,
FRANCES RYAN, for her support and maintenance, the sum
of SEVEN HUNDRED ($700.00) DOLLARS per month, in
advance, commencing January 5, 1990, for January,
February, March and April of 1990, and commencing
May 5, 1990, the sum of TWO HUNDRED FIFTY ($250.00)
DOLLARS PER WEEK, and continuing thereafter until the
death or substantial change in circumstances, or until
further order of this Court having competent
jurisdiction. This alimony shall be paid through the
Friend of the Court consistent with the provisions
hereinafter found dealing with payment of support.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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In 1991, petitioner appealed the Judgment of Divorce to the
Michigan Court of Appeals (court of appeals) on the grounds that
the alimony granted by the trial court was in excess of the
alimony requested by Frances Ryan. In the divorce proceedings,
Frances Ryan had asked for alimony for a term of 8 years, yet the
Judgment of Divorce provided alimony until Frances Ryan's death
or a substantial change in circumstances.
The court of appeals rendered a per curiam opinion dated
May 8, 1991, finding that the trial court's alimony award was
improper and remanded the matter to the trial court "for
modification of the divorce judgment to reflect an alimony award
of $250 a week for eight years."
Petitioner subsequently filed a motion for clarification
with the court of appeals, which was dismissed because it was not
timely filed. The trial court did not amend the Judgment of
Divorce pursuant to the court of appeals' opinion.
Frances Ryan did not include payments from petitioner in
1991, 1992, and 1993 as income. Although she did not testify at
trial, the record reflects that she treated the court of appeals'
opinion as having specifically removed the termination-upon-death
provision contained in the original Judgment of Divorce.
Petitioner, on the other hand, treated the payments as though a
termination upon death provision was still in effect and the
payments were alimony for a term of 8 years.
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Respondent determined a deficiency in petitioner's Federal
income tax for 1991 in the amount of $4,030, and deficiencies in
petitioners' Federal income taxes for 1992 and 1993 in the
amounts of $3,954 and $4,019, respectively. Respondent
determined that petitioner failed to establish that the $13,000
he paid during each of the taxable years 1991, 1992, and 1993
qualified for the alimony deduction under section 215.
This Court rendered Ryan v. Commissioner, T.C. Memo.
1998-331, deciding that the amounts paid by petitioner to his
former wife were properly deductible as alimony. Petitioner now
requests the Court to award him reasonable litigation costs in
the amount of $24,409.
OPINION
In general, section 7430 allows a taxpayer who is a
prevailing party in a civil tax proceeding to recover reasonable
administrative and litigation costs incurred in such proceeding.
An award of administrative or litigation costs may be made where
the taxpayer: (1) Is the prevailing party; (2) exhausted
available administrative remedies; and (3) did not unreasonably
protract the administrative or judicial proceeding. See sec.
7430(a) and (b)(1), (4).
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Prevailing Party
To be a "prevailing party", a taxpayer must2 (1) establish
that respondent's position was not substantially justified; (2)
substantially prevail with respect to either the amount in
controversy or the most significant issue or set of issues
presented, and (3) meet the net worth requirements of 28 U.S.C.
sec. 2412(d)(2)(B). See sec. 7430(c)(4)(A)(i), (ii), and (iii).
Respondent concedes that petitioners substantially prevailed
with respect to the amount in controversy and the most
significant issue involved in this case and met the net worth
requirements. The parties dispute, however, whether respondent's
position in the judicial proceeding was substantially justified.
Specifically, petitioners make three arguments as to why
respondent's position was not substantially justified: (1)
Respondent took inconsistent positions with respect to
petitioners and Frances Ryan, claiming that the payments made by
petitioners were not alimony, but the payments received by
2
In 1996, legislation was enacted which shifted to the
Commissioner the burden of proving whether the position of the
United States was substantially justified. See sec.
7430(c)(4)(B), as amended by the Taxpayer Bill of Rights 2 (TBOR
2), Pub. L. 104-168, sec. 701, 110 Stat. 1452, 1463 (1996). The
changes made by this legislation apply only to proceedings
commenced after July 30, 1996. TBOR 2 secs. 701(d), 702(b), 110
Stat. 1464. Since petitioners filed their petition on Jan. 22,
1996, the proceedings at issue were commenced before the
effective date of TBOR 2, and the changes enacted by TBOR 2 are
not applicable. See Maggie Management Co. v. Commissioner, 108
T.C. 430, 441 (1997).
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Frances Ryan were alimony; (2) respondent took inconsistent
positions by disallowing deductions claimed as alimony by
petitioner in 1991, 1992, and 1993, while allowing those same
deductions claimed in 1990 and 1994; and (3) respondent's
position was not supported by facts and law.
Respondent asserts that it was reasonable to argue
inconsistent positions against petitioner and Frances Ryan in
order to protect the revenue, and that the failure to audit
petitioner's prior or subsequent taxable years is irrelevant to a
determination of the tax liability for the years at issue in this
case. Furthermore, respondent argues that this case focused on
the legal question of whether the subsequent State court order
modified the alimony award in the original Judgment of Divorce by
eliminating the termination-upon-death provision. Under these
circumstances, respondent contends, the position of the United
States was substantially justified.
We agree with respondent that taking inconsistent positions
with respect to petitioner and Frances Ryan was reasonable.
Inconsistent determinations may be made against the former
spouses in order to protect the revenue in a "whipsaw" situation.
See Doggett v. Commissioner, 66 T.C. 101, 103 (1976); Smith v.
Commissioner, T.C. Memo. 1996-292. Unlike the case of Human v.
Commissioner, T.C. Memo. 1998-65, inconsistent positions were
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appropriate in this case because the facts and law did not make
it clear that the payments were alimony.
We also agree with respondent that it is irrelevant whether
petitioner took alimony deductions on his 1990 and 1994 returns.
It is well settled that respondent may assert a position as in
the instant case even though he raised no objection to similar
claims by the taxpayer in prior years. See Yeaman v. United
States, 584 F.2d 322, 326 (9th Cir. 1978); Rose v. Commissioner,
55 T.C. 28, 32 (1970); Meneguzzo v. Commissioner, 43 T.C. 824,
836 (1965). Even if the Commissioner erroneously accepted the
tax treatment of certain items in previous years, he is not
precluded from correcting that error in a subsequent year. See
Hawkins v. Commissioner, 713 F.2d 347, 351-352 (8th Cir. 1983),
affg. T.C. Memo. 1982-451. We focus, therefore, on whether
respondent's position for the years in suit was supported by fact
and law. See Pierce v. Underwood, 487 U.S. 552, 565 (1988).
For purposes of litigation costs in a judicial proceeding,
the Government initially takes a position on the date the answer
is filed. See Lockett v. Commissioner, T.C. Memo. 1994-144; Han
v. Commissioner, T.C. Memo. 1993-386. Respondent filed an answer
on August 6, 1996. Thus, we shall consider respondent's position
as of this date in determining whether to award petitioner
litigation costs. Respondent's position in the answer was the
same as in the notice of deficiency; i.e., that petitioner's
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deduction of the claimed alimony payments to Frances Ryan was
disallowed.
In this case, respondent's position was based on the
uncertainty associated with what effect, if any, the court of
appeals' opinion had on the alimony provisions contained in the
Judgment of Divorce. If the court of appeals' opinion eliminated
the termination-upon-death provision contained in the Judgment of
Divorce, the payments made by petitioner to Frances Ryan may not
have qualified as alimony under State law, and may not have been
deductible. If the court of appeals' opinion did not alter the
termination-upon-death provision contained in the Judgment of
Divorce, the payments would be considered alimony and would have
been deductible under section 215. This was ultimately a matter
of legal interpretation.
Under these circumstances, we find that respondent acted
reasonably in raising the issue of what effect, if any, the court
of appeals' opinion had on the alimony provisions contained in
the Judgment of Divorce. The Judgment of Divorce had not been
modified to reflect the changes mandated by the court of appeals'
decision. The absence of a corrected Judgment of Divorce,
coupled with Frances Ryan's position on her tax return, left the
terms of the payment provisions open to interpretation. We
addressed the effect of the court of appeals' opinion in Ryan v.
Commissioner, supra, and ultimately rejected the position on this
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issue taken by respondent in the notice of deficiency to
petitioner. The position, however, was grounded in the
uncertainty of the interpretation of the court of appeals'
opinion.
In light of the conflicting positions taken by Frances Ryan
and petitioner, and taking into consideration our decision in
Ryan v. Commissioner, supra, we hold that respondent's position
in the civil proceeding was reasonable in fact and law and thus
substantially justified.
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 litigation costs.
To reflect the foregoing,
An appropriate order and
decision will be entered.