T.C. Memo. 2000-341
UNITED STATES TAX COURT
INGO H. JENSEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13005-98. Filed November 6, 2000.
Richard F. Battagline and Robert M. Stefancin, for
petitioner.
John M. Tkacik, Jr., and Richard S. Bloom, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
POWELL, Special Trial Judge: This case is before the Court
on petitioner’s motion for reasonable litigation costs pursuant
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to section 7430 and Rules 230, 231, and 232,1 filed April 14,
2000.
Neither party requested a hearing, and the Court concludes
that a hearing is not necessary for the proper disposition of
this motion. Although some facts appear in dispute, those facts
are essentially irrelevant to our resolution of this matter.
FINDINGS OF FACT
At the time the petition was filed petitioner resided in
Macedonia, Ohio.
Guild Mortgage Co. (Guild) issued petitioner a Form 1099-A,
Acquisition or Abandonment of Secured Property, and a Form 1099-
C, Cancellation of Debt, for petitioner’s 1996 taxable year. The
Form 1099-C indicated cancellation of debt income of $36,865.
Petitioner did not include this amount in income on his 1996
Federal income tax return.
Respondent mailed a CP2000 letter (commonly known as a 30-
day letter) to petitioner on January 13, 1998. The letter
proposed to increase petitioner’s 1996 taxable income to reflect
income from the cancellation of the debt. The proposed increase
resulted in an additional tax liability of $11,105 and the
imposition of an accuracy-related penalty under section 6662 of
$2,221.
1
Unless otherwise indicated, section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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The letter stated that the proposed inclusion of
cancellation of debt income was the result of third-party
information, specifically referencing the Form 1099-C received
from Guild. The letter set forth in detail the procedures for
petitioner to follow should he choose to contest the proposed
changes. The letter also stated that petitioner’s response was
required by February 12, 1998, and that if petitioner failed to
respond by February 12, 1998, respondent would presume that the
proposed changes were correct and issue petitioner a notice of
deficiency.
Petitioner retained the law firm of Brouse McDowell on March
27, 1998. No response to the 30-day letter, however, was
submitted to respondent. On April 22, 1998, respondent issued a
notice of deficiency to petitioner based on the changes proposed
in the 30–day letter. On July 23, 1998, Jeffrey W. Leonard (Mr.
Leonard), an attorney with Brouse McDowell, filed a petition on
behalf of petitioner with this Court. The petition alleged that
petitioner was insolvent at the time the debt was canceled and,
therefore, no income was recognized. See sec. 108.
Petitioner never requested an Appeals Office conference
before the filing of his petition with the Tax Court. When Mr.
Leonard was offered a conference by Appeals Officer John Mazur
during a telephone conversation on September 17, 1998, the offer
was declined. Instead, Mr. Leonard promised the Appeals officer
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that he would provide respondent documentation proving
petitioner’s insolvency at the time of the cancellation of the
debt.
Despite the Appeals officer’s followup attempts to contact
Mr. Leonard by telephone on October 16, 1998, and by letter dated
October 28, 1998, Mr. Leonard failed to provide the promised
documentation relating to the alleged insolvency. On January 20,
1999, Associate District Counsel Dennis Driscoll sent Mr. Leonard
a letter seeking to explore the possibility of settlement and
again requesting the information relating to petitioner’s
insolvency.
On January 29, 1999, Robert M. Stefancin (Mr. Stefancin),
another attorney with Brouse McDowell, informed the Appeals
officer that Mr. Leonard was no longer with the firm. Mr.
Stefancin requested additional time to enter an appearance so
that he could respond to the letter sent by Mr. Driscoll. As of
February 23, 1999, Mr. Leonard remained the attorney of record,
and no other attorney had filed an entry of appearance. The
Appeals officer never received the information or documentation
promised regarding the insolvency issue. On February 23, 1999,
the case was transferred to the District Counsel’s Office. A
letter was sent to Mr. Leonard informing him of this action.
On February 24, 1999, John M. Tkacik (Mr. Tkacik), an
attorney with the Office of District Counsel, left a telephone
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message for Mr. Leonard. On February 26, 1999, Mr. Leonard
returned Mr. Tkacik’s telephone call. During the ensuing
conversation Mr. Leonard was informed that: (1) Respondent was
not permitted to contact petitioner directly because of Mr.
Leonard’s entry of appearance, (2) the case was calendared for
the Tax Court trial session in Cleveland, Ohio, commencing on
April 26, 1999, and (3) a conference should be scheduled to
comply with the Branerton2 requirements. Mr. Leonard stated that
he would discuss the matter with his client and with Mr.
Stefancin, and indicated that he might withdraw as attorney of
record.
On March 1, 1999, Mr. Leonard called Mr. Tkacik to inform
him that the necessary documents for his withdrawal as attorney
of record as well as the necessary documents for substitution of
counsel would be prepared and filed. To date, no withdrawal as
attorney of record by Mr. Leonard has been received by the Tax
Court. Richard F. Battagline (Mr. Battagline), another attorney
at Brouse McDowell, entered an appearance in this case on March
8, 1999.
During a telephone conference between Messrs. Tkacik and
Battagline on March 19, 1999, Mr. Battagline raised the issue
2
See Branerton Corp. v. Commissioner, 61 T.C. 691
(1974), requiring that parties make reasonable informal efforts
to obtain needed information voluntarily before resorting to
formal discovery.
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whether an erroneous Form 1099-C had been issued because the debt
discharged was nonrecourse (the erroneous Form 1099-C issue).
Mr. Tkacik requested information to support this argument as well
as reiterated respondent’s request for documentation regarding
the insolvency issue. Some documentation was forwarded to Mr.
Tkacik on March 31, 1999. Mr. Tkacik found the documentation
failed to prove petitioner’s insolvency and did not address the
erroneous Form 1099-C issue. Additional documentation was
received by Mr. Tkacik on April 13, 1999. Mr. Tkacik found that
this additional documentation again failed to substantiate the
insolvency claim and failed to address the erroneous Form 1099-C
issue.
Finally, in a conference call conducted on April 16, 1999,
Mr. Battagline set forth arguments of law and facts sufficient to
set the basis for determining that the Form 1099-C was erroneous.
On April 22, 1999, Mr. Battagline filed a motion for leave to
amend petition and motion for continuance of trial, which the
Court granted.
Correspondence resumed between the parties beginning July
14, 1999. Mr. Battagline provided Mr. Tkacik with legal
arguments establishing that the canceled debt was nonrecourse.
Mr. Tkacik reached the same conclusion and, on September 8, 1999,
informed Mr. Battagline.
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The final issue involved petitioner’s treatment of the
canceled nonrecourse debt. On September 8, 1999, Mr. Tkacik
informed Mr. Battagline that respondent was now treating the
matter as a taxable exchange under section 1001 and that
respondent therefore needed documentation regarding petitioner’s
basis in the property. On November 29, 1999, Mr. Battagline
contacted Mr. Tkacik, stating that the required documentation
would be furnished. Mr. Tkacik received the documentation on
January 6, 2000. After an initial disagreement over the tax
treatment of the exchange and on the basis of additional
information received by respondent on February 18, 2000,
respondent conceded the case on February 24, 2000. On April 14,
2000, the parties filed a stipulation of settlement. On the same
date, petitioner’s motion for litigation costs of $15,778.29 was
filed.
OPINION
Section 7430 provides that, in any court proceeding brought
by or against the United States, the “prevailing party” may be
awarded reasonable litigation costs if the “prevailing party”
establishes that he exhausted the administrative remedies
available within the Internal Revenue Service and did not
unreasonably protract the proceedings. See sec. 7430(b)(1), (3).
For petitioner to qualify as a “prevailing party” for purposes of
section 7430, it must be established that: (1) The position of
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the United States in the proceeding was not substantially
justified; (2) petitioner substantially prevailed with respect to
either the amount in controversy or with respect to the most
significant issue presented; and (3) petitioner met the net worth
requirements of 28 U.S.C. section 2412(d)(2)(B) (1994) at the
time the petition was filed. Sec. 7430(c)(4). Respondent has
the burden of proving that the position of the United States was
substantially justified, and petitioner bears the burden of proof
with respect to all other requirements. See sec. 7430(c)(4)(B);
Rule 232(e); Maggie Management Co. v. Commissioner, 108 T.C. 430,
437 (1997).
Respondent concedes that petitioner substantially prevailed
with respect to the amount in controversy, and that petitioner
met the net worth requirements. Respondent maintains, however,
that respondent’s position was substantially justified, that
petitioner failed to exhaust his administrative remedies, and
that petitioner unreasonably protracted the proceedings. The
requirements of section 7430 are conjunctive; therefore, failure
to meet any one of the requirements will preclude an award of
costs. See Minahan v. Commissioner, 88 T.C. 492, 497 (1987).
While we have great difficulty with petitioner’s argument that
respondent’s position was not substantially justified, we do not
believe that it is necessary to reach that question. In our
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view, petitioner did not exhaust his administrative remedies, and
we find no reason to delve into the other requirements.
Petitioner never requested an Appeals conference with
respondent although such a conference was available. Section
301.7430-1(b)(1), Proced. & Admin. Regs., provides that, where an
Appeals conference is available, administrative remedies are
exhausted only when the taxpayer (1) participates in an Appeals
conference before petitioning this Court, or (2) requested such a
conference (as applicable herein by filing a written protest with
respondent) and had his request denied. See Lloyd v.
Commissioner, T.C. Memo. 2000-299; see also Swanagan v.
Commissioner, T.C. Memo. 2000-294. Additionally, after filing
the petition, petitioner was contacted by the Appeals officer and
offered a post-petition Appeals conference. Petitioner declined
the opportunity to participate in the offered Appeals conference.
Petitioner asserts that he would have provided documentation
to respondent sufficient to satisfy the exhaustion of
administrative remedies requirement if only respondent had not
been hasty in issuing a notice of deficiency, and then, after the
petition had been filed, had respondent not quickly transferred
the case to the District Counsel’s Office. We find this argument
meritless. The fact is that petitioner and his attorney ignored
the 30-day letter. That letter set forth a clear deadline for
responding to the proposed changes. Petitioner failed to even
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retain counsel until a month after this deadline had passed.
Then, after retaining counsel, petitioner continued to ignore the
30-day letter. It was not until respondent mailed the notice of
deficiency, more than 2 months after the deadline set forth in
the 30-day letter and more than a month after petitioner had
retained counsel, that petitioner made any attempt to contact
respondent.
Petitioner argues that pursuing the Appeals remedy would
have been futile. See Phillips v. Commissioner, 88 T.C. 529
(1987), affd. in part and revd. in part on other grounds 851 F.2d
1492 (D.C. Cir. 1988). In Phillips the taxpayer was unaware of
the issue until after his case was docketed in the Tax Court.
Furthermore, we found that the Commissioner’s insistence on
pursuing the matter through litigation and the refusal to
consider the effect of his own revenue rulings “demonstrate[d]
that any discussion of this issue that petitioner attempted was
futile.” Id. at 533. But there is no suggestion here that
respondent’s mind was closed and that development of the case
through the administrative Appeals process would have been
unproductive. The fact is that petitioner never attempted to get
the matter settled before the case was calendared for trial.
Petitioner also cites Cole v. Commissioner, T.C. Memo. 1996-
375. In Cole we found that the taxpayer had satisfied the
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exhaustion of administrative remedies requirement of section 7430
despite not having requested an Appeals conference.
The taxpayer responded in writing to the Commissioner’s 30-day
letter setting forth her arguments and providing substantiation.
She kept up a continuous dialog with the Commissioner in an
attempt to settle the matter and filed a petition with the Tax
Court only after the Commissioner failed to cooperate. We found
that the taxpayer had exhausted her administrative remedies
because of her ongoing dialog with the Commissioner, the
Commissioner’s failure to respond to several of her letters, the
Commissioner’s filing of a notice of deficiency in the middle of
the negotiations process, and her lack of reason to believe that
the negotiations had reached an impasse. See id.
The facts in Cole are distinguishable from those in this
case. Petitioner ignored the 30-day letter, delayed providing
requested documentation, and rejected respondent’s offer of a
post-petition Appeals conference. Meanwhile, respondent stood
by, ready, willing, and able to proceed with settlement
discussions. If petitioner had acted promptly, this matter could
have been resolved shortly after petitioner received the 30-day
letter. This is not conduct that we condone. See Uddo v.
Commissioner, T.C. Memo. 1998-276.
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Accordingly, petitioner’s motion will be denied.
An appropriate order and
decision will be entered.