T.C. Summary Opinion 2001-26
UNITED STATES TAX COURT
NADEEM CHOWDHURY AND BRENDA S. GARTH CHOWDHURY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11683-99S. Filed March 9, 2001.
Nadeem Chowdhury and Brenda Chowdhury, pro sese.
Gerald L. Brantley and Silvia M. Rheinbolt, for respondent.
PAJAK, Special Trial Judge: This case was heard pursuant to
section 7463. Unless otherwise indicated, all section references
are to the Internal Revenue Code in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
This case is before the Court pursuant to petitioners'
motion for litigation costs under section 7430 and Rules 230
through 233. Petitioner claimed $3,920 of litigation costs based
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upon the following expenses: $60.00 for the filing fee and $3,860
for attorney's fees. An objection to petitioner's motion by
respondent was filed.
Neither party requested a hearing on petitioners' motion.
Rule 232(a). Accordingly, we rule on petitioners' motion on the
basis of the parties' submissions and the record in this case.
The underlying issues raised in the petition were settled by a
stipulation of settlement. At the time the petition was filed,
petitioners resided in San Antonio, Texas.
By notice of deficiency, respondent determined deficiencies
in petitioners' Federal income taxes of $7,182, $3,290, and
$3,378 for the taxable years 1995, 1996, and 1997, respectively.
Under section 7430, a taxpayer may be awarded a judgment for
reasonable litigation costs if the taxpayer establishes certain
criteria and if respondent’s position was not substantially
justified. Respondent concedes that petitioner substantially
prevailed for purposes of section 7430(c)(4)(A)(i). However,
respondent maintains that his position was substantially
justified, that petitioners did not exhaust their administrative
remedies, that petitioners unreasonably protracted the Court
proceeding, and that the costs claimed are not reasonable.
Because of our disposition of this issue, we need only address
whether respondent's position was substantially justified.
In deciding the merits of a motion for litigation costs, the
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Court generally considers the reasonableness of respondent’s
position from the date the answer was filed. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,
revg. in part, and remanding T.C. Memo. 1991-144. No answer was
required in this case which was tried under the small tax case
procedures. Rule 175(b). Accordingly, respondent’s position for
the purpose of the motion is the position maintained by
respondent during the pendency of this case. There is nothing in
the record that suggests that respondent’s position changed from
that taken in the notice of deficiency, so these positions are,
in effect, the same.
Whether respondent's position was substantially justified
turns on a finding of reasonableness, based upon all the facts
and circumstances, as well as the legal precedents relating to
the case. Pierce v. Underwood, 487 U.S. 552, 565 (1988); Swanson
v. Commissioner, 106 T.C. 76, 86 (1996). A position is
substantially justified if the position is "justified to a degree
that could satisfy a reasonable person." Pierce v. Underwood,
supra at 565. The Court must "consider the basis for
respondent's legal position and the manner in which the position
was maintained." Wasie v. Commissioner, 86 T.C. 962, 969 (1986).
The reasonableness of respondent's position and conduct
necessarily requires considering the facts available to
respondent at that time. Coastal Petroleum Refiners, Inc. v.
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Commissioner, 94 T.C. 685, 689 (1990); DeVenney v. Commissioner,
85 T.C. 927, 930 (1985). The fact that respondent eventually
loses or concedes the case does not establish an unreasonable
position. Sokol v. Commissioner, 92 T.C. 760, 767 (1989).
In this case, respondent disallowed petitioners' Schedule C
deductions for their mail order activity. Petitioners started
the mail order activity in 1992. Thereafter, petitioners
reported 6 consecutive years of losses on their Schedules C.
The information petitioners initially provided to the
revenue agent showed that petitioners ran one advertising
campaign per year in the first 4 years and none in the next 2
years, that petitioners spent 10 to 15 hours per week on the
activity, and that they had never modified their original
business plan. Based on this limited information, respondent
concluded that the mail order activity was not entered into for
profit under section 183.
Petitioners provided the same limited information to the
Appeals officer. Because petitioners did not provide any
additional information, the Appeals Division issued the statutory
notice of deficiency. The notice of deficiency stated that
petitioners had not established that the activity was entered
into for profit, that the claimed Schedule C expenses were
ordinary and necessary as required under section 162, or that the
expenses were not personal in nature.
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Respondent sent a “Branerton” letter to petitioners on
December 3, 1999. In response, petitioners sent respondent items
such as telephone bills, an invoice for a 1995 advertisement,
miscellaneous invoices for cost of goods sold, and letters from
credit card companies stating how much petitioners owed in
principal and interest.
Less than 72 hours before the calendar call for this case to
go to trial, petitioners provided respondent with additional
substantiating documentation. This documentation established
that petitioners did have an advertising campaign. There were
also records of 180 clients’ names, the orders the clients
placed, follow-up letters, and thank-you letters. During the
week of the trial calendar, petitioners provided records that
established that they incurred substantial debts in the early
years of their activity to finance inventory and advertising
costs. These debts were in the form of credit card purchases and
cash advances. Other newly provided information demonstrated
that the interest and commission expenses were related to
business purposes. The Schedule C deductions disallowed by
respondent consisted mainly of the interest and commission
expenses. After receiving and reviewing the newly furnished
information, respondent settled the case in a period of 6 days.
Respondent conceded the issues to the extent that they were
properly substantiated. Respondent and petitioners agreed that
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petitioners had deficiencies of $1,428, $1,246, and $1,011 for
1995, 1996, and 1997, respectively.
Whenever there is a factual determination, respondent is not
obliged to concede a case until respondent receives the necessary
documentation which proves the taxpayer's contentions. Brice v.
Commissioner, T.C. Memo. 1990-355, affd. without published
opinion 940 F.2d 667 (9th Cir. 1991); Currie v. Commissioner,
T.C. Memo. 1989-23. Moreover, after respondent receives
documentation, respondent is provided a reasonable period in
which to analyze the documentation and modify its position
accordingly. Sokol v. Commissioner, supra at 765-766.
In this case, petitioners had not established that they had
a profit motive in their mail order activity, nor had they
substantiated the majority of their claimed expenses, until they
provided the relevant information to respondent 3 days prior to
the calendar call and during the first 3 days of the week of the
trial calendar. After receiving the substantiating
documentation, respondent promptly conceded the case to the
extent the expenses were substantiated. Based on the record, we
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find that respondent's position was substantially justified.
Consequently, petitioners' motion will be denied.
Reviewed and adopted as the report of the Small Tax Case
Division.
An appropriate order and
decision will be entered.