T.C. Memo. 2002-237
UNITED STATES TAX COURT
TAM N. HUYNH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13540-99. Filed September 23, 2002.
Bruce E. Gardner, for petitioner.
Roger W. Bracken, for respondent.
MEMORANDUM OPINION
WOLFE, Special Trial Judge: This matter is before the Court
on petitioner’s motion for an award of administrative and
litigation costs, filed pursuant to section 7430 and Rules 230
through 233. Unless otherwise indicated, all section references
are to the Internal Revenue Code, as amended; however, references
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to section 7430 are to that section in effect when the petition
was filed (August 9, 1999). All Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
Petitioner resided in Alexandria, Virginia, at the time the
petition was filed with the Court. Petitioner is the father of
three children who were, respectively, 16, 18, and 20 years of
age at the time of the hearing (July 18, 2001). Petitioner and
his ex-wife, who is the mother of the children, divorced in 1989.
The divorce decree granted petitioner custody of their two sons
and his ex-wife custody of their daughter.
During 1998, petitioner was self-employed as a manicurist.
Petitioner timely filed a 1998 Federal income tax return on which
he reported total income of $10,698. On the tax return,
petitioner listed his filing status as head of household, claimed
dependency exemption deductions for his three children, and
claimed an earned income credit of $3,756. Petitioner also
claimed an income tax refund of $2,244.
By letter dated March 18, 1999 (the examination letter),
respondent informed petitioner that “We are examining your
Federal income tax return for 1998 and find we need documentation
to verify certain items.” Respondent requested that petitioner
mail documentation to verify the claimed dependency exemptions,
head of household status, and earned income credit.
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Petitioner responded to the examination letter by mailing
various documents to respondent. After reviewing the documents,
respondent concluded that the information submitted by petitioner
was insufficient to verify the items under examination.
By letter dated April 6, 1999 (the proposed adjustment
letter), respondent proposed a deficiency of $4,215 in
petitioner’s 1998 Federal income tax. The proposed deficiency
was predicated on a change in petitioner’s filing status from
head of household to single, the disallowance of the three
dependency exemptions, and the partial disallowance of the earned
income credit. The proposed adjustment letter informed
petitioner that he had not submitted all of the documentation
that respondent had requested. The letter also listed each item
that respondent still required for verification.
Petitioner responded to the proposed adjustment letter by
mailing various documents to respondent. After reviewing the
documents, respondent concluded that they were insufficient to
verify the items under examination. By letter dated May 11, 1999
(the May 11th letter), respondent so informed petitioner.
Respondent also repeated his request for documentation
establishing that petitioner’s children lived with petitioner for
more than 6 months of 1998 and a record of funds that petitioner
spent in support of his children. Respondent also informed
petitioner that any further supporting documents or information
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that petitioner wished respondent to consider should be received
within 15 days of the date of the May 11th letter.
By a notice of deficiency dated May 28, 1999, respondent
determined a deficiency of $4,196 in petitioner’s 1998 Federal
income tax. Petitioner hired counsel to represent him in June
1999. The petition was filed August 9, 1999. Respondent’s
answer was filed October 12, 1999.
On November 3, 1999, respondent assigned the case to an
Appeals officer. On November 18, 1999, the Appeals officer spoke
with petitioner’s counsel about settling the dispute. The
following day, the Appeals officer mailed a letter to
petitioner’s counsel proposing that respondent would concede the
earned income credit issue if petitioner conceded the dependency
deductions and head of household filing status issues.
On January 11, 2000, the Appeals officer received a letter
from petitioner’s counsel suggesting that she agree to concede
all three issues. Attached to the letter were documents
concerning petitioner’s public assistance, dependency deductions,
and filing status. After reviewing the letter and documents, the
Appeals officer did not alter her settlement position.
In February 2000, the Appeals officer forwarded the case to
respondent’s District Counsel office for trial preparation.
After reviewing the case, the District Counsel office offered to
settle the dispute with petitioner on the same terms that had
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been proposed by the Appeals officer.
At calendar call (March 20, 2000), the parties filed a
stipulation in which they resolved all of the issues raised in
the notice of deficiency. The stipulation did not differ from
the settlement offers that the Appeals and District Counsel
offices previously had made. Specifically, the parties
stipulated that for 1998: (1) Petitioner is not entitled to any
dependency exemptions for his three children; (2) petitioner is
not entitled to head of household filing status, but rather to
single filing status; and (3) petitioner is entitled to an earned
income credit in the amount claimed by petitioner on his 1998
Federal income tax return, based on two qualifying children. The
stipulation resulted in a tax deficiency of $448 for 1998.
At calendar call, petitioner also filed a motion for an
award of reasonable administrative and litigation costs (motion
for costs), requesting an award of $1,837.45. Subsequently,
petitioner filed a supplement to the motion for costs in which he
raised his previous request to $2,335.11.
On May 4, 2000, respondent filed a response to petitioner’s
motion for costs and supplement thereto. In the response,
respondent disputed petitioner’s allegations that respondent’s
position was not substantially justified, that petitioner did not
unreasonably protract the proceedings, and that the costs
requested were reasonable.
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On June 7 and 15, 2000, petitioner filed a motion in limine
and a motion to strike, respectively. In these motions,
petitioner sought to exclude from evidence the declaration of the
Appeals officer and the exhibits attached thereto. On June 30,
2000, respondent filed responses objecting to these motions. The
Court subsequently denied both petitioner’s motion in limine and
motion to strike.
On June 28, 2001, petitioner filed a reply to respondent’s
response to petitioner’s motion for costs. Petitioner argued,
among other things, that at the time respondent sent the notice
of deficiency to petitioner, petitioner had already provided
respondent with enough documentation to resolve the issues
conclusively in favor of petitioner.
On July 2, 2001, petitioner filed a supplement to his reply
to respondent’s response to petitioner’s motion for costs. The
supplement reiterated his request for an award of reasonable
administrative and litigation costs, and also detailed a summary
of litigation costs totaling $6,610.45 incurred between June 2000
and June 2001. Presumably, this request for costs was in
addition to his previous request of $2,335.11, which he
previously made in his supplement to his motion for costs filed
on March 31, 2000.
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Discussion
In general, section 74301 allows a taxpayer who is a
prevailing party in an administrative or court proceeding brought
against the United States in connection with the determination,
collection, or refund of any tax to recover reasonable
administrative and litigation costs incurred in such proceeding.
Sec. 7430(a). A judgment for litigation costs incurred in
connection with a court proceeding may be awarded only if a
taxpayer: (1) Is the prevailing party; (2) exhausted available
administrative remedies; and (3) did not unreasonably protract
the court proceeding. Sec. 7430(a), (b)(1), (3), (c)(4).
Similarly, a judgment for administrative costs incurred in
connection with an administrative proceeding may be awarded only
if a taxpayer: (1) Is the prevailing party; and (2) did not
unreasonably protract the administrative proceeding. Sec.
7430(a), (b)(3), (c)(4).
A taxpayer qualifies as a prevailing party only if: (1) The
taxpayer substantially prevailed with respect to either the
amount in controversy or the most significant issue or set of
issues presented; (2) the taxpayer satisfies the applicable net
1
We apply sec. 7430 as amended by Congress in the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA 1998),
Pub. L. 105-206, sec. 3101, 112 Stat. 685, 727. The amendments
made by RRA 1998 to sec. 7430 apply to costs incurred or services
performed after Jan. 18, 1999. Since petitioner’s counsel
neither incurred costs nor performed services for petitioner
until June 1999, the RRA 1998 amendments clearly apply to this
case.
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worth requirement; and (3) the Commissioner fails to establish
that his position was substantially justified. Sec.
7430(c)(4)(A) and (B).
The parties agree that petitioner exhausted his
administrative remedies, substantially prevailed with respect to
the amount in controversy, and meets the applicable net worth
requirement. The remaining issues are: (1) Whether respondent’s
position in the administrative and court proceedings was
substantially justified; (2) whether petitioner unreasonably
protracted any portion of such proceedings; and (3) whether the
amount of administrative and litigation costs petitioner seeks is
reasonable.
Respondent bears the burden of proving that his position was
substantially justified, while petitioner bears the burden of
proof with respect to all other requirements. Sec.
7430(c)(4)(B); Rule 232(e); Maggie Mgmt. Co. v. Commissioner, 108
T.C. 430, 437 (1997).
The Supreme Court has interpreted “substantially justified”
to mean “justified to a degree that could satisfy a reasonable
person.” Pierce v. Underwood, 487 U.S. 552, 565 (1988)
(construing similar language in the Equal Access to Justice Act,
28 U.S.C. sec. 2412(d)(1)(A) (1994)). Respondent’s position need
not be correct to be substantially justified; it need only have a
“reasonable basis in law and fact.” Id. at 566 n.2. Whether
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respondent acted reasonably “ultimately turns upon those
available facts which formed the basis for the position taken in
the notice of deficiency and during the litigation, as well as
upon any legal precedents related to the case.” Maggie Mgmt. Co.
v. Commissioner, supra at 443. The fact that respondent
eventually loses or concedes a case is not determinative. Sokol
v. Commissioner, 92 T.C. 760, 767 (1989). However, it is a
factor that may be considered. Estate of Perry v. Commissioner,
931 F.2d 1044, 1046 (5th Cir. 1991).
For purposes of the administrative proceedings in this case,
respondent’s position is that which was articulated in the notice
of deficiency, dated May 28, 1999. See sec. 7430(c)(7)(B). For
purposes of the court proceedings in this case, respondent’s
position is that which was set forth in the answer to the
petition filed on October 12, 1999. See Maggie Mgmt. Co. v.
Commissioner, supra at 442. Ordinarily, we consider the
reasonableness of each of these positions separately. Id. Here,
however, we need not consider them separately because there is no
indication that respondent’s position changed or that respondent
became aware of any additional facts that rendered his position
any less justified between the issuance of the notice of
deficiency and the filing of the answer to the petition. See id.
at 442-443; Pittman v. Commissioner, T.C. Memo. 1999-389.
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Dependency Exemptions
Section 151(c)(1) allows a taxpayer to deduct an exemption
amount for each dependent as defined in section 152. Under
section 152(a), the term “dependent” means certain individuals
over half of whose support during the calendar year was received
from the taxpayer. Eligible individuals who may be claimed as
dependents include a son or daughter of the taxpayer. Sec.
152(a)(1).
When a child’s parents are divorced, section 152(e)(1)
provides a special rule to determine which one of them, if
either, is entitled to the dependency exemption. That section
provides that, if a child received over half of his support from
his divorced parents, and such child is in the custody of one or
both of his parents for more than one-half of the calendar year,
then the parent having custody for a greater portion of the
calendar year is entitled to the dependency exemption.2 See sec.
1.152-4(a), Income Tax Regs.; sec. 1.152-4T, Temporary Income Tax
Regs., 49 Fed. Reg. 34459 (Aug. 31, 1984), to the effect that
2
Sec. 152(e)(2) provides an exception to the rules stated
above. That section allows the dependency exemption to the
noncustodial parent when the custodial parent agrees to release
the exemption. To obtain the advantage of this exception, the
noncustodial parent must obtain from the custodial parent a
written declaration that he or she “will not claim such child as
a dependent for any taxable year beginning in such calendar
year”, and the noncustodial parent must attach the written
declaration to his or her tax return. Sec.152(e)(2).
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sec. 152(e) and the regulations concerning that section are
inapplicable where both parents combined do not provide more than
one-half the child’s total support during the year in question.
In applying the support test, we evaluate the amount of
support furnished by the taxpayer (or the taxpayer and his former
wife in the case of divorced parents) as compared to the total
amount of support received by the claimed dependent from all
sources. Turecamo v. Commissioner, 554 F.2d 564, 569 (2d Cir.
1977), affg. 64 T.C. 720 (1975); sec. 1.152-1(a)(2)(i), Income
Tax Regs. The taxpayer must initially demonstrate, by competent
evidence, the total amount of support furnished by all sources
for the taxable year at issue. Blanco v. Commissioner, 56 T.C.
512, 514 (1971). Otherwise, the taxpayer cannot be said to have
established that he provided more than one-half of the support
for the claimed dependent. Id. at 514-515.
Support provided by a third party, such as a Federal or
State agency, is not considered support furnished by the
taxpayer. See, e.g., Gulvin v. Commissioner, 644 F.2d 2 (5th
Cir. 1981), affg. T.C. Memo. 1980-111; Lutter v. Commissioner, 61
T.C. 685 (1974), affd. 514 F.2d 1095 (7th Cir. 1975); Williams v.
Commissioner, T.C. Memo. 1996-126, affd. without published
opinion 119 F.3d 10 (11th Cir. 1997).
Petitioner reported total income of $10,698 on his 1998
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Federal income tax return. Petitioner sent documents to
respondent showing that during 1998 he received public assistance
of $1,584 from the Fairfax County Department of Human Development
(FCDHD), and that during the period between December 1, 1998, and
December 1, 1999, petitioner received housing assistance of
$9,036 from the U.S. Department of Housing and Urban Development
(HUD). Petitioner did not send to respondent any documents that
showed how much assistance he received from HUD prior to December
1, 1998.
Respondent’s position in the administrative and litigation
proceedings was that petitioner did not establish that he
furnished over half the support of his three children during
1998. Respondent received the following documentation from
petitioner in support of petitioner’s claimed dependency
exemptions: (1) An account ledger maintained by the apartment
building where petitioner lived indicating that petitioner paid
rent of $176 each month during 1998; (2) monthly phone bills
ranging from $37 to $269 during 1998; and (3) an account
statement indicating that during 1998 petitioner’s monthly
utility bills ranged from $49 to $125, prior to adjustment for
“energy assistance”.
On this record, we conclude that respondent’s position
denying petitioner dependency exemptions for his children during
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1998 was substantially justified. The documents that petitioner
sent to respondent failed to establish that his children received
over half of their support from petitioner during 1998.
Petitioner furnished no evidence that his ex-wife provided any
support for the children during 1998, and the record does not
include any indication of the amount of support, if any, that she
may have provided. Moreover, the record does not indicate that
petitioner’s ex-wife signed a waiver of her right to claim a
deduction for support of the child of whom she was awarded
custody in the divorce, and no such waiver was attached to
petitioner’s tax return as required by section 152(e)(2).
Petitioner’s failure to show how much assistance he received from
HUD during 1998 justified respondent’s disallowance of
petitioner’s claimed dependency exemptions. Even on the
assumption that petitioner’s assistance from HUD did not
significantly change from 1998 to 1999, petitioner’s combined
public assistance from HUD and FCDHD during 1998 nearly equaled
his total income of $10,698. The other documents that petitioner
submitted in support of his claimed dependency deductions did not
establish that petitioner’s children received over half of their
support from petitioner and his wife during 1998.
Head of Household Filing Status
Section 2(b)(1) defines a head of household as including an
individual taxpayer who is not married at the close of the
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taxable year, and who maintains as his home a household that
constitutes for more than one-half of such year the principal
place of abode of the taxpayer’s child. Other provisions of
section 2(b) are not relevant to this case.
A taxpayer is entitled to head of household filing status
only if he pays more than half the cost of maintaining the
household during the year. Sec. 2(b)(1). The cost of
maintaining a household consists of the “expenses incurred for
the mutual benefit of the occupants thereof by reason of its
operation as the principal place of abode of such occupants”.
Sec. 1.2-2(d), Income Tax Regs. Such expenses include “property
taxes, mortgage interest, rent, utility charges, upkeep and
repairs, property insurance, and food consumed on the premises”,
but do not include “the cost of clothing, education, medical
treatment, vacations, life insurance, and transportation.” Id.
Respondent’s position in the administrative and litigation
proceedings was that petitioner did not establish that he
maintained as his home a household that constituted for more than
one-half of 1998 the principal place of abode of his children and
that petitioner did not establish that he paid over half the cost
of maintaining the household during 1998.
As stated above, the documents that petitioner sent to
respondent showed that petitioner received housing assistance
from HUD of $9,036 during the period between December 1, 1998,
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and December 1, 1999, but did not show how much housing
assistance he received from HUD prior to December 1, 1998. On
the assumption that petitioner’s housing assistance from HUD did
not significantly change from 1998 to 1999, petitioner’s housing
assistance from HUD nearly matched his total income of $10,698
during 1998.
We hold that respondent was substantially justified in
concluding that petitioner failed to provide sufficient
documentation to establish that he paid over half the cost of
maintaining the household during 1998.
Earned Income Credit
Section 32(a) provides that, subject to limitations, in the
case of an “eligible individual” an earned income credit shall be
allowed against the individual’s income tax liability. Section
32(c)(1)(A) defines an eligible individual as either (1) any
individual who has a qualifying child for the taxable year, or
(2) any other individual who does not have a qualifying child for
the taxable year, if the individual’s principal place of abode is
in the United States for more than one-half of such taxable year,
the individual is at least 25 years of age but has not reached 65
years of age before the close of the taxable year, and the
individual is not a dependent for whom a deduction is allowable
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under section 151 to another taxpayer in the same year.3 A
qualifying child must have the same principal place of abode as
the taxpayer for more than one-half of the taxable year. Sec.
32(c)(3)(A).
As set forth in the notice of deficiency, a portion of
petitioner’s claimed earned income credit was denied because
respondent determined that petitioner failed to establish that
any of his children had the same principal place of abode as
petitioner for more than one-half of 1998.
In support of petitioner’s claim that his children lived
with him for more than one-half of 1998, petitioner sent to
respondent the following documents: (1) A handwritten letter
from an administrative assistant of petitioner’s apartment
building dated June 29, 1999, addressed to whom it may concern:
“Mr. Huyn [sic] rent for the year of 1998. was 236.00. His
family member is Viet Huyhn [sic], Thuy Huynh and Van Huynh”; (2)
three certifications of enrollment, each dated May 20, 1999,
issued by schools in Virginia for the 1998-99 school year listing
petitioner’s address as the current address of his children; (3)
report cards for each of his children for the period of September
8, 1998, to November 11, 1998; (4) letters dated May 20, 1999,
from Dr. Duc M. Ngo, a physician who practiced in Fairfax,
3
An eligible individual with a qualifying child is
entitled to a larger credit than is an eligible individual
without a qualifying child. See sec. 32(a) and (b).
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Virginia, stating that petitioner’s children had been under his
medical care since October 1997; and (5) a document entitled
“OWNER’S CERTIFICATION OF COMPLIANCE WITH HUD’S TENANT
ELIGIBILITY AND RENT PROCEDURES”, with an effective date of
December 1, 1998, which listed petitioner and his three children
as occupants of the household.
From the limited information in these documents, we are
satisfied that respondent had a reasonable basis for his position
that petitioner did not establish that his children lived with
him for more than one-half of 1998.
The HUD certification document establishes that petitioner’s
children lived with him during the last month of 1998. The
children’s report cards and certifications of enrollment indicate
that they lived with petitioner as early as September 1998.
However, none of the documents establish that his children lived
with him prior to September 1998. The copy of the administrative
assistant’s handwritten note is wrong about the amount of rent
and inaccurate about the name of at least one of petitioner’s
children, and it is a hearsay document that we consider unworthy
of belief. Similarly the document from the doctor is approximate
on its face and does not establish the children’s residence in
1998.
Despite having a reasonable basis for disallowing
petitioner’s claimed earned income credit, the Appeals officer,
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in an effort to settle the dispute, offered to concede the earned
income credit issue in exchange for petitioner’s concessions of
the dependency exemptions and head of household filing status
issues. Petitioner refused the offer. After 4 months of
correspondence and a transfer of the case to respondent’s
District Counsel office for litigation preparation, the parties
settled the dispute on the same terms that respondent had
originally offered and had continued to offer throughout the
proceedings.
Petitioner argues that the Appeals officer’s decision to
concede the earned income credit issue at an early stage in the
litigation shows that petitioner had furnished sufficient
documentation to establish that he was entitled to the earned
income credit.
On the contrary, the documents that petitioner submitted did
not establish that his children lived with him for more than one-
half of 1998. The Appeals officer’s offer to concede the earned
income credit issue reflects respondent’s attempt to settle the
matter expeditiously–-not a conclusion by respondent that
petitioner had established his entitlement to the earned income
credit. Respondent’s proposed concession was conditioned on
petitioner’s conceding the remaining issues. We note that even
if respondent had not conditioned his concession of the earned
income credit issue on petitioner’s concession of the other
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issues, the Commissioner’s concession of an issue by itself is
not determinative in the inquiry of whether his position was
substantially justified. Swanson v. Commissioner, 106 T.C. 76,
94 (1996).
Petitioner also contends that even if the documentation that
he submitted to respondent was insufficient to establish that his
children lived with him for more than 6 months of 1998,
respondent independently should have investigated the matter for
petitioner.4
On the contrary, it is not unreasonable for the Commissioner
to require a taxpayer to corroborate a claim concerning
dispositive and unresolved facts. Baker v. Commissioner, 83 T.C.
822, 830 (1984), vacated and remanded on another issue 787 F.2d
637 (D.C. Cir. 1986); see Williams v. Commissioner, T.C. Memo.
1997-541, affd. without published opinion 176 F.3d 486 (9th Cir.
1999); Simpson v. Commissioner, T.C. Memo. 1995-194. The
4
In the present case petitioner never did provide evidence
to establish that his children lived with him for more than 6
months of 1998. Petitioner did not even appear at the hearing on
this matter. Petitioner’s counsel did not obtain the required
evidence or arrange for petitioner to be present at the hearing.
Under the present condition of the record, not only was
respondent’s position reasonable with respect to the issue as to
petitioner’s entitlement to the earned income credit, but that
issue well might have been decided for respondent if respondent
had not conceded it as part of the overall settlement of the
case.
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Commissioner is not required to concede a case until he receives
the documentation necessary to prove a taxpayer’s contentions.
Brice v. Commissioner, T.C. Memo. 1990-355, affd. without
published opinion 940 F.2d 667 (9th Cir. 1991).
Conclusion
We conclude that respondent had a reasonable basis in fact
and law for all issues raised in the notice of deficiency, and,
therefore, his position was substantially justified. Thus,
petitioner is not a prevailing party and is not entitled to an
award of administrative or litigation costs under section 7430.
Based on the foregoing, we need not consider whether petitioner
unreasonably protracted any portion of the proceedings or whether
the amount of administrative and litigation costs claimed by
petitioner is reasonable.
To reflect the foregoing,
An appropriate order and
a decision as stipulated by
the parties will be entered.