T.C. Summary Opinion 2002-135
UNITED STATES TAX COURT
MICHAEL O’KEEFE SOWELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2307-01S. Filed October 17, 2002.
Michael O’Keefe Sowell, pro se.
Angelique M. Neal, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 of the Internal Revenue Code in effect
at the time the petition was filed.1 The decision to be entered
is not reviewable by any other court, and this opinion should not
be cited as authority. Petitioner filed a motion for claims for
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code as amended, and Rule references
are to the Tax Court Rules of Practice and Procedure.
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litigation and administrative costs pursuant to section 7430 and
Rule 231. Neither party has requested a hearing, and the Court
sees no need for an evidentiary hearing on this matter. Rule
232(a)(2). Accordingly, the Court considers petitioner’s motion
based on the parties’ submissions and the existing record. Rule
232(a)(1). Petitioner’s legal residence at the time the petition
was filed was Los Angeles, California.
Respondent conceded the deficiency on the date the case was
called from the calendar for trial. The case arises from a
dispute over gambling winnings. In the notice of deficiency,
respondent determined a deficiency of $1,044 in Federal income
tax and a section 6651(a)(1) addition to tax of $29 for
petitioner’s 1998 tax year based on petitioner’s failure to
report gambling winnings in the amount of $5,642 for that year.
The gambling winnings had been reported to respondent by a
third-party payor, Gulf Greyhound Park, of Lamarque, Texas, based
on Forms W-2G, Certain Gambling Winnings, issued to petitioner.
According to respondent, the Forms W-2G appeared to be signed by
petitioner.2 Petitioner did not include the payments in gross
income on his Federal income tax return for 1998. Respondent
sent petitioner notification of proposed changes to his 1998
income tax return to include the gambling winnings. The
2
The Forms W-2G on which the deficiency is based have not
been offered into evidence.
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notification gave the basis for the proposed changes and informed
petitioner of his appeal rights. Petitioner did not avail
himself of these available administrative remedies, nor did he
otherwise respond to the notification. A notice of deficiency
was issued on November 29, 2000.
Thereafter, petitioner timely petitioned this Court, denying
he had ever gambled at Gulf Greyhound Park. Petitioner averred
that he was from California and had formerly been employed by
Gulf Greyhound Park. He left Texas in December 1997. After
receiving the notification from respondent, petitioner returned
to Texas to try to resolve the problem but claims he was harassed
by Gulf Greyhound Park security personnel and the Hitchcock
Police Department and then arrested.
Following the petition to this Court, the case was referred
to respondent’s Appeals Office. The Appeals officer investigated
petitioner’s explanation by obtaining copies of Forms W-2G and
video surveillance footage of the individual who placed the bets
at issue from Gulf Greyhound Park. Respondent’s Appeals Office
then determined that the evidence was not sufficient to establish
that petitioner received the gambling winnings at issue.
Respondent offered petitioner a complete concession of the
deficiency on July 25, 2001. Petitioner rejected the offer.3
3
Respondent stated that petitioner’s refusal was based on the
(continued...)
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Respondent also offered to concede the case during the trial
preparation process. Petitioner refused to accept.
At the calendar call of this case, respondent conceded the
deficiency, and petitioner subsequently filed a motion for costs.
In his motion, petitioner claimed $5,000. The motion listed the
following synopsis of events and summary of expenses claimed,
totaling $5,356:
Date Amount Description
11-29-00 N/A Letter of deficiency
12-8-00 $ 138 Bus from Los Angeles
12-9-00 350 3 weeks motel TX
12-12-00 20 Taxi to Gulf Greyhound Park
12-15-00 1,000 Collusion
12-15-00 1,000 Defamations
12-15-00 2,000 False imprisonment, two days
$1,000 per day
12-16-00 251 Bond out of jail
12-16-00 300 Phone calls
1-2-01 60 Court and paper work
1-5-01 77 Bus to Los Angeles
from LaMarque, TX
1-09-01 100 Petition
12-3-01 60 Went to Tax Court
A taxpayer who substantially prevails in an administrative
or court proceeding may be awarded a judgment for reasonable
costs incurred in such proceedings. Sec. 7430(a)(1) and (2). A
3
(...continued)
fact that petitioner had a pending civil case against Gulf
Greyhound Park in Texas. Petitioner did not offer any
explanation to the Court as to why he declined respondent’s offer
of concession.
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judgment may be awarded under section 7430 if a taxpayer (1) was
the “prevailing party”, (2) exhausted the administrative remedies
available to the taxpayer within the Internal Revenue Service,4
and (3) did not unreasonably protract the proceedings. Sec.
7430(a) and (b)(1), (3). Respondent’s position is that
petitioner is not a “prevailing party”, failed to exhaust his
administrative remedies, and unreasonably protracted the
proceedings.
For a taxpayer to qualify as the “prevailing party”, it must
be established that (1) the position of the United States in the
proceeding was not substantially justified, (2) the taxpayer has
substantially prevailed with respect to the amount in controversy
or with respect to the most significant issue or set of issues
presented, and (3) the taxpayer satisfied the applicable net
worth requirements. Sec. 7430(c)(4)(A). Respondent concedes the
second and third of these criteria. Respondent argues, however,
that the position taken by the United States against petitioner
was substantially justified. Rule 232(e); Dixson Intl. Service
Corp. v. Commissioner, 94 T.C. 708, 714-715 (1990); Gantner v.
Commissioner, 92 T.C. 192, 193 (1989), affd. 905 F.2d 241 (8th
Cir. 1990).
4
This requirement does not apply to an award for reasonable
administrative costs. Sec. 7430(b)(1).
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Accordingly, the threshold issue is whether the position of
the United States in the proceeding was substantially justified.
Sec. 7430(c)(4)(A) and (B). The parties agree that, under
section 7430, the burden of proof rests with respondent to
establish that respondent’s position was substantially justified.
To determine whether respondent has met this burden, the
Court must first identify the point in time at which the United
States is considered to have taken a position and then decide
whether the position taken from that point forward was
substantially justified. The “not substantially justified”
standard is applied as of the separate dates that respondent took
a position in the administrative proceeding as distinguished from
the proceeding in this Court. Sec. 7430(c)(7)(A) and (B); Han v.
Commissioner, T.C. Memo. 1993-386.
With respect to a claim for reasonable administrative costs,
the position of the United States means the position taken by the
United States in any administrative proceeding to which section
7430 applies as of the earlier of (1) the date of the receipt by
the taxpayer of the decision of the IRS Appeals Office, or (2)
the date of the notice of deficiency. Sec. 7430(c)(7)(B). In
this case, petitioner did not take an administrative appeal. No
notice of decision of the IRS Appeals Office was issued or
received by petitioner prior to the date of the notice of
deficiency. Therefore, for purposes of the administrative
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proceeding, respondent is considered to have taken a position on
the date the notice of deficiency was issued, November 29, 2000.
Respondent’s position with regard to a request for
litigation costs is generally the position taken in the answer.
Huffman v. Commissioner, 978 F.2d 1139, 1144-1147 (9th Cir.
1992). Here, because petitioner elected to have the case heard
under section 7463, no answer was required of respondent. 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. Respondent’s position was that petitioner had $5,482 in
gambling income in 1998 that had not been reported. The Court,
therefore, simply considers whether such position was
substantially justified. Maggie Mgmt. Co. v. Commissioner, 108
T.C. 430, 442-443 (1997); Pittman v. Commissioner, T.C. Memo.
1999-389.
Whether the Commissioner'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); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861
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F.2d 131 (5th Cir. 1988). 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; Powers v.
Commissioner, 100 T.C. 457, 473 (1993), affd. in part and revd.
in part 43 F.3d 172 (5th Cir. 1995). A position that merely
possesses enough merit to avoid sanctions for frivolousness will
not satisfy this standard; rather, it must have a “reasonable
basis both in law and fact”. 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 fact that
the Commissioner eventually loses or concedes the case does not
establish an unreasonable position. Sokol v. Commissioner, 92
T.C. 760, 767 (1989); Baker v. Commissioner, 83 T.C. 822, 828
(1984), vacated on other issues 787 F.2d 637 (D.C. Cir. 1986).
However, it remains a factor that may be considered. Estate of
Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991);
Powers v. Commissioner, supra at 471. The reasonableness of the
Commissioner’s position and conduct necessarily requires
considering what the Commissioner knew at the time. Compare
Rutana v. Commissioner, 88 T.C. 1329, 1334 (1987), with DeVenney
v. Commissioner, 85 T.C. 927, 930 (1985).
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In his motion, petitioner does not distinguish between
reasonableness “as a matter of law” or “as a matter of fact”.
The Court assumes that petitioner intended to dispute the
reasonableness of respondent’s position both in law and in fact.
Consequently, the Court treats the two separate items in
conjunction with each other. See Kingston v. Commissioner, T.C.
Memo. 1998-119.
In determining the deficiency against petitioner, respondent
acted upon third party information from a credible source, the
establishment where the alleged gambling took place. In
addition, the Forms W-2G appeared to bear petitioner’s signature.
Respondent’s initial determination that petitioner had failed to
report gambling winnings was based on this information. This
reliance on apparently credible third party information was
reasonable, since at that time it had not been refuted by
petitioner. See, e.g., Uddo v. Commissioner, T.C. Memo. 1998-276
(IRS justified in relying on Form 1099-R issued by a third
party); Andrews v. Commissioner, T.C. Memo. 1998-316 (IRS could
rely on Forms W-2 and 1099 to support deficiency where its action
was not arbitrary and where taxpayer failed to file tax returns);
Schaeffer v. Commissioner, T.C. Memo. 1994-206 (IRS’ disallowance
of deductions was not arbitrary where taxpayers failed to provide
information substantiating the items).
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Moreover, respondent investigated petitioner’s denial of
having gambled at Gulf Greyhound Park at the first available
opportunity, and the results of respondent’s investigation were
sufficient to convince respondent to concede the case. Twice,
respondent made an offer of full concession to petitioner.
Twice, petitioner refused. The Court understands petitioner’s
frustration in having to endure the investigation and proceedings
and expend effort and resources to resolve it. However,
respondent did his part to clear up the matter. Although
respondent ultimately determined that the evidence was
insufficient to establish that petitioner received the gambling
income at issue, respondent is allowed reasonable time to
receive, analyze, and act upon documentation that proves
petitioner’s contentions before he is obligated to concede the
case. Gealer v. Commissioner, T.C. Memo. 2001-180. The Court
also notes that petitioner ignored the notification originally
sent to him by respondent prior to the issuance of the notice of
deficiency. Had petitioner responded earlier, the entire matter
could have been disposed of without the issuance of a notice of
deficiency and subsequent court proceeding. See Corkrey v.
Commissioner, 115 T.C. 366, 375 (2000).
Respondent’s actions in this case fall within the boundaries
of what is reasonable. Respondent has shown that his position
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was substantially justified. Therefore, petitioner is not a
“prevailing party” under section 7430. Petitioner is not
entitled to recover administrative and litigation costs.
Even if petitioner were the prevailing party, he could not
recover costs. Petitioner did not exhaust the administrative
remedies available to him within the Internal Revenue Service.
He did not respond to the notification sent to him prior to the
issuance of the notice of deficiency. See sec. 301.7430-1(b)(1),
Proced. & Admin. Regs. He participated in the appeals process
only after his petition was filed at this Court and the matter
was referred to an Appeals officer. Petitioner is not entitled
to administrative or litigation costs, and his motion will be
denied.5
Reviewed and adopted as the report of the Small Tax Case
Division.
An appropriate order and
decision will be entered.
5
Given these conclusions, the Court sees no need to address
whether petitioner unreasonably protracted the proceedings.