T.C. Memo. 2003-23
UNITED STATES TAX COURT
KOLOTOLU V. AND SEINI LITI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2404-00. Filed January 27, 2003.
A. Lavar Taylor, for petitioners.
Louis Jack, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: This matter is before the Court on remand
from the Court of Appeals for the Ninth Circuit for further
consideration consistent with its opinion in Liti v.
Commissioner, 289 F.3d 1103 (9th Cir. 2002) (vacating and
remanding this Court’s order and decision, dated May 24, 2001,
denying petitioners’ request for litigation and administrative
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costs and imposition of sanctions against respondent). The Court
of Appeals for the Ninth Circuit determined that it could not
review this Court’s order and decision because such order and
decision was unaccompanied by a statement of reasons.
Background
Petitioners were born in a farming community in Tonga. In
the late 1970s, petitioners moved to the United States, learned
English, and began a lawn-cutting business. The lawn-cutting
business grew into a landscaping business, Best Landscape and
Brickwork, which relied heavily on the labor of migrant workers,
who received cash payments, and Mr. Liti. Mrs. Liti was in
charge of the administrative aspects of the business. Prior to
assuming those duties, Mrs. Liti worked in the accounting
department of a church where she was responsible for typing
checks and filing. She did not have significant accounting
experience, and her bookkeeping skills were poor. Petitioners
routinely failed to account for certain income and expenses.
By notice dated December 8, 1999, respondent determined
additions to tax and section 66631 penalties in petitioners’ 1995
and 1996 Federal income taxes. At trial, respondent contended
that petitioners, in violation of section 6663, intended to evade
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at relevant times, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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taxes they knew to be owing. Respondent’s position was based on
petitioners’ omissions of gross income from their 1995 and 1996
Federal income tax returns. Respondent, who did not believe
petitioners’ explanations for such omissions, reasoned that
petitioners’ tax deficiencies could not be due to mere negligence
because petitioners had enough business acumen to operate a
successful business and acquire real estate and other
investments. The Court, however, found petitioners to be
credible. The tax deficiencies were due to petitioners’
negligence and lack of sophistication rather than any intent to
avoid taxes. Petitioners did not intend to conceal income,
mislead respondent, or prevent the collection of income tax.
Accordingly, in a bench opinion rendered on October 17, 2000, we
held that respondent failed to adequately establish that the
underpayments of petitioners’ taxes were due to fraud.
On December 12, 2000, the Court filed petitioner Kolotolu
Liti’s motion for litigation and administrative costs and
petitioner Seini Liti’s motion for litigation and administrative
costs and ordered respondent to file objections to petitioners’
motions. On February 20, 2001, the Court filed respondent’s
objection to petitioners’ motions for litigation and
administrative costs. On March 15, 2001, the Court filed
petitioners’ reply of Seini Liti and Kolotolu Liti to
respondent’s objection to Seini Liti’s motion for litigation and
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administrative costs. On March 15, 2001, the Court filed
petitioners’ motion for sanctions.
On May 24, 2001, the Court issued an order and decision
denying all of petitioners’ motions. Petitioners, on July 20,
2001, filed a notice of appeal from the decisions of this Court.
On May 8, 2002, the Court of Appeals for the Ninth Circuit
vacated this Court’s May 24, 2001, order and decision and
remanded such order for further explanation.
Discussion
The prevailing party in a Tax Court proceeding may recover
litigation costs. Sec. 7430(a); Rule 231. Petitioners will not
be treated as the prevailing party if respondent’s position was
substantially justified (i.e., had a reasonable basis in law and
fact). Sec. 7430(c)(4)(B); see Pierce v. Underwood, 487 U.S.
552, 565 (1988). For the following reasons, we conclude that
respondent’s position relating to the section 6663 fraud penalty
was substantially justified.
Evidence of fraud may include substantial understatement of
income, failure to maintain adequate books and records, dealing
in cash, failure to cooperate with tax authorities, and
implausible or inconsistent explanations of behavior. See, e.g.,
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). The
record established that petitioners underreported income for 2
years, deposited business funds in their personal bank accounts,
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failed to maintain records, paid numerous workers with cash, and
failed to provide their return preparer with full and accurate
information. Respondent contended that these facts, among
others, indicated that petitioners intended to evade taxes they
knew to be owing.
Prior to the presentation of witnesses, the uncontested
facts of the case laid the foundation for a finding of fraud.
Petitioners’ intent was the primary issue at trial. Respondent,
who had the burden of proof, proffered witnesses who presented
rambling, inconsistent, and unconvincing testimony. Conversely,
the testimony of petitioners and their witnesses was credible and
established that petitioners were careless and inattentive but
did not intend to evade taxes. Simply put, respondent had a
reasonable basis for not believing petitioners, but the evidence
presented at trial established that respondent was wrong.
Notwithstanding the shortcomings of respondent’s case at trial,
respondent’s position was substantially justified. Accordingly,
petitioners are not entitled to an award of litigation and
administrative costs pursuant to section 7430.
Section 6673(a)(2) allows the Court to sanction an attorney
who has unreasonably and vexatiously multiplied the proceedings
in any case. Because we conclude that respondent’s position was
substantially justified, we also conclude that petitioners are
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not entitled to an award of sanctions pursuant to section
6673(a)(2).
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
An appropriate order and
decision will be entered.