T.C. Summary Opinion 2003-54
UNITED STATES TAX COURT
ALLEN R. KRAWCZYK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3202-01S. Filed May 15, 2003.
Allen R. Krawczyk, pro se.
Russell F. Kurdys, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect at the time the petition was filed. The
decision to be entered is not reviewable by any other court, and
this opinion should not be cited as authority. All references to
section 7430 are to that section as in effect at the time the
petition was filed. Unless otherwise indicated, all other
section references are to the Internal Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
This case is before the Court on petitioner’s motion for
award of litigation costs pursuant to section 7430. After
concessions,1 the issue for decision is whether petitioner is a
“prevailing party” that may be awarded a judgment for reasonable
litigation costs incurred in connection with this court
proceeding. As explained in further detail below, we hold that
respondent’s position was substantially justified, and,
therefore, we shall deny petitioner’s motion for award of
litigation costs.
Background
Petitioner filed a Federal income tax return for the 1999
taxable year (1999 tax return). He claimed head-of-household
filing status, the earned income credit, and two dependency
exemption deductions.
In April 2000, respondent began an examination of
petitioner’s 1999 tax return by requesting documentation from
petitioner to verify the claimed filing status, dependency
exemption deductions, and earned income credit. Respondent then
1
Respondent concedes that petitioner has substantially
prevailed with respect to the amount in controversy or has
substantially prevailed with respect to the most significant
issue or set of issues presented.
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sent petitioner a so-called 30-day letter dated September 13,
2000, proposing adjustments to petitioner’s 1999 tax return.
In a letter dated September 27, 2000, petitioner sent
respondent copies of several utility bills, Social Security cards
for himself and his two children, and two letters from a school
stating that the children resided with petitioner.
Respondent responded by issuing a notice of deficiency dated
December 11, 2000, stating in part:
We have received your correspondence on October
11, 2002, in regard to the examination of your 1999 tax
return.
After reviewing the correspondence you submitted,
we have determined that additional information is
necessary to resolve the issues. Please see the
enclosed explanations listing the adjusted items. In
order for us to reconsider the proposed adjustment, you
must submit the documentation explained on the
attachments.
Petitioner did not submit any of the requested documentation.
Without the benefit of additional information from petitioner,
respondent determined a deficiency in petitioner’s Federal income
tax of $4,354 for the 1999 taxable year.
Petitioner filed a petition on March 5, 2001, and an amended
petition on May 4, 2001. At the time of filing the petition,
petitioner resided in Johnstown, Pennsylvania.
From June 2001 to February 2002, respondent’s Pittsburgh
Appeals Office sent petitioner six letters seeking information
regarding his case. Respondent’s counsel also sent petitioner
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two letters, one dated February 12, 2002, and another dated April
5, 2002. Petitioner did not respond to any of these letters.
Beginning in November 2001, petitioner suffered from anxiety and
depression.
By notice dated August 23, 2002, this case was set for trial
at a Pittsburgh, Pennsylvania, trial session scheduled to
commence November 18, 2002.2 Petitioner brought with him
information regarding his 1999 tax return. On November 18, 2002,
the parties filed a stipulation and stipulation of settled
issues, which resolved all issues in petitioner’s favor.3
On November 18, 2002, petitioner filed a motion for award of
litigation costs. Petitioner seeks an award of $448,010.78.
Respondent contends that petitioner is not the prevailing party
within the meaning of section 7430(c)(4) because, while the
stipulation and stipulation of settled issues resolved all issues
in petitioner’s favor, respondent’s position was substantially
justified. In addition, respondent contends that petitioner did
not exhaust administrative remedies and that petitioner
unreasonably protracted the proceedings.
2
Because of petitioner’s failure to appear at the calendar
call, respondent filed a motion to dismiss for lack of
prosecution. Upon petitioner’s subsequent appearance, we denied
respondent’s motion to dismiss.
3
While the documents were initially titled stipulation and
decision, the Court changed the designation when it became
apparent that petitioner intended to make a claim for litigation
costs.
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Neither party has requested a hearing, and we conclude that
a hearing is not necessary. Rule 232(a)(2). Accordingly, we
decide petitioner’s motion on the basis of the motion,
respondent’s notice of objection, petitioner’s response, and
exhibits submitted by both parties.
Discussion
Subject to certain limitations, the prevailing party in any
court proceeding may be awarded a judgment for reasonable
litigation costs incurred in connection with such court
proceeding. Sec. 7430(a)(2). The prevailing party must exhaust
the administrative remedies available to it within the Internal
Revenue Service, and the prevailing party must not have
unreasonably protracted any portion of the administrative or
court proceeding. See sec. 7430(b)(1), (3).
The term “prevailing party” means “any party * * * which (I)
has substantially prevailed with respect to the amount in
controversy, or (II) has substantially prevailed with respect to
the most significant issue or set of issues presented”. Sec.
7430(c)(4)(A)(i). And in the case of an individual taxpayer, the
term also means any party which had a net worth that did not
exceed $2,000,000 at the time the civil tax case proceeding was
commenced. Sec. 7430(c)(4)(A)(ii) (referring to 28 U.S.C. sec.
2412(d)(1)(B) and (2)(B)(2000)). However, a party shall not be
treated as the prevailing party if the Commissioner can establish
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that his position was substantially justified. Sec.
7430(c)(4)(B).
Respondent contends that petitioner is not the prevailing
party within the meaning of section 7430(c)(4) because, while the
stipulation and stipulation of settled issues resolved all issues
in petitioner’s favor, respondent’s position was substantially
justified.4 The Commissioner’s position is substantially
justified if, based on all of the facts and circumstances and the
legal precedents relating to the case, the Commissioner acted
reasonably. Pierce v. Underwood, 487 U.S. 552 (1988); Sher v.
Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir.
1988). In other words, to be substantially justified, the
Commissioner’s position must have a reasonable basis in both law
and fact. Pierce v. Underwood, supra; Rickel v. Commissioner,
900 F.2d 655, 665 (3d Cir. 1990), affg. in part and revg. in part
on other grounds 92 T.C. 510 (1989). 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
(construing similar language in the Equal Access to Justice Act).
Thus, the Commissioner’s position may be incorrect but
nevertheless be substantially justified “‘if a reasonable person
4
As discussed above, respondent also contends that
petitioner did not exhaust administrative remedies and that
petitioner unreasonably protracted the proceedings. As a result
of our conclusion herein, we need not address respondent’s
additional contentions.
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could think it correct’”. Maggie Mgmt. Co. v. Commissioner, 108
T.C. 430, 443 (1997) (quoting Pierce v. Underwood, supra at 566
n.2).
The relevant inquiry is “whether * * * [the Commissioner]
knew or should have known that * * * [his] position was invalid
at the onset”. Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.
1995), affg. T.C. Memo. 1994-182. We look to whether the
Commissioner’s position was reasonable, in light of and subject
to the available facts and circumstances at the time that the
Commissioner took his position. Maggie Mgmt. Co. v.
Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C.
927, 930 (1985).
The fact that the Commissioner eventually concedes, or even
loses, a case does not establish that his position was
unreasonable. Estate of Perry v. Commissioner, 931 F.2d 1044,
1046 (5th Cir. 1991); Sokol v. Commissioner, 92 T.C. 760, 767
(1989). However, the Commissioner’s concession does remain a
factor to be considered. Powers v. Commissioner, 100 T.C. 457,
471 (1993), affd. in part, revd. in part and remanded on another
issue 43 F.3d 172 (5th Cir. 1995).
As relevant herein, the position of the United States that
must be examined against the substantial justification standard
with respect to the recovery of litigation costs is the position
taken by the Commissioner in the answer to the petition. Sher v.
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Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988); see sec.
7430(c)(7)(A). In the present case, respondent did not file an
answer to the petition,5 but we note that respondent’s position
was essentially the same in the administrative and litigation
proceedings.6 More specifically, respondent’s position was that
petitioner was not entitled to the head-of-household filing
status, the earned income credit, and two dependency exemption
deductions.
Considering all the facts and circumstances, respondent did
not know and could not have known that his position was invalid
after the petition was filed. Petitioner’s marital status and
the amount of support he provided to his children for the 1999
taxable year were unknown to respondent. See secs. 2(b), 32,
151, 152. On at least eight separate occasions, respondent
requested that petitioner provide documents to substantiate such
5
Rule 175(b) provides generally that no answer is required
where a petition is filed pursuant to sec. 7463.
6
The motion filed by petitioner seeks only the recovery of
litigation costs and not that of reasonable administrative costs.
If petitioner had sought to recover such costs, then we would
review the Commissioner’s position as of the date of the notice
of deficiency to determine whether he was substantially justified
with respect to the recovery of administrative costs. See sec.
7430(c)(7)(B). In the present case, respondent received
information from petitioner in a letter dated Sept. 27, 2000,
before the issuance of the notice of deficiency dated Dec. 11,
2000. However, the information provided by petitioner was
insufficient to invalidate respondent’s position. Accordingly,
petitioner would not be entitled to recovery of reasonable
administrative costs.
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information. Petitioner declined to respond. The documents
provided by petitioner in a letter dated September 27, 2000,
while helpful, did not invalidate respondent’s position. More
documentation was necessary for petitioner to establish that he
was entitled to the claimed filing status, deductions, and
credit. We note that, when petitioner did bring the necessary
documents on November 18, 2002, the case was quickly resolved.
We hold that petitioner is not entitled to an award for
litigation costs because respondent’s position was substantially
justified. In so holding, we have carefully considered the
remaining arguments made by the parties, and to the extent not
discussed above, we consider those arguments to be without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
In order to reflect the foregoing,
An appropriate order and
decision will be entered.