T.C. Memo. 2004-115
UNITED STATES TAX COURT
ROBERT C. MCKEE AND VALERY W. MCKEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4036-03. Filed May 12, 2004.
Donald L. Feurzeig, for petitioners.
Charlotte Mitchell, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: This case is before the Court on
petitioners’ motion for reasonable litigation costs filed
pursuant to section 7430 and Rule 231. Unless otherwise
indicated, all section references are to the Internal Revenue
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Code in effect at the time petitioners filed the petition, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. When the petition in this case was filed,
petitioners’ mailing address was in Whitethorn, California.
On October 20, 2003, the day this case was calendared for
trial, the parties filed a stipulation of settled issues. On
October 31, 2003, petitioners filed their motion for reasonable
litigation costs. After obtaining an extension of time in which
to respond, on February 2, 2004, respondent filed an objection to
petitioners’ motion. On February 17, 2004, petitioners filed an
additional affidavit pursuant to Rule 232(d).
Neither party requested a hearing, and we have concluded
that a hearing on this matter is not necessary. See Rule
232(a)(2). In disposing of this motion, we rely on the parties’
filings and attached exhibits.
Background
During 2002, petitioners were selected for audit. In a
letter to respondent dated August 9, 2002, on behalf of
petitioners, Roland Potter, C.P.A., addressed certain proposed
adjustments to petitioners’ income tax. Mr. Potter did not
enclose any documents with the letter.
As an attachment to a letter dated January 9, 2003,
respondent sent to petitioners Form 4549A, Income Tax Examination
Changes, for petitioners’ 1999, 2000, and 2001 taxable years.
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In the letter, respondent provided the following explanation:
Since the statute of limitations will expire for the
1999 year on April 15, we cannot issue a 30 day letter
that would allow you to file a protest to have your
case heard by our Appeals division. We send [sic] you
a statute extension earlier, but since you did not sign
and return the extension[,] April 15 remains the
statute date. If your case is unagreed, we will send
you a statutory notice of deficiency. This is a
certified letter than [sic] will allow you to file a
petition to have your case heard in Tax Court. * * *
Respondent also sent a copy of the Form 4549A and a brief cover
letter dated January 17, 2003, to petitioners’ attorney, Donald
L. Feurzeig.
In a notice of deficiency dated March 10, 2003 (the notice),
respondent determined the following deficiencies with respect to
petitioners’ income tax:
Year Deficiency
1999 $42,947
2000 73,891
2001 47,927
The notice contained the following errors: (1) An incomplete
explanation of Schedule E, Supplemental Income and Loss,
adjustments, (2) an alternative minimum tax computational error
twice disallowing petitioners’ 1999 net operating loss (NOL), and
(3) missing computations that would have explained the
adjustments to petitioners’ 1999 NOL.
On March 13, 2003, petitioners filed a petition with this
Court contesting respondent’s determinations. On April 24, 2003,
respondent filed an answer. Soon thereafter, in a letter dated
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May 5, 2003, petitioners submitted to respondent a section
7430(g) qualified offer in the amount of $6,000. Respondent did
not accept petitioners’ settlement offer.
On August 12, 2003, respondent held an Appeals conference
with petitioners’ representative. Before the conference, Appeals
Officer Melvin M. Chinen had provided to petitioners the
information missing from the notice and had agreed to correct the
computational error. According to Appeals Officer Chinen, the
two main issues in the case were: (1) Whether petitioner Robert
C. McKee was a dealer in real estate, whose sales of undeveloped
ranch property parcels would be taxed as ordinary income; and (2)
whether certain losses petitioners claimed are limited under
sections 1366(d), 465, and 469.
As a result of the Appeals conference, the parties reached a
settlement. In resolving the dealer in real estate issue,
pursuant to petitioners’ offer, the parties agreed to treat 50
percent of the parcel sales as sales of dealer property, subject
to ordinary income tax, and the other 50 percent as sales giving
rise to capital gains.
In June 2002, when petitioners retained Mr. Feurzeig’s law
firm, Titchell, Maltzman, Mark & Ohleyer, P.C. (the law firm),
petitioners agreed to a fee arrangement of $300 per hour. The
law firm expended a total of 202.8 hours on petitioners’ case.
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Petitioners now seek litigation costs of $31,078.28.1
Discussion
Section 7430(a) authorizes the award of reasonable
litigation costs to the prevailing party in court proceedings
brought by or against the United States in connection with the
determination of income tax. In order to receive an award of
reasonable litigation costs, a taxpayer must exhaust
administrative remedies and not unreasonably protract the court
proceeding, in addition to being the prevailing party. Sec.
7430(b)(1), (3). Unless the taxpayer satisfies all of the
section 7430 requirements, we do not award costs. Minahan v.
Commissioner, 88 T.C. 492, 497 (1987).
Respondent concedes that petitioners did not unreasonably
protract the court proceeding. Respondent contends, however,
that respondent’s position with respect to the issues in the
notice was substantially justified, that petitioners did not
1
According to one statement in their motion for reasonable
litigation costs, petitioners “claim litigation costs of $29,800
all of which were incurred after the Statutory Notice of
Deficiency was issued on March 10, 2003”. However, in their
prayer for relief, petitioners ask that we “determine that the
award of litigation costs of $31,078.28 is reasonable”. Both the
supporting affidavit attached to the motion and petitioners’
additional affidavit filed pursuant to Rule 232(d) list costs
totaling $31,078.28. After examining the detailed summary of the
nature and amount of each item of costs, for purposes of
disposing of this motion, we conclude that the court costs and
“fees paid or incurred for the services of attorneys in
connection with the court proceeding” totaled $31,078.28. See
sec. 7430(c)(1).
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exhaust the administrative remedies available to them, and that
the costs petitioners claim are unreasonable. In contrast,
petitioners contend that they were the prevailing party with
respect to both the amount in controversy and the most
significant issue or set of issues, that they exhausted all
available administrative remedies, and that the amount of
litigation costs sought is reasonable.
Section 7430(c)(4)(A) and (B)(i) provides that a taxpayer is
a prevailing party if (1) the Commissioner’s position in the
court proceeding was not substantially justified, (2) the
taxpayer substantially prevailed with respect to the amount in
controversy or the most significant issue or set of issues, and
(3) the taxpayer meets the net worth requirements of 28 U.S.C.
section 2412(d)(2)(B) (2000). See also sec. 301.7430-5(a),
Proced. & Admin. Regs. Although the taxpayer has the burden of
proving that the taxpayer meets requirements (2) and (3), supra,
the Commissioner must show that the Commissioner’s position was
substantially justified. See sec. 7430(c)(4)(B)(i); Rule 232(e).
Respondent concedes that petitioners meet the net worth
requirement of 28 U.S.C. section 2412(d)(2)(B). We first
consider whether respondent’s position in the court proceeding
was substantially justified.
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For purposes of deciding a motion for reasonable litigation
costs, section 7430(c)(7)(A) defines the Commissioner’s
“position” as the position taken in the court proceeding. In the
present case, respondent took a position when respondent filed an
answer to petitioners’ petition. See Huffman v. Commissioner,
978 F.2d 1139, 1149 (9th Cir. 1992), affg. in part, revg. in part
and remanding T.C. Memo. 1991-144; Maggie Mgmt. Co. v.
Commissioner, 108 T.C. 430, 442 (1997).
The Commissioner’s position is substantially justified if it
has a reasonable basis in both fact and law and is justified to a
degree that could satisfy a reasonable person. Huffman v.
Commissioner, supra at 1147 n.8 (citing Pierce v. Underwood, 487
U.S. 552, 565 (1988)); Rosario v. Commissioner, T.C. Memo. 2002-
247; sec. 301.7430-5(c)(1), Proced. & Admin. Regs. In deciding
whether the Commissioner’s position was substantially justified,
a significant factor is whether, on or before the date the
Commissioner assumed the position, the taxpayer provided “all
relevant information under the taxpayer’s control and relevant
legal arguments supporting the taxpayer’s position to the
appropriate Internal Revenue Service personnel.”2 Sec. 301.7430-
2
“Appropriate Internal Revenue Service personnel” are those
employees who are reviewing the taxpayer’s information or
arguments, or employees who, in the normal course of procedure
and administration, would transfer the information or arguments
to the reviewing employees. Sec. 301.7430-5(c)(1), Proced. &
Admin. Regs.
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5(c)(1), Proced. & Admin. Regs.
Petitioners contend that respondent’s position in the answer
was not substantially justified because it was “patently
incorrect or not adequately stated to be justified”. In so
arguing, petitioners rely on the following statements respondent
made in the answer: (1) Respondent denied that the three errors
in the notice existed, and (2) respondent denied that certain
adjustments to petitioners’ income tax, which respondent
eventually conceded, were incorrect. In addition, petitioners
assert that Mr. Potter’s letter of August 9, 2002, had addressed
some of the adjustments that respondent later conceded.
According to petitioners, respondent’s position in the answer was
not substantially justified because respondent had been
“presented with undisputed contrary facts” beforehand.
Although respondent ultimately conceded certain adjustments
to petitioners’ income taxes for 1999, 2000, and 2001, our focus
is on the information that respondent possessed at the time of
filing the answer. Rosario v. Commissioner, supra. The only
information petitioners had provided before respondent filed the
answer was the information contained in Mr. Potter’s letter. In
the letter, Mr. Potter set forth petitioners’ disagreements with
respondent’s proposed adjustment but included no supporting
documents or other proof of his assertions. Respondent was not
required to concede the case on the basis of Mr. Potter’s letter
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alone. We agree with respondent that petitioners did not provide
to respondent all relevant information under their control on or
before the date respondent filed the answer.
Moreover, after reviewing the extracts from Appeals Officer
Chinen’s Appeals closing memorandum, which explains respondent’s
position, it is clear that respondent’s position in the answer
had a reasonable basis in both fact and law that could satisfy a
reasonable person. The dealer in real estate issue was a close
factual issue, as evidenced by its 50/50 settlement. In
addition, with respect to the issue of losses petitioners
claimed, the Appeals closing memorandum demonstrates that the
adjustments were reasonable, and errors were attributable to the
complexity of the Code provisions. Respondent has established
that respondent’s position was substantially justified, and,
accordingly, we do not treat petitioners as the prevailing party.
See sec. 7430(c)(4)(B)(i).
After concluding that petitioners were not the prevailing
party, we need not consider whether petitioners exhausted their
administrative remedies or whether the costs petitioners claimed
are reasonable. See Minahan v. Commissioner, 88 T.C. at 497.
We have considered the remaining arguments of both parties
for results contrary to those expressed herein and, to the extent
not discussed above, find those arguments to be irrelevant, moot,
or without merit.
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To reflect the foregoing,
An appropriate order will
be issued.