T.C. Memo. 2005-106
UNITED STATES TAX COURT
SUSANNE SHAW, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15888-03. Filed May 11, 2005.
Jeffrey D. Stoermer, for petitioner.
Donald E. Edwards, for respondent.
MEMORANDUM OPINION
GERBER, Chief Judge: This matter is before us on
petitioner’s motion pursuant to Rule 231 for an award of
reasonable administrative and litigation costs under section
- 2 -
7430.1 In accordance with Rule 232, the parties have filed
affidavits and memoranda in support of their respective
positions. The primary issues to be addressed are: (1) Whether
petitioner exhausted the administrative remedies available to her
within the Internal Revenue Service as required by section
7430(b)(1) and is eligible for an award of litigation costs; (2)
whether the position of the United States in the administrative
proceeding was substantially justified so as to preclude an award
of administrative costs to petitioner under section
7430(c)(4)(B); (3) whether the position of the United States in
this Tax Court proceeding was substantially justified so as to
preclude an award of litigation costs to petitioner under section
7430(c)(4)(B); and (4) in the event that petitioner is determined
to be entitled to recover administrative and/or litigation costs,
whether she is entitled to recover, as part of her litigation
costs, any additional expense she incurs in pursuing this motion.
Background
At the time that she filed her petition, petitioner resided
in Tulsa, Oklahoma. On the Federal income tax return that she
filed for 2002, petitioner claimed that she was entitled to head
of household filing status and a $4,522 refund. Among other
things on her 2002 return, petitioner claimed (1) dependency
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
- 3 -
exemptions for her two children, Brent Shaw (Brent) and Ronald
Shaw (Ronald), (2) an earned income tax credit of $3,075, and (3)
a child tax credit of $821.
On April 4, 2003, respondent’s Compliance Center in Austin,
Texas, mailed a 30-day letter to petitioner proposing to disallow
her: (1) Head of household filing status and instead to treat
her as a single filer; (2) dependency exemptions for her two
children, Brent and Ronald; (3) earned income tax credit; and (4)
child care tax credit. The 30-day letter included an address and
telephone number to contact by May 4, 2003, if petitioner did not
agree with the proposed changes to her 2002 return.
Shortly after she received the April 4, 2003, 30-day letter,
petitioner retained Jeffrey D. Stoermer (petitioner’s counsel) to
represent her in the above matter concerning her claimed 2002 tax
refund. Petitioner did not respond to the 30-day letter.
On June 13, 2003, respondent issued to petitioner a notice
of deficiency for 2002 in which respondent determined an income
tax deficiency of $5,227. Among other things, respondent
determined that petitioner should use a filing status of single
and disallowed her earned income credit, child care credit, and
claimed exemptions for her two children.
- 4 -
On September 11, 2003, petitioner filed her Tax Court
petition2 in this case seeking review of the notice of deficiency
that was issued to her for 2002. At no time during the period
from her receipt of the April 4, 2003, 30-day letter through
September 11, 2003, when she filed her petition, did petitioner
request an Appeals Office conference.
On October 15, 2003, respondent filed his answer asserting
that his determinations in the notice of deficiency should be
sustained.
From July 2, 2003, through September 29, 2004, petitioner
provided substantial information and documentation to the
Internal Revenue Service supporting her entitlement to head of
household filing status and to her claimed exemptions and earned
income and child care credits.
Petitioner and her representatives advised respondent that
petitioner was married, but they maintained that in 2002
petitioner and her husband lived apart. Initially, petitioner’s
counsel communicated only with the Taxpayer Advocate’s Office and
an examiner in respondent’s Examination Division. Later, on
October 14, 2003, after petitioner filed her petition and
respondent prepared his answer, respondent’s counsel forwarded
the administrative file to the Appeals Office in Oklahoma City.
2
Though the Court filed the petition on Sept. 16, 2003, the
Sept. 11, 2003, date of the postmark on the cover in which the
petition was mailed is deemed to be the date of delivery. See
sec. 7502(a)(1).
- 5 -
On October 16, 2003, an Appeals officer sent petitioner’s counsel
a letter offering petitioner an Appeals conference. Thereafter,
petitioner’s counsel and the Appeals officer corresponded and
held telephone conferences concerning the issues and evidence in
the case. On August 6, 2004, petitioner’s counsel sent the
Appeals officer a fax indicating he needed to gather more
information and had to interview two potential witnesses before
discussing the possibility of settlement with the Appeals
officer.
On August 9, 2004, this Court issued its notice setting this
case for trial at the trial session in Oklahoma City, Oklahoma,
beginning on January 10, 2005. On September 7, 2004, the Appeals
officer, having received no further documentation from
petitioner’s counsel, forwarded her Appeals Transmittal and Case
Memorandum to respondent’s associate area counsel, thereby
releasing the case from the Appeals Office. The Appeals officer
still questioned whether petitioner lived apart from her husband
for the requisite amount of time during the 2002 taxable year to
qualify for head of household filing status.3
3
See secs. 2(b)(1), (c), 7703(b). If petitioner and her
husband had filed jointly for 2002, their combined incomes would
have exceeded the threshold for qualifying for the earned income
credit by a married couple filing jointly with more than one
child. If petitioner’s correct filing status were married filing
separately rather than head of household, she also would not
qualify for the earned income credit for that year. See sec.
32(d).
- 6 -
On September 28, 2004, respondent’s associate area counsel
reviewed the administrative file and determined that
consideration should be given to conceding all issues in the
case. On September 29, 2004, respondent’s Appeals officer spoke
with petitioner’s counsel and learned that petitioner would be
obtaining from her husband an affidavit stating that her husband
did not live with her during the last 6 months of 2002. On
October 4, 2004, respondent’s associate area counsel approved a
settlement memorandum recommending respondent’s full concession
of the case. In a letter to petitioner’s counsel dated October
13, 2004, respondent notified petitioner of respondent’s decision
to concede the case.
On December 2, 2004, after the filing of the parties’
supplemental stipulation of settlement, petitioner filed her
instant motion seeking an award of administrative and litigation
costs under section 7430. In her motion, petitioner seeks to
recover certain fees and costs that she incurred from April 10,
2003, through November 24, 2004, plus any additional expenses
that she might incur in pursuing that motion. From April 10,
2003, through November 24, 2004, petitioner incurred the
following fees and costs:
- 7 -
Type of Fees and Costs Total
Attorney’s fees $4,770.00
Paralegal’s fees 1,770.00
Miscellaneous costs:
Fax 7.80
Photocopies 27.20
Postage and express mail 34.07
Long distance 30.00
Filing fee 60.00
159.07
Total 6,699.07
Of the $4,770 in attorney’s fees and $1,770 in paralegal’s fees,
$1,623 covered work done from April 10 through September 11,
2003, when petitioner filed her Tax Court petition. Of the
$1,623, $546 may have related to the preparation and filing of
the petition.
Discussion
Petitioner seeks to recover under section 7430
administrative and litigation costs that she incurred after
respondent’s April 4, 2003, 30-day letter was mailed to her.
Respondent acknowledges: (1) Petitioner substantially
prevailed both with respect to the amounts in controversy and
with respect to the most significant issues presented; (2)
petitioner meets the net worth requirements provided by law; (3)
petitioner has not unreasonably protracted the administrative and
Court proceedings; and (4) the specified costs that petitioner
claims are reasonable in amount within section 7430(a).
- 8 -
In opposing petitioner’s recovery of administrative and
litigation costs, respondent primarily contends, however: (1)
Because petitioner did not request and participate in an Appeals
Office conference before filing her Tax Court petition, she
failed to exhaust her administrative remedies and is precluded
from recovering litigation costs under section 7430(b)(1); (2)
the position of the United States in the administrative
proceeding was substantially justified so that petitioner was not
a prevailing party in that proceeding and is not entitled to
recover administrative costs under section 7430(a)(1) and
(c)(4)(B); and (3) the position of the United States in this
judicial proceeding was substantially justified so that
petitioner was not a prevailing party in this proceeding and is
not entitled to recover litigation costs under section 7430(a)(2)
and (c)(4)(B).
Except as provided in section 7430(c)(4)(B), petitioner must
show that she meets each of the requirements of section 7430.
See Rule 232(e).
I. Exhaustion of Administrative Remedies
Section 7430(b)(1) requires that a taxpayer take advantage
of all “available” administrative remedies to be eligible for an
award of litigation costs. Haas & Associates Accountancy Corp.
v. Commissioner, 117 T.C. 48, 57 (2001), affd. 55 Fed. Appx. 476
(9th Cir. 2003); see H. Rept. 97-404, at 13 (1982) (explaining
- 9 -
that this statutory requirement is intended to preserve the role
that the administrative appeals process plays in the resolution
of tax disputes by requiring taxpayers to pursue such remedies
before litigation).
A taxpayer generally is not regarded as having exhausted
available administrative remedies unless (1) before filing a Tax
Court petition, the taxpayer participates in an Appeals Office
conference, or (2) if no Appeals Office conference is granted,
the taxpayer, before the issuance of a notice of deficiency in
the case of a Tax Court petition, (a) requests an Appeals Office
conference and (b) files a written protest if a written protest
is required to obtain an Appeals Office conference. Sec.
301.7430-1(a) and (b)(1), Proced. & Admin. Regs.; see Rogers v.
Commissioner, T.C. Memo. 1987-374 (noting that before the
issuance of a notice of deficiency, the Internal Revenue Service
is seeking facts to decide whether it should determine a tax
deficiency and thereby force a taxpayer to incur litigation costs
or pay the determined tax; noting further that the regulations
are designed to require a taxpayer to either disclose information
needed by the Internal Revenue Service to make its decision or
forgo recovery of the taxpayer’s litigation costs). Though not
applicable here, certain limited exceptions apply to relieve
taxpayers of the requirement that they either participate in or
request an Appeals Office conference in order to be treated as
- 10 -
having exhausted available administrative remedies. Sec.
301.7430-1(f) and (g), Examples (4) and (5), Proced. & Admin.
Regs.; see also Kaufman v. Egger, 758 F.2d 1, 3 (1st Cir. 1985);
Burke v. Commissioner, T.C. Memo. 1997-127.
Petitioner failed to request an Appeals Office conference
before respondent’s issuance of the notice of deficiency, even
though the April 4, 2003, 30-day letter advised petitioner of her
right to file an administrative appeal. Indeed, petitioner did
not commence dealing with the Appeals Office until well after she
filed her Tax Court petition. Accordingly, we hold that
petitioner failed to exhaust her available administrative
remedies as required by section 7430(b)(1) and is ineligible for
an award of reasonable litigation costs under section
7430(a)(2).4 See Haas & Associates Accountancy Corp. v.
Commissioner, supra at 57-59; Roginiel v. Commissioner, T.C.
Memo. 2002-270; Swanagan v. Commissioner, T.C. Memo. 2000-294.
In light of this holding, for the purposes of deciding whether to
award petitioner reasonable litigation costs, we need not decide
whether the position of the United States in this proceeding was
substantially justified so that petitioner would not be treated
as the prevailing party.
4
Petitioner’s litigation costs are those incurred (1) in
connection with the preparation and filing of her Tax Court
petition and (2) after the filing of the petition. See sec.
301.7430-4(c)(3) and (4), Example (2), Proced. & Admin. Regs.
- 11 -
II. Reasonableness of the Position of the United States in the
Administrative Proceeding With Respect to Administrative
Costs
As previously discussed, respondent contends that petitioner
does not qualify for an award of reasonable administrative costs
because the position of the United States in the administrative
proceeding was substantially justified. A taxpayer is not
treated as a prevailing party if the Commissioner can establish
that the Commissioner’s position in the administrative proceeding
was substantially justified. Sec. 7430(c)(4)(B); Rule 232(e).
We must identify the point at which the United States is
first considered to have taken a position in the administrative
proceeding, and then decide whether that position from that point
forward was substantially justified. For purposes of the
administrative proceeding in this case, respondent’s position is
that which was articulated in the notice of deficiency issued to
petitioner on June 13, 2003, as the Appeals Office never
considered petitioner’s entitlement to her claimed 2002 refund
before the issuance of the notice of deficiency. See sec.
7430(c)(7)(B); Fla. Country Clubs, Inc. v. Commissioner, 122 T.C.
73, 85-87 (2004), affd. F.3d (11th Cir., Mar. 31, 2005);
Maggie Management Co. v. Commissioner, 108 T.C. 430, 442 (1997);
sec. 301.7430-5(b), Proced. & Admin. Regs.
- 12 -
A position in the notice of deficiency is substantially
justified if it is “justified to a degree that could satisfy a
reasonable person” and has a “reasonable basis in both law and
fact.” Pierce v. Underwood, 487 U.S. 552, 565 (1988)
(interpreting similar language in the Equal Access to Justice
Act, 28 U.S.C. sec. 2412 (1988)); Swanson v. Commissioner, 106
T.C. 76, 86 (1996). A reasonable basis exists if legal precedent
substantially supports the Commissioner’s position given the
facts available to the Commissioner. Coastal Petroleum Refiners,
Inc. v. Commissioner, 94 T.C. 685, 688 (1990). In deciding
whether the Commissioner acted reasonably, this Court must
“consider the basis for * * * [the Commissioner’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 is not conclusive as to whether the taxpayer is entitled
to an award of administrative costs. Coastal Petroleum Refiners,
Inc. v. Commissioner, supra at 689; Wasie v. Commissioner, supra
at 968-969. It remains, however, a relevant factor to consider
in deciding the degree of the Commissioner’s justification.
Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir.
1991) (award of litigation costs in the Court of Appeals), affg.
T.C. Memo. 1990-123; Swanson v. Commissioner, supra at 94.
- 13 -
As of June 13, 2003, when respondent issued the notice of
deficiency, petitioner had not responded to the April 4, 2003,
30-day letter or communicated in any way with the examiner,
except perhaps to make one telephone call to the Taxpayer
Advocate’s Office. Although petitioner eventually provided
substantial documentation and information (much of which earlier
had been requested in the 30-day letter) supporting her claimed
filing status, personal exemptions for her two children, earned
income credit, and child care credit, virtually all of this
documentation and information was provided to the Internal
Revenue Service well after the notice of deficiency was issued on
June 13, 2003. It was not until July 2, 2003, that petitioner
first began providing documents to the examiner. As of September
11, 2003, when petitioner filed her petition, she had still
failed to establish her entitlement to head of household filing
status and the earned income credit. Indeed, not until much
later, on September 29, 2004, did petitioner inform respondent
that she would be obtaining an affidavit from her husband that he
did not live with her during the last 6 months of 2002. See
supra p. 6. We find that the position respondent took in the
notice of deficiency and maintained through September 11, 2003,
- 14 -
was substantially justified.5 Coastal Petroleum Refiners, Inc.
v. Commissioner, supra at 688-689; see also Corkrey v.
Commissioner, 115 T.C. 366, 375 n.5 (2000) (citing McDaniel v.
Commissioner, T.C. Memo. 1993-148, for the propositions that (1)
whenever there is a factual determination, the Commissioner is
not obliged to concede a case until the Commissioner receives the
necessary documentation to prove the taxpayer’s contentions, and
(2) the Commissioner must be given reasonable time to analyze the
documents and make adjustments after receiving the documents).
From June 13, 2003 (the date of the notice of deficiency),
through September 11, 2003 (the date upon which petitioner filed
her petition), respondent’s position with respect to all issues
in the administrative proceeding was substantially justified.
See sec. 7430(c)(4)(B); sec. 301.7430-5(c)(1), Proced. & Admin.
Regs. As a result, we hold that petitioner is not eligible to
receive an award of reasonable administrative costs under section
7430(a)(1).
5
Costs petitioner incurred (1) in connection with the
preparation and filing of her Tax Court petition and (2) after
the Sept. 11, 2003, filing of the petition would be litigation
costs rather than administrative costs. Sec. 301.7430-4(c)(3)
and (4), Example (2), Proced. & Admin. Regs. As we have
previously held, petitioner is ineligible for an award of
reasonable litigation costs because of her failure to exhaust
administrative remedies as required by sec. 7430(b)(1).
- 15 -
III. Additional Expenses in Pursuing This Motion
In light of our above holdings that petitioner is not
eligible to recover reasonable administrative and litigation
costs under section 7430, we hold that petitioner is not entitled
to recover, as part of her litigation costs, additional expenses
(if any) she incurred in pursuing this motion.
To reflect the foregoing,
An appropriate order and
decision will be entered.