125 T.C. No. 2
UNITED STATES TAX COURT
KENNETH C. RATHBUN, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14383-03, 14384-03, Filed July 12, 2005.
14385-03, 14387-03,
14391-03.
Ps seek administrative costs for expenses incurred in
administrative proceedings with R regarding the 1993 taxable
year. Ps contend that a letter issued by R in December of
1995 constitutes a notice of the decision of the Internal
Revenue Service Office of Appeals and R’s position in the
administrative proceedings as provided by sec.
7430(c)(7)(B), I.R.C.
Held: The letter issued by R in December of 1995 is
not a notice of the decision of the Internal Revenue Service
1
Cases of the following petitioners are consolidated
herewith: Doreen M. and Marc R. Fretwell, docket No. 14384-03;
Charles E. and Gladythe M. Rathbun, docket No. 14385-03; Linda J.
and Arlen R. Johnson, docket No. 14387-03; and Jana B. Rathbun-
Hanley, docket No. 14391-03.
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Office of Appeals. Consequently, Ps are not entitled
to recover administrative costs because they are not
prevailing parties under sec. 7430(c)(4), I.R.C.
Nicole M. Chicoine, Darrell D. Hallett, and Cori E.
Flanders-Palmer, for petitioners.
Gregory M. Hahn, for respondent.
OPINION
NIMS, Judge: This matter is before the Court on petitions
for administrative costs filed pursuant to Rule 271 and section
7430(f)(2). Both sides have filed motions for summary judgment
under Rule 121. The issue for consideration is whether
petitioners are entitled to reasonable costs for expenses
incurred in administrative proceedings with the Internal Revenue
Service (IRS) regarding their 1993 gift tax liabilities. Unless
otherwise indicated, all Rule references are to the Tax Court
Rules of Practice and Procedure, and all section references are
to the Internal Revenue Code as amended.
Background
Petitioners Charles Rathbun (Charles) and his spouse,
Gladythe Rathbun (Gladythe), are the parents of petitioners Linda
Johnson, Kenneth Rathbun, Jana Rathbun-Hanley, and Marc Fretwell
(collectively referred to herein as the Rathbun children).
Charles, Gladythe, and the Rathbun children are partners in the
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Mission Family Limited Partnership (limited partnership). All
petitioners resided in the State of Washington at the time the
petitions were filed.
On January 9, 1993, Charles purchased a winning ticket in
the Washington State lottery. The winning ticket entitled the
owner to $15 million payable in equal installments of $750,000
over 20 years. Respondent ultimately agreed that Charles
purchased the ticket on behalf of an informal family partnership.
See discussion infra p. 7.
On January 11, 1993, petitioners retained attorney Ronald
Braley (Mr. Braley) and formed the limited partnership to
collect, manage, and distribute the proceeds of the lottery
winnings. The partnership agreement specifies that Charles and
Gladythe are each 1 percent general partners in the limited
partnership. The remaining 98 percent is owned by the limited
partners as follows:
Partner Percentage ownership
Charles Rathbun 15.68
Gladythe Rathbun 15.67
Linda Johnson 13.33
Kenneth Rathbun 13.33
Jana Rathbun-Hanley 13.33
Marc Fretwell 13.33
Brian Fretwell1 13.33
1
Brian Fretwell’s petition was resolved separately in
docket No. 14386-03.
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On January 25, 1995, respondent issued individual notices of
proposed deficiency (1995 30-day letters) to Charles and
Gladythe. Respondent alleged that the couple, as a “marital
community”, were the true owners of the winning lottery ticket
and that capitalizing the limited partnership with the right to
collect the prize constituted a taxable gift to the Rathbun
children.
On March 24, 1995, Mr. Braley filed a written protest to
respondent’s 1995 30-day letters. Mr. Braley challenged
respondent’s assertion that the ticket was owned by the marital
community and maintained that Charles purchased the ticket on
behalf of an informal family partnership. Mr. Braley claimed no
taxable gifts were made because petitioners had a “common
understanding” that the prize would be shared by the entire
family in the event one of them held a winning ticket. According
to Mr. Braley, petitioners created the limited partnership to
merely formalize the relationship between the family members and
to satisfy various requirements of the Washington State Lottery
Commission.
The Rathbuns’ protest was assigned to IRS Appeals Officer
Fred Rawley (AO Rawley). AO Rawley disagreed with Mr. Braley’s
arguments and was prepared to issue notices of deficiency to
Charles and Gladythe for the alleged 1993 gift tax liability. In
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November of 1995, AO Rawley sent the proposed notices of
deficiency to respondent’s District Counsel for review because he
viewed the issue involved as a “novel one”.
On December 13, 1995, respondent’s District Counsel advised
against issuing the proposed notices of deficiency and
recommended that the cases be returned to respondent’s
Examination Division for further factual development.
On December 26, 1995, AO Rawley sent a Form 3100, Appeals
Division Feedback Report and Transmittal Memorandum, to the
District Director in which the Appeals Office released
jurisdiction over the Rathbuns’ cases. The form included the
following explanation:
We were unable to resolve these two cases, and were
prepared to issue Notices of Deficiency based on the
examiner’s recommendation * * *. However, at our request
Counsel reviewed the proposed notices; and they have
strongly recommended that additional development be done by
the Examination Division prior to issuance * * *. We are
now concluding our consideration and releasing jurisdiction
of these two cases so that the recommended development
activity may be considered. We trust that you will take
whatever action you consider appropriate, including the
issuance of Notices of Deficiency at such time as you
consider proper.
On the same day, December 26, 1995, Mr. Rawley sent a letter
(December 1995 letter) to the Rathbuns’ attorney that stated:
Dear Mr. Braley:
We have completed our consideration of the two
cases captioned above; and we are sorry that we were
unable to reach a mutually satisfactory resolution. We
have returned the cases to the District Director for
whatever action he deems appropriate.
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Thank you for your cooperation; and if you have
any further questions please contact me * * *.
Sincerely,
Fred R. Rawley
Appeals Officer
On April 6, 1996, respondent served summonses on Charles and
Gladythe with respect to their 1993 gift tax liability. Shortly
thereafter, the couple retained attorney Larry Johnson (Mr.
Johnson) to represent them with respect to respondent’s
examination. On December 5, 1996, respondent’s examiner proposed
an alternative theory conceding that the Rathbun children, along
with their parents, were members of an informal partnership on
January 11, 1993, but that the children “gifted” a portion of
their interests in the lottery winnings to Charles and Gladythe
upon creation of the limited partnership. Faced with
respondent’s new argument, the Rathbun children also retained Mr.
Johnson in February of 1997.
On September 8, 1999, respondent issued additional 30-day
letters to Charles and Gladythe that mirrored the argument
outlined in the 1995 30-day letters. On the same day, respondent
issued individual 30-day letters to the Rathbun children that
advanced the alternative theory.
On November 10, 1999, Mr. Johnson filed a written protest to
the 30-day letters, and the case was reassigned to respondent’s
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Appeals Office. Respondent and petitioners eventually reached a
settlement in September of 2000. The parties agreed that (1)
Charles purchased the winning lottery ticket on behalf of an
informal general partnership including his wife and children, and
(2) the transfer of the collection rights to the limited
partnership, under the terms of the partnership agreement,
reduced the partnership interests of each of the Rathbun children
from 14.29 percent to 13.33 percent. Consequently, the Rathbun
children in 1993 each made a gift valued at $250,000 to their
parents, but no gift tax was owed because of the available
unified credit under section 2505.
On December 8, 2000, petitioners submitted requests to
respondent for administrative costs under section 7430. Linda
Johnson and Marc Fretwell filed joint requests with their
spouses, Arlen Johnson and Dorene Fretwell. On May 27, 2003,
respondent sent separate letters to petitioners denying their
claims for administrative costs. The respective petitions in the
underlying case were filed on August 28, 2003. The cases were
then consolidated under Rule 141(a) on January 18, 2005.
Discussion
I. Standard for Summary Judgment
Rule 121(a) allows a party to move “for a summary
adjudication in the moving party’s favor upon all or any part of
the legal issues in controversy.” Rule 121(b) provides that a
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decision on such a motion shall be rendered “if the pleadings,
answers to interrogatories, depositions, admissions, and any
other acceptable materials, together with the affidavits, if any,
show that there is no genuine issue as to any material fact and
that a decision may be rendered as a matter of law.” See
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.
17 F.3d 965 (7th Cir. 1994).
II. Section 7430
Section 7430 provides for the award of administrative costs
in any administrative proceeding which is brought by or against
the United States in connection with the determination,
collection, or refund of any tax, interest, or penalty pursuant
to the Internal Revenue Code. An award of administrative costs
may be made where the taxpayer: (1) Is the “prevailing party”;
(2) did not unreasonably protract the administrative proceedings;
(3) filed an application for administrative costs before the 91st
day after the date on which the final decision of the IRS was
made; and (4) claimed reasonable administrative costs. Sec.
7430(a), (b)(3) and (4). Our focus is on whether petitioners
were prevailing parties in their administrative proceedings with
the IRS.
To be a prevailing party, the taxpayer must substantially
prevail with respect to either the amount in controversy or with
respect to the most significant issue or set of issues presented,
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and, at the time the petition is filed, satisfy certain net worth
requirements. Sec. 7430(c)(4)(A). Section 7430(c)(4)(B),
however, provides that a taxpayer shall not be treated as a
prevailing party if the United States establishes that the
position of the United States in the proceeding was substantially
justified. Section 7430(c)(7)(B) states that the term “position
of the United States” means the position taken by the United
States in an administrative proceeding as of the earlier of (1)
the date of the receipt by the taxpayer of the notice of the
decision of the IRS Office of Appeals, or (2) the date of the
notice of deficiency. Respondent is not considered as having
taken any position in an administrative proceeding prior to the
issuance of an Appeals Office decision or a notice of deficiency.
See, e.g., Richardson v. Commissioner, T.C. Memo. 1991-427.
Taxpayers must, among other things, receive either a notice of
decision from the Appeals Office or a notice of deficiency to
qualify as prevailing parties in an administrative proceeding
under section 7430(c)(4). Fla. Country Clubs, Inc. v.
Commissioner, 404 F.3d 1291 (11th Cir. 2005), affg. 122 T.C. 73
(2004).
Petitioners never received a notice of deficiency from
respondent so we turn to the meaning of a notice of the decision
of the Appeals Office. A notice of decision, for purposes of
section 7430, is “the final written document, mailed or delivered
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to the taxpayer, that is signed by an individual in the Office of
Appeals who has been delegated the authority to settle the
dispute on behalf of the Commissioner, and states or indicates
that the notice is the final determination of the entire case.”
Sec. 301.7430-3(c)(2), Proced. & Admin. Regs. (the regulation
also treats a notice of claim disallowance issued by the Office
of Appeals as a notice of decision, but this relates to claims
for refund, which is not our situation).
A 30-day letter does not constitute a position of the United
States, and a proposed notice of deficiency, circulated within
the IRS and not sent to taxpayers, is not a notice of deficiency
for purposes of section 7430(c)(7)(B)(ii). Fla. Country Clubs,
Inc. v. Commissioner, supra.
III. Contentions of the Parties
Respondent contends that petitioners are not “prevailing
parties” for purposes of section 7430(c)(4) and cannot recover
administrative costs because the Appeals Office never took a
position through a notice of decision.
Petitioners maintain that the December 1995 letter sent by
AO Rawley was an Appeals Office notice of decision. Petitioners
specifically assert that the December 1995 letter was the final
determination of the entire case because the document indicated
that the Appeals Office had completed its consideration and
returned the cases to the District Director.
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We disagree with petitioners’ interpretation of the December
1995 letter. Petitioners mistakenly equate an evaluation of the
issues in controversy and release of jurisdiction with a final
determination. The letter’s content does not point to a final
determination as required by section 301.7430-3(c)(2), Proced. &
Admin. Regs. The letter merely served to notify petitioners that
AO Rawley had finished his consideration and that respondent’s
District Director would take further action. Moreover, in
December of 1995, respondent had yet to even include the Rathbun
children in his examination. Since respondent failed to reach a
final determination, the cases were returned to the Appeals
Office following issuance of additional 30-day letters.
For this reason, we conclude that the December 1995 letter
was not an IRS Appeals Office notice of decision. In light of
our conclusion that petitioners never received a notice of
decision, it is unnecessary for us to discuss whether petitioners
substantially prevailed in their administrative proceedings.
IV. Conclusion
Respondent did not take a position in petitioners’ cases
because the December 1995 letter was not an Appeals Office notice
of decision. Given that respondent never took a position for
purposes of section 7430(c)(4), petitioners are not “prevailing
parties” entitled to administrative costs under section 7430, and
we so hold.
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We have considered all the contentions and arguments of the
parties that are not discussed herein, and we find them to be
without merit, irrelevant, or moot.
To reflect the foregoing,
Appropriate orders and
decisions will be entered for
respondent.