T.C. Summary Opinion 2005-136
UNITED STATES TAX COURT
RONALD A. HORTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17058-04S. Filed September 15, 2005.
Robert L. Stephens, Jr., for petitioner.
Robert V. Boeshaar, for respondent.
NIMS, Judge: This case was heard pursuant to 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 may not be cited as authority.
Unless otherwise indicated, all other section references are to
- 2 -
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
This matter is before the Court on petitioner’s motion for
award of costs and attorney’s fees pursuant to section 7430. The
issue for consideration is whether petitioner is entitled to
reasonable costs for expenses incurred in proceedings with the
Internal Revenue Service regarding his 2003 Federal income tax
liability.
Background
Petitioner claimed head-of-household filing status, the
earned income credit, and a dependency exemption deduction on his
2002 and 2003 Federal income tax returns.
Respondent determined that petitioner’s daughter did not
qualify as a dependent and that petitioner was not entitled to
the claimed filing status, credit, and deduction for the 2002 and
2003 taxable years.
Respondent issued a notice of deficiency with respect to
petitioner’s 2002 taxable year on August 22, 2003. Petitioner
filed a petition in connection with the 2002 taxable year on
November 25, 2003. Petitioner’s case was assigned to Appeals
Officer Pat Fu (Ms. Fu). Petitioner provided respondent with
various documentation, including a modified divorce decree and
parenting plan signed by petitioner’s former wife. These
- 3 -
documents supported petitioner’s position that his daughter
resided with him in 2002 and that he provided over half of her
total support for the year. The parties reached a settlement
regarding the 2002 taxable year on September 30, 2004. The
parties agreed that petitioner was entitled to the claimed filing
status, credit, and deduction for the 2002 taxable year.
On April 5, 2004, petitioner received a proposed notice of
deficiency from respondent’s examiner, Jan Sinclair (Ms.
Sinclair), regarding the 2003 taxable year. Respondent proposed
to disallow, for 2003, the same items as those at issue for the
2002 taxable year. On May 3, 2004, petitioner sent a letter to
Ms. Sinclair asking her to use petitioner’s submissions for the
2002 taxable year to settle the 2003 taxable year. Petitioner
asserted that once respondent had agreed to petitioner’s status
as head-of-household in 2002, the 2003 examination would be
“unnecessary”.
On June 14, 2004, respondent issued a notice of deficiency
to petitioner with respect to the 2003 taxable year. On
September 7, 2004, shortly before the parties reached a final
settlement regarding the 2002 taxable year, petitioner sent a
letter to Ms. Fu that stated in part:
I don’t know if you can help us or not, but I am
enclosing a copy of the very same type of notice for Mr.
Horton’s tax year 2003. This was brought about, of course,
by the very same problem that we have finally brought to
resolution for 2002 now in 2004.
- 4 -
I am also enclosing a copy of our letter to Ms.
Sinclair, written in May of 2004, informing her of the on-
going petition for 2002.
Is there any way you can help us avoid having to go
through this entire process again for another two years?
Whatever you could do would certainly be greatly
appreciated.
On September 10, 2004, petitioner sent Ms. Sinclair another
letter, informing her of the imminent settlement regarding the
2002 taxable year and attaching a copy of the letter sent on May
3, 2004. Petitioner filed a petition with respect to the 2003
taxable year on September 14, 2004. At the time the petition was
filed, petitioner resided in Billings, Montana.
On November 29, 2004, petitioner filed a motion for summary
judgment pursuant to Rule 121. On December 9, 2004, petitioner
faxed copies of his daughter’s birth certificate, Social Security
card, and school record to respondent. On January 13, 2005, the
parties filed a stipulation of settled issues, which resolved all
issues in petitioner’s favor.
On January 24, 2005, petitioner filed a motion for award of
costs and attorney’s fees. Petitioner seeks an award of
$3,921.88. Respondent contends that petitioner is not the
prevailing party within the meaning of section 7430(c)(4) because
respondent’s position was substantially justified until December
9, 2004, when petitioner provided relevant information regarding
the 2003 taxable year. Furthermore, respondent argues that
- 5 -
petitioner failed to exhaust his administrative remedies,
unreasonably protracted the proceedings, and claimed unreasonable
costs.
Neither party has requested a hearing, and we conclude that
a hearing is not necessary for the proper disposition of
petitioner’s motion. Rule 232(a)(2). Therefore, we decide
petitioner’s motion on the basis of the parties’ submissions and
the record developed to date. For the reasons described below,
we deny petitioner’s claim for costs and attorney’s fees.
Discussion
Section 7430 provides for the award of litigation costs in
any court 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 litigation costs may be made where the
taxpayer is the “prevailing party”, has exhausted the
administrative remedies with the Internal Revenue Service, and
did not unreasonably protract the administrative or court
proceeding. See sec. 7430(b)(1), (3).
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,
and, at the time the petition is filed, satisfy a net worth
requirement. Sec. 7430(c)(4)(A). Respondent has conceded that
- 6 -
petitioner meets the net worth requirement. Section
7430(c)(4)(B), however, provides that a taxpayer shall not be
treated as the prevailing party if the United States establishes
that the position of the United States in the proceeding was
substantially justified.
Respondent contends that petitioner is not the prevailing
party within the meaning of section 7430(c)(4) because
respondent’s position was substantially justified prior to
December 9, 2004, on which date petitioner faxed to respondent
copies of documents sufficient to establish petitioner’s
position. Within a little over a month thereafter, the parties
filed a stipulation that resolved all issues in petitioner’s
favor. Respondent’s position was substantially justified if,
based on all the facts and circumstances and legal precedents
related to the case, respondent 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). We must examine
whether respondent’ position was reasonable given the available
facts and circumstances at the time respondent took his position.
Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997).
A significant factor in determining whether the position of
the Internal Revenue Service was substantially justified as of a
given date is whether, on or before that date, the taxpayer
presented all relevant information under the taxpayer’s control
- 7 -
and relevant legal arguments supporting the taxpayer’s position
to the appropriate Internal Revenue Service personnel. Sec.
301.7430-5(c), Proced. & Admin. Regs. The fact that the
Commissioner eventually conceded a case does not alone 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).
Here, petitioner failed to specify whether he seeks
litigation or administrative costs. The position of the United
States with respect to recovery of litigation costs is the
position taken by the Commissioner in the answer to the petition.
Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988),
affg. 89 T.C. 79 (1987). For purposes of recovery of
administrative costs, the Commissioner’s position is determined
as of the earlier of the date of the receipt by the taxpayer of
the notice of the decision of the Appeals Office or the date of
the notice of deficiency, which in this case was June 14, 2004.
Sec. 7430(c)(7)(B).
Under section 7430(c)(4), our application of the
substantially justified standard in a litigated case is limited
to the period beginning with the point at which the
Commissioner’s counsel has become involved. Sher v.
Commissioner, 89 T.C. at 86. This would normally take place when
the Commissioner answered the petition. Id. However, in a small
- 8 -
tax case such as this, no Answer is required. See Rule 173(b).
Accordingly, respondent’s position for the purposes of the motion
is the position maintained by respondent during the pendency of
this case. We note that respondent’s position, specifically that
petitioner was not entitled to head-of-household filing status,
the earned income credit, and the dependency exemption deduction,
was the same in both the administrative and the judicial
proceedings.
Section 151(c) allows a taxpayer to deduct an annual
exemption amount for each dependent. Section 152(a) defines a
“dependent” to include a taxpayer’s child, provided that more
than half of the child’s support was received from the taxpayer
during the calendar year. Under section 152(e)(1), if a child
receives over half of his support during the calendar year from
divorced parents, and such child is in the custody of one or both
parents for more than one-half of the calendar year, then such
child is treated for purposes of section 152(a) as receiving over
half the support from the parent having custody for a greater
portion of the calendar year, regardless of which parent actually
provided the support.
Petitioner contends that since the May 2004 letter directed
respondent to use information previously submitted for the 2002
taxable year, respondent had a basis to “resolve” the examination
for the 2003 taxable year. We disagree. The documents submitted
- 9 -
in May 2004, relating to the 2002 taxable year, were useful but
not sufficient to invalidate respondent’s position as to the 2003
taxable year. Each taxable year stands on its own and must be
separately considered. See United States v. Skelly Oil Co., 394
U.S. 678 (1969).
Respondent’s position was substantially justified until
December 9, 2004, when petitioner provided respondent with
relevant information related to the 2003 taxable year. The
Commissioner has a reasonable period to analyze submitted
documentation and modify his position accordingly. Sokol v.
Commissioner, supra at 765-766. We note that respondent promptly
settled all issues related to the 2003 taxable year after
petitioner’s claims were substantiated.
We conclude that respondent’s position was substantially
justified under section 7430(c)(4)(B). Respondent was unaware
that his position was invalid because he had yet to receive
sufficient information necessary to make an appropriate
determination as to petitioner’s 2003 taxable year. Moreover,
the parties did not reach a final settlement regarding
petitioner’s 2002 taxable year until more than 3 months after the
2003 notice of deficiency was issued.
We also note that in his motion petitioner has apparently
intermingled services which were rendered for both the 2002 and
- 10 -
2003 taxable years. Obviously, any services relating to 2002 are
irrelevant in this 2003 tax case. It was petitioner’s job to
sort these out, and this he has not done.
We hold that petitioner is not entitled to an award of costs
and attorney’s fees because respondent’s position was
substantially justified. As a result of our conclusion, we need
not discuss whether petitioner exhausted his administrative
remedies, unreasonably protracted the proceedings, or claimed
unreasonable costs.
We have considered all the contentions and arguments of the
parties not discussed herein, and we conclude they are without
merit, irrelevant, or moot.
To reflect the foregoing,
An appropriate order and
decision will be entered.