T.C. Memo. 2005-214
UNITED STATES TAX COURT
JAMES E. BLASIUS AND MARY JO BLASIUS, ET AL.1, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4366-01, 4367-01, Filed September 14, 2005.
4368-01.
Ps and R have settled all issues in these
consolidated cases save for Ps’ claims made pursuant to
sec. 7430, I.R.C., for recovery of administrative and
litigation costs totaling $8,700.50. Ps’ grounds for
recovery are that R’s position in these proceeding with
respect to the capitalization of certain expenditures,
which position R conceded before trial, was not
substantially justified within the meaning of sec.
7430(c)(4)(B)(i), I.R.C.
Held: R’s position with respect to the
capitalization of the expenditures in question was
substantially justified within the meaning of sec.
1
Cases of the following petitioners are consolidated
herewith: Steven G. Balan, docket No. 4367-01, and Steven G.
Balan and Rachel Margules, docket No. 4368-01.
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7430(c)(4)(B)(i), I.R.C., with the result that Ps’ are
not entitled to recovery under sec. 7430(a), I.R.C.
Erwin A. Rubenstein and Nicole R. Tennenhouse, for
petitioners.
Eric R. Skinner and Phoebe L. Nearing, for respondent.
MEMORANDUM OPINION
HALPERN, Judge: These cases (the consolidated cases, or,
when referred to prior to consolidation, the cases) are before
the Court on petitioners’ motions for litigation and
administrative fees and costs (the motions) filed October 9,
2002.2 The motions are made pursuant to section 7430 and Rules
230 through 233.3 Petitioners seek to recover (1) attorney’s
fees of $7,131 and costs of $182 in connection with respondent’s
determinations of deficiencies in tax with respect to
petitioners’ taxable (calendar) years 1996, 1997, and 1998 (the
audit years),4 (2) attorney’s fees of $1,357.50 incurred through
August 31, 2002, in connection with filing the motions, plus (3)
2
On Oct. 23, 2002, petitioners moved to consolidate the
cases for purposes of disposing of the motions, which motions to
consolidate were granted on Nov. 18, 2002.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
4
Docket No. 4366-01 involves calendar years 1996, 1997,
and 1998. Docket No. 4367-01 involves calendar year 1996.
Docket No. 4368-01 involves calendar years 1997 and 1998.
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“other fees and expenses since August 31, 2002.” Petitioners
also request that we increase the statutory fee limit based on
the expertise of petitioners’ counsel. Respondent objects to the
motions in all respects.
On March 7, 2005, the parties jointly moved pursuant to Rule
141(b) to bifurcate consideration of the issues presented in the
motions. They requested that the Court first decide the “primary
legal issue”, whether respondent has met his burden of proving
that his position in the consolidated cases was “substantially
justified” within the meaning of section 7430(c)(4)(B)(i). If,
and only if, the Court were to decide that issue in petitioners’
favor, then the Court would decide the remaining issues, which
involve the amount of the attorney’s fees and other expenses
properly recoverable by petitioners.5 During a March 14, 2005,
teleconference, counsel for the parties agreed that the Court may
decide the substantial justification issue without a trial or
hearing. On March 17, 2005, the Court issued an order granting
the parties’ joint motion to bifurcate. No trial or hearing has
been held.
Because the parties appear to agree on the underlying facts
necessary for us to reach a decision on the substantial
5
A decision in respondent’s favor on the substantial
justification issue would result in a denial of the motions and
render moot the issues relating to the amount of any recoverable
attorney’s fees or other expenses. See sec. 7430(c)(4)(B).
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justification issue, there are no factual issues in that respect
to resolve.6 Therefore, we shall proceed on the basis of the
parties’ submissions. For the reasons discussed below, we shall
deny the motions.
Factual and Procedural Background
The parties filed a “Stipulation of Agreed Facts”, which,
with accompanying exhibits, is incorporated herein by this
reference.
Petitioners
Petitioners James E. Blasius (Blasius) and Mary Jo Blasius
are husband and wife who, at the time their petition was filed,
resided in Northville, Michigan. Petitioners Steven G. Balan
(Balan) and Rachel Margules are husband and wife who, at the time
their petitions were filed, resided in West Bloomfield, Michigan.
During the audit years, Blasius and Balan were the sole
shareholders (Blasius, 80 percent, Balan, 20 percent) of
Automotive Credit Corporation (ACC), an S corporation.7
6
Respondent concedes that (1) none of the limitations on
recovery found in sec. 7430(b) limits petitioners’ rights to a
recovery and (2) each petitioner is a “prevailing party”, as that
term is defined in sec. 7430(c)(4)(A), except with respect to the
issue of substantial justification raised by sec. 7430(c)(4)(B)
and herein addressed.
7
The term “S corporation” is defined in sec. 1361(a)(1).
In general, an S corporation has no Federal income tax liability,
and its items of income, deduction, credit, and such are passed
through to (i.e., taken into account by) its shareholders. See
secs. 1363(a), 1366(a).
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History of the Consolidated Cases
By notices of deficiency dated December 29 and 31, 2000 (the
notices of deficiency), respondent determined deficiencies in the
Federal income taxes of petitioners for the audit years.
Explanations included with the notices of deficiency show
adjustments to petitioners’ incomes resulting from changes in the
treatment of items of ACC passed through to Blasius and Balan on
account of their status as shareholders of ACC. Respondent
required the capitalization of certain costs incurred (and
deducted) by ACC in connection with (1) “Loan Origination/
Acquisition”, (2) “Offering Expenses”, and (3) “Professional
Fees”.
On March 30, 2001, petitions were filed in the cases (the
petitions), and, on May 21, 2001, respondent answered the
petitions denying all assignments of error.
On January 9, 2002, the Court notified the parties that the
cases were set for trial at the trial session of the Court
commencing June 10, 2002, in Detroit, Michigan.
On March 14, 2002, attorney Oksana O. Xenos, on behalf of
all petitioners, wrote a letter to Eric R. Skinner, one of
respondent’s counsel in this case. In that letter, Ms. Xenos
requested that, in light of respondent’s position regarding the
deductibility of the types of costs at issue in the consolidated
cases, as stated in Announcement 2002-9, 2002-1 C.B. 536, issued
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on February 15, 2002 (discussed infra), respondent “should
without inordinate delay, confess error and concede the instant
cases in their entirety.”
On April 19, 2002, Mr. Skinner informed Ms. Xenos that, in
light of the March 15, 2002, issuance of Chief Counsel Notice
2002-21 (discussed infra), respondent would concede the
deductibility of the loan origination/acquisition costs at issue
in each of the cases (the loan origination/acquisition costs).8
Sometime previously, Mr. Skinner had been instructed by his
superior, Division Counsel, Large and Mid-Size Business Division
(LMSB), to contact Victoria Balacek, Senior Legal Counsel (LMSB),
to confirm the office’s position with respect to the loan
origination/acquisition costs. On April 19, 2002, Mr. Skinner
learned from Ms. Balacek that a concession of the issue was
appropriate in light of Chief Counsel Notice 2002-21. He then
contacted Ms. Xenos.
On May 29, 2002, Ms. Xenos again wrote Mr. Skinner, alleging
that he was reneging in part on his promise to concede the costs
at issue in the consolidated cases. Ms. Xenos requested that
“any stipulated decision you propose for our consideration
8
Although petitioners argue that respondent did not
concede the deductibility of the loan origination/acquisition
costs and professional fees until June 10, 2002, they do not
dispute Mr. Skinner’s affidavit stating that he informed Ms.
Xenos of the concession on Apr. 19, 2002.
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provide for an award of reasonable administrative and litigation
fees and costs incurred in these civil proceedings.”9
On May 31, 2002, we filed respondent’s trial memorandum in
each of the cases. In those memoranda, respondent concedes the
deductibility of both the loan origination/acquisition costs and
the professional fees at issue.
On June 10, 2002, the cases were called for trial. No trial
was held, however, since the Court received from the parties
stipulations of settled issues that resolved all of the then
outstanding issues in the cases.10 A section of each stipulation
is entitled “Adjustments to Automotive Credit Corporation, Inc.
(1120S)”. In those sections, petitioner(s) in each case
concede(s) that ACC’s “expenditures for commissions and offering
expenses should be capitalized rather than deducted in the year
incurred”, and respondent in each case concedes the deductibility
9
Ms. Xenos does not identify the portion of the “costs at
issue” that respondent is alleged to be “reneging on”. We
surmise that Ms. Xenos is not referring to the loan
origination/acquisition costs conceded by respondent on Apr. 19,
2002, because her letter specifically confirms that “the service
has disavowed the position it pursued in the Lychuk case”; i.e.,
the capitalization of loan acquisition costs. (See the
description infra of the costs at issue in Lychuk v.
Commissioner, 116 T.C. 374 (2001).) The request for costs and
fees recoverable under sec. 7430 suggests it is to those costs
(e.g., attorney’s fees) that Ms. Xenos refers in her letter.
10
Although stipulations of settled issues were not filed
in the cases until Oct. 9, 2002, the parties urge, and we agree,
that identical stipulations were reached on June 10, 2002. We
shall, therefore, treat June 10, 2002, as the date the parties
stipulated as set forth in the stipulations filed on Oct. 9.
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of ACC’s (1) loan origination/acquisition costs and (2)
professional fees.
Nature of the Expenses Conceded by Respondent To Be Deductible in
the Year Incurred
Loan Origination/Acquisition Costs
ACC is the same S corporation that was the focus of our
report in Lychuk v. Commissioner, 116 T.C. 374 (2001), which
dealt with the 1993 and 1994 tax years of its then shareholders
(including petitioners James E. and Mary Jo Blasius). In Lychuk
v. Commissioner, supra at 376, we reported certain basic facts
with respect to ACC:
It was formed to provide alternate financing for
purchasers of used automobiles or light trucks
(collectively, automobiles) who have marginal credit.
Its sole business operation is (1) the acquisition of
installment contracts from automobile dealers (dealers)
who have sold automobiles to high credit risk
individuals and (2) the servicing of those contracts.
Its primary business activities are credit
investigation, credit evaluation, documentation, and
the monitoring of collections on installment contracts.
* * *
We have no reason to believe that those reported facts have
changed.
Moreover, the parties appear to agree that the loan
origination/acquisition costs are essentially identical in nature
to costs described in Lychuk v. Commissioner, supra at 377-381,
as incurred by ACC in investigating and acquiring automobile
dealer installment contracts with purchasers of automobiles.
Briefly, the costs at issue were incurred by ACC employees in
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analyzing credit applications submitted by the dealers’
customers, analyzing credit reports, verifying information
provided by credit applicants (the credit analysis activities),
and purchasing the approved installment contracts from the
dealers. Those costs consisted of employee salaries and benefits
deemed attributable to the foregoing activities.
Professional Fees
The professional fees at issue in the consolidated cases
(professional fees) were payments, apparently to third parties,
relating to the creation of a bank line of credit for ACC, which
extended over 2 calendar years.
Chronology of Administrative and Judicial Developments
Regarding the Capitalization Versus Expense Issues Conceded by
Respondent in the Consolidated Cases
Cases and Public Pronouncements
On June 8, 1998, this Court issued its report in PNC
Bancorp, Inc. v. Commissioner, 110 T.C. 349 (1998), revd. 212
F.3d 822 (3d Cir. 2000), in which we held that a bank’s costs
associated with making loans extending beyond the years in which
the costs were incurred, including salaries and benefits paid to
employees, are not currently deductible under section 162(a) and
must be capitalized under section 263(a).
On March 8, 1999, this Court issued its report in Norwest
Corp. v. Commissioner, 112 T.C. 89 (1999), affd. in part and
revd. in part sub nom. Wells Fargo & Co. & Subs. v. Commissioner,
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224 F.3d 874 (8th Cir. 2000), in which we held that officer
salaries and outside legal fees incurred in investigating a
potential consolidation that was ultimately consummated are
capital expenditures not currently deductible under section
162(a).
On March 21, 2000, the Internal Revenue Service (IRS)
released a document entitled “2000 Priority Guidance Plan”, in
which it listed “loan origination costs” among the expenditures
to be addressed in “[g]uidance on deduction and capitalization”.
On May 19, 2000, the Court of Appeals for the Third Circuit
reversed our decision in PNC Bancorp, Inc. v. Commissioner, 212
F.3d 822 (3d Cir. 2000), revg. 110 T.C. 349 (1998).
On August 29, 2000, the Court of Appeals for the Eighth
Circuit reversed in part our decision in Norwest Corp. v.
Commissioner, supra, affirming only our capitalization of outside
legal fees incurred after a “final decision” had been made to
enter into the consolidation. Wells Fargo & Co. and Subs. v.
Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and
revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89
(1999).11
11
Before the Court of Appeals, the Commissioner conceded
the deductibility of outside legal fees incurred before a “final
decision” was made on the basis of Rev. Rul. 99-23, 1999-1 C.B.
998 (released on Apr. 30, 1999). Wells Fargo & Co. and Subs. v.
Commissioner, 224 F.3d 874, 888 (8th Cir. 2000), affg. in part
and revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89
(continued...)
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On May 31, 2001, this Court issued its report in Lychuk v.
Commissioner, supra, in which we held that loan acquisition costs
of the type at issue in the consolidated cases and certain
offering expenditures are capital expenditures not deductible
under section 162(a).
On January 24, 2002, the IRS released an Advance Notice of
Proposed Rulemaking (ANPRM) describing “rules and standards that
the IRS and Treasury Department expect to propose in 2002 in a
notice of proposed rulemaking that will clarify the application
of section 263(a) * * * to expenditures incurred in acquiring,
creating, or enhancing certain intangible assets or benefits.”
67 Fed. Reg. 3461 (Jan. 24, 2002). The ANPRM invites public
comments “regarding these standards.” Id. at 3461. One of the
anticipated proposals is a “12-month rule applicable to
expenditures paid to create or enhance certain intangible rights
or benefits.” Id. at 3462. The ANPRM states:
Under the rule, capitalization under section 263(a)
would not be required for * * * [certain described
expenditures paid to create or enhance certain
intangible rights or benefits] unless that expenditure
created or enhanced intangible rights or benefits for
the taxpayer that extend beyond the earlier of (i) 12
months after the first date on which the taxpayer
realizes the rights or benefits attributable to the
11
(...continued)
(1999). Rev. Rul. 99-23, 1999-1 C.B. at 1000, distinguishes
between investigatory expenses incurred “in order to determine
whether to enter a new business and which new business to enter”
(deductible) and expenses “incurred in the attempt to acquire a
specific business” (nondeductible).
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expenditure, or (ii) the end of the taxable year
following the taxable year in which the expenditure is
incurred. [Id.]
The list of described expenditures eligible for immediate
deduction under the 12-month rule does not include an expenditure
for, or with respect to, a bank line of credit of the type
acquired by ACC (the professional fees). The ANPRM also advises
that, as one alternative approach designed “to minimize
uncertainty and to ease the administrative burden of accounting
for transaction costs * * * [,] the rules could allow a deduction
for all employee compensation (including bonuses and commissions
that are paid with respect to the transaction)”. Id. at 3464.
On February 15, 2002, the IRS issued Announcement 2002-9,
2002-1 C.B. 536 (originally published in 2002-7 I.R.B. 536),
which is identical to the ANPRM.
On March 15, 2002, the Chief Counsel, IRS, issued Chief
Counsel Notice (CCN) 2002-21, in which the Chief Counsel
announced that the IRS would no longer “assert capitalization
under section 263(a) for employee compensation (other than
bonuses and commissions that are paid with respect to the
transaction), fixed overhead, or de minimis [under $5000] costs
related to the acquisition, creation, or enhancement of
intangible assets or benefits.”
On December 19, 2002, the Treasury Department issued
proposed regulations under section 263(a) (the proposed or
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proposed INDOPCO12 regulations), which contain the 12-month rule
described above, and make it generally applicable to “amounts
paid to create or enhance an intangible asset”. Sec. 1.263(a)-
4(f)(1), Proposed Income Tax Regs., 67 Fed. Reg. 77719 (Dec. 19,
2002). The proposed regulations also permit a deduction in the
year incurred for all “compensation paid to employees (including
bonuses and commissions paid to employees)”. Sec. 1.263(a)-
4(e)(3)(i), Proposed Income Tax Regs., 67 Fed. Reg. 77717 (Dec.
19, 2002).
The final regulations under section 263(a) (the final or
final INDOPCO regulations), published in the Federal Register on
January 5, 2004, include both rules. Sec. 1.263(a)-4(e)(4)(i)
and (ii), Income Tax Regs. (“employee compensation * * *
including salary, bonuses and commissions” treated as
deductible), and sec. 1.263(a)-4(f)(l), Income Tax Regs. (12-
month rule, applicable to “amounts paid to create (or to
facilitate the creation of)” an intangible). Pursuant to section
1.263(a)-4(o), Income Tax Regs., the final regulations apply to
“amounts paid or incurred on or after December 31, 2003", which
is in accord with the statement in the proposed regulations that,
as proposed, section 1.263(a)-4 would apply to “amounts paid or
12
So named for the U.S. Supreme Court decision that was
the genesis of the regulations project that ultimately resulted
in the final regulations. See INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992).
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incurred on or after the date the final regulations are published
in the Federal Register.” Sec. 1.263(a)-4(o), Proposed Income
Tax Regs., 67 Fed. Reg. 77723 (Dec. 19, 2002).
Internal IRS Developments
The motions also reference a number of internal IRS
documents released by respondent to petitioners in connection
with July 1, 2002, Freedom of Information Act (FOIA) requests
made by petitioners’ counsel. One of those documents is entitled
“Case History Report Form, Internal Revenue Service – Office of
Chief Counsel”; it further states: “Case name: Capitalization of
Self-Created Intangibles Regulation” (case history report form).
It traces the Chief Counsel’s and Treasury Department’s actions
that resulted in the issuance of the proposed INDOPCO
regulations. It reflects that, on May 7, 2001, Chief Counsel and
Treasury Department officials met to discuss the scope of a
proposed regulations project regarding capitalization of self-
created intangibles and that, throughout the balance of 1991 and
into January 1992, when the ANPRM was issued, there were numerous
Chief Counsel – Treasury Department discussions. At first, when
the discussions began on August 1, 2001, they were with regard to
the issuance of “a moratorium on capitalization of intangibles in
examinations pending issuance of regulations”. Beginning on
January 10, 2002 (when “Treasury, the Chief Counsel, and
Commissioner (LMSB) decided that guidance should take the form of
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an * * * (ANPRM) and should not impose a moratorium on
examination”), the discussions turned to the drafting of the
ANPRM, which was filed with the Federal Register on January 23,
2002, and published the following day. See 67 Fed. Reg. 3461
(Jan. 24, 2002).
Another document obtained by petitioners pursuant to their
FOIA request and attached to their reply to respondent’s
objection to the motions is a memorandum dated February 26, 2002,
and entitled “Memorandum for LMSB and SB/SE [Small Business/
Self-Employed Division] Employees” (the LMSB-SB/SE memorandum or
the memorandum). The memorandum is from the commissioners of
those two divisions, and the subject of the memorandum is:
“Guidelines for the Application of Advance Notice of Proposed
Rulemaking for Intangibles Under Secs. 263(a)”. The memorandum
advises: “The rules and standards in the ANPRM are not Service
position and do not provide any authority for the concession of
[capitalization issues discussed in the ANPRM].” The memorandum
notes, however, the statement in the ANPRM that “the IRS and
Treasury Department expect to propose [the 12-month rule]” and
that that rule “would be consistent with * * * U.S. Freightways
Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001), [revg. 113
T.C. 329 (1999)] * * * [which] recognized a ‘a one-year rule’ for
purposes of allowing a deduction for prepaid license fees and
insurance premiums.” The memorandum states that, although “the
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ANPRM does not provide authority for present application of a 12-
month rule, it is likely that Treasury and the Service will
ultimately adopt such a rule in regulations”. The memorandum
concludes: “Given this likelihood, and considering the opinion
in U.S. Freightways Corp., we must consider whether it is an
efficient utilization of our resources to propose capitalization
of those expenditures, particularly in light of the relatively
short tax deferral period (one taxable year) that results from
the application of the 12-month rule.” Accordingly, the
memorandum recommends that, with respect to “examinations
initiated prior to the release of the regulations”, the issue of
whether to capitalize “certain short-term expenditures * * *
should be pursued”, but only where the examination “has [already]
resulted in the preparation of a Form 5701, Notice of Proposed
Adjustment (LMSB), or Form 4549, Revenue Agents Report (SB/SE).”
Otherwise, that issue “should not be pursued, in the absence of
contrary guidance.”
Discussion
I. Section 7430
A. General Scope
Section 7430 provides that a taxpayer may recover reasonable
costs, including attorney’s fees, incurred in connection with any
tax proceeding (administrative or judicial) against the United
States if the taxpayer is the prevailing party in the proceeding.
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Section 7430(c)(4)(B) provides that a taxpayer shall not be
treated as the prevailing party in any proceeding if the United
States establishes that its position in the proceeding was
substantially justified. See sec. 7430(c)(4)(B)(i). The
position of the United States in an administrative proceeding is
established as of the earlier of (1) the date the taxpayer
receives notice of a decision of the IRS Office of Appeals, or
(2) the date of the notice of deficiency. Sec. 7430(c)(7)(B).
The position of the United States in a deficiency proceeding in
this Court is that set forth in the Commissioner’s answer. E.g.,
Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997); see
sec. 7430(c)(7)(A).
B. Substantial Justification
For purposes of section 7430, a position of the United
States is substantially justified if it has a reasonable basis in
both law and fact. E.g., Maggie Mgmt. Co. v. Commissioner, supra
at 443. The determination of the reasonableness of that position
is based upon the available facts that formed the basis for the
position, as well as any controlling legal precedent. Id. The
inquiry is not a static one; that is, a position of the United
States that was reasonable when established may become
unreasonable in light of changed circumstances. See, e.g., Wasie
v. Commissioner, 86 T.C. 962, 969 (1986); see also sec. 301.7430-
5(c)(2), Proced. & Admin. Regs. (any award of administrative
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costs may be limited to costs attributable to the portion of the
proceeding during which the position of the IRS was not
substantially justified). The fact that respondent ultimately
concedes an issue does not, by itself, establish that his prior
position with respect to that issue was unreasonable. Maggie
Mgmt. Co. v. Commissioner, supra at 443. However, it is a factor
that may be considered. Id.
There is a rebuttable presumption of no substantial
justification if the IRS “did not follow its applicable published
guidance in the administrative proceeding.” Sec.
7430(c)(4)(B)(ii). The term “applicable published guidance” is
defined to mean “(I) regulations, revenue rulings, revenue
procedures, information releases, notices and announcements, and
(II) * * * private letter rulings, technical advice memoranda,
and determination letters [issued to the taxpayer].” Sec.
7430(c)(4)(B)(iv). Section 7430(c)(4)(B)(iii) requires that
courts “take into account whether the United States has lost in
courts of appeal[s] [sic] for other circuits on substantially
similar issues” in determining “whether the position of the
United States was substantially justified”.
II. Summary of the Parties’ Arguments
A. Petitioners’ Arguments
Petitioners make the following arguments in support of their
position:
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(1) Beginning on March 21, 2000, when the IRS released its
2000 Priority Guidance Plan, listing “loan origination costs”
among the expenditures to be addressed in “[g]uidance on
deduction and capitalization”, respondent was “pursuing” the
petitioners for deficiencies “under a litigating position
[capitalization of such costs] that * * * [he] knew * * * would
soon be reversed.” Petitioners reason that respondent’s
litigating position, even though ultimately successful in Lychuk
v. Commissioner, 116 T.C. 374 (2001), was not substantially
justified because respondent’s placement of the issue of “loan
origination costs” on the tax accounting issues list for priority
guidance “shows not only the high priority accorded to the issue
by the IRS at least as of March 2000, but also the IRS’
affirmative intent to actually publish guidance * * * on this
controversial issue in 2000.” Petitioners also point to the
internal IRS and joint IRS –- Treasury Department meetings in
2001 through 2002, which ultimately led to the January 24, 2002,
issuance of the ANPRM. Petitioners consider those meetings
evidence of respondent’s then present intent to concede issues
that petitioners were being forced to litigate in the
consolidated cases during that timeframe.
(2) Under section 7430(c)(4)(B)(iii), we must take into
account the fact that the Commissioner’s position was overruled
in PNC Bancorp, Inc. v. Commissioner, 212 F.3d 822 (3d Cir.
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2000), and Wells Fargo & Co. and Subs. v. Commissioner, 224 F.3d
874 (8th Cir. 2000), in determining whether respondent’s present
position seeking to capitalize ACC’s loan origination/acquisition
costs and professional fees was substantially justified.
Petitioners argue that respondent was not substantially justified
in litigating his position before “finally conceding” after “two
years had past [sic] since the PNC and Wells Fargo circuit court
decisions.”
(3) Because respondent did not concede the loan
origination/acquisition costs and professional fees issues until
June 10, 2002, which was months after the issuance of the ANPRM,
Announcement 2002-9, 2002-1 C.B. 536, and CCN 2002-21, and years
after the issuance of Rev. Rul. 99-23, 1999-1 C.B. 998,13
respondent “did not follow * * * [his] own published guidance,
[and, therefore, he] must meet a higher standard of proof to
rebut the presumption [of no justification] created by * * *
[section] 7430(c)(4)(B)(ii) * * * [, which he] has not met”.
B. Respondent’s Arguments
1. Loan Origination/Acquisition Costs
Capitalization is substantially justified by the Court’s
decision in Lychuk v. Commissioner, supra, which upheld the
Commissioner’s capitalization of costs identical to those at
issue in the consolidated cases; i.e., employee salaries and
13
See supra note 11.
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benefits paid by ACC in connection with its loan origination/
acquisition activities.
2. Professional Fees
Capitalization is “consistent with the capitalization
arguments presented for the loan origination/acquisition and
offering expenses of ACC in [Lychuk].” Respondent argues that
“the professional fees at issue were related to ACC’s securing a
line of credit with NBD Bank, N.A., and, thus, were similar to
the offering expenses incurred in securing the source of
borrowing in Lychuk.” Also, like the offering expenses
capitalized in Lychuk, they established an intangible asset (a
line of credit) that “extended beyond the year in which the fees
were incurred.”
3. Timeliness of Respondent’s Concessions
a. Loan Origination/Acquisition Costs
Respondent’s April 19, 2002, concession that petitioners’
loan origination/acquisition costs for the audit years are
deductible, just over 1 month after the issuance of CCN 2002-21,
on March 15, 2002 (wherein the IRS announced that it would no
longer seek to capitalize employee compensation related to a
capital transaction other than bonuses and commissions paid with
respect to the transaction), was timely.
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b. Professional Fees
Respondent does not appear to consider timeliness to be an
issue because the deductibility of petitioners’ professional fees
for the audit years was conceded (first in the trial memorandum
filed May 31, 2002, and, again, in the Stipulation of Settled
Issues filed June 10, 2002), in deference to the anticipated (but
not yet formally adopted) 12-month rule.
III. Analysis
A. Introduction
Petitioners’ argument that respondent’s proposed
capitalization of the loan origination/acquisition costs and
professional fees at issue was not substantially justified within
the meaning of section 7430(c)(4)(B) appears to proceed down
three separate but, ultimately, converging roads: Respondent has
been improperly litigating against (1) a position that he knew,
as early as March 21, 2000, would be adopted by the IRS; (2)
controlling, adverse caselaw in certain U.S. Courts of Appeals
(PNC Bancorp, Inc. v. Commissioner, 212 F.3d 822 (3d Cir. 2000),
and Wells Fargo & Co. and Subs. v. Commissioner, 224 F.3d 874
(8th Cir. 2000)); and (3) his own published guidance in the form
of Rev. Rul. 99-23, 1999-1 C.B. 998, the ANPRM issued January 24,
2002, Announcement 2002-9, issued February 15, 2002, and CCN
2002-21 issued March 15, 2002. Petitioners’ first two approaches
relate to the deductibility of the loan origination/acquisition
- 23 -
costs. Their third approach relates to the deductibility of both
those costs and the professional fees, and it posits that
respondent’s concession in June of 2002 of both issues, almost 3
months after the issuance of CNN 2002-21 and 4 months after
issuance of the ANPRM and Announcement 2002-9 (and some 3 years
after the issuance of Rev. Rul. 99-23) was not timely. We
consider each argument in turn.
B. Effect of Respondent’s Litigating Against a Position
Likely To Be Adopted in the Future
Petitioners characterize the listing of “loan origination
costs” as an item slated for 2000 IRS published guidance as a
step that “evidences years of intensive, and ultimately
successful, lobbying by the likes of the INDOPCO Coalition to
impress its views on the IRS.” Petitioners appear to be
suggesting that the selection of loan origination costs for 2000
published guidance was tantamount to an IRS decision, on March
21, 2000, to treat those costs as deductible in the taxable year
incurred. Therefore, respondent was not substantially justified
in seeking to capitalize petitioners’ loan origination/
acquisition costs in 2000, despite the subsequent 2001 decision
of the Tax Court in Lychuk v. Commissioner, 116 T.C. 374 (2001),
sustaining the Commissioner’s capitalization of those costs. We
disagree.
As noted supra, there is a rebuttable presumption of no
substantial justification if respondent fails to follow his own
- 24 -
“applicable published guidance in the administrative proceeding”.
Sec. 7430(c)(4)(B)(ii). The term “applicable published guidance”
is defined to mean “regulations, revenue rulings, revenue
procedures, information releases, notices, and announcements,”
and, if issued to the taxpayer, “private letter rulings,
technical advice memoranda, and determination letters.” Sec.
7430(c)(4)(B)(iv); see also Rauenhorst v. Commissioner, 119 T.C.
157, 170-171 (2002), wherein we refused “to allow * * * [the
Commissioner’s] counsel to argue the legal principles of * * *
[court] opinions against the principles and public guidance
articulated in the Commissioner’s currently outstanding revenue
rulings.”
The 2000 Priority Guidance Plan does not constitute
“applicable published guidance” that would trigger a rebuttable
presumption of no substantial justification pursuant to section
7430(c)(4)(B)(ii) because it is not among the IRS pronouncements
listed in section 7430(c)(4)(B)(iv). And because it was not a
revenue ruling (or guidance of comparable stature), it did not,
under Rauenhorst, prohibit respondent from litigating to require
the capitalization of loan origination/acquisition costs. More
fundamentally, the 2000 Priority Guidance Plan is not the type of
“guidance” contemplated by either section 7430(c)(4)(B)(ii) or
Rauenhorst. It is, on its face, no more that an informal
announcement of anticipated “guidance projects” that “may be
- 25 -
published in 2000", not specific guidance to taxpayers on any
particular issue. Petitioners’ suggestion that the inclusion of
loan origination costs in the list of planned projects was
intended to be an unambiguously favorable response to taxpayer
lobbying efforts to have the IRS treat those costs as deductible
in the year incurred is sheer speculation without support in the
record.
Petitioners also imply that they were improperly required to
“expend their resources” litigating the deductibility of loan
origination/acquisition costs while the IRS and Treasury
Department had meetings, in May, June, and July 2001, in
connection with the project that eventually led to the IRS’s
“change in litigating position” with respect to those costs. The
internal IRS and the IRS-Treasury Department meetings and
correspondence referred to in the case history report form
reflect efforts to reach a decision on the capitalization of
various types of expenses, including those at issue in the
consolidated cases, not the decision itself. In fact, the
discussions, between August 1, 2001, and January 10, 2002,
concerning the issuance of a “moratorium” on IRS examiners
capitalizing intangibles, pending issuance of regulations, were
aborted when it was decided to issue the ANPRM and “not impose a
moratorium on capitalization of intangibles in examinations”.
- 26 -
We conclude that none of the internal administrative actions
referred to by petitioners indicate a present intent to permit a
deduction for loan origination/acquisition costs in the year
incurred. Moreover, even if they did, those actions do not
constitute “applicable published guidance” under section
7430(c)(4)(B)(ii), (iv), or “public guidance” under Rauenhorst v.
Commissioner, supra. Therefore, none of those actions is
sufficient to support the conclusion, or even raise a
presumption, that respondent was not substantially justified in
seeking to capitalize ACC’s 1996 through 1998 loan origination/
acquisition costs.
C. Controlling Effect of the Courts of Appeals Decisions in
PNC Bancorp and Wells Fargo
Petitioners argue that, after the decisions in PNC Bancorp,
Inc. v. Commissioner, 212 F.3d 822 (3d Cir. 2000), and Wells
Fargo & Co. and Subs. v. Commissioner, 224 F.3d 874 (8th Cir.
2000), reversing this Court’s capitalization of employee
salaries, respondent was improperly seeking to establish a split
of authority in the U.S. Courts of Appeals by continuing to
litigate the deductibility of the loan origination/acquisition
costs. In support of that argument, petitioners cite section
7430(c)(4)(B)(iii), which requires that we “take into account
whether * * * [respondent] has lost in courts of appeal[s] [sic]
for other circuits on substantially similar issues”. Petitioners
also cite two cases in which the Court of Appeals for the Fifth
- 27 -
Circuit awarded attorney’s fees pursuant to section 7430 under
circumstances in which the Commissioner appealed an adverse
decision of the Tax Court in the face of adverse decisions on the
same issue in other courts of appeals. See Allbritton v.
Commissioner, 37 F.3d 183, 184-185 (5th Cir. 1994), affg. T.C.
Memo. 1993-490; Estate of Perry v. Commissioner, 931 F.2d 1044,
1046 (5th Cir. 1991).
In Lychuk v. Commissioner, 116 T.C. at 405-406, we
distinguished the facts of that case from the facts in Wells
Fargo & Co. and Subs. v. Commissioner, supra. We said that, in
Wells Fargo, the services performed by the bank’s employees as to
the capital transaction under consideration “were extraordinary
in the daily course of their employment * * *. They would have
been paid the same salaries regardless of whether the transaction
was consummated.” Lychuk v. Commissioner, supra at 405. By
contrast, in Lychuk (and in the consolidated cases) the employees
spent much or all of their time working on installment contract
acquisitions, and the employees’ compensation “hinged directly on
the number of installment contracts [acquired by ACC]”. Id. at
405. We also stated our belief in Lychuk that PNC Bancorp, Inc.
v. Commissioner, supra, is not “so factually distinguishable from
the instant case [and, by extension, from the consolidated cases]
to support contrary results.” Id. at 407. The issue, then, is
whether the 2000 reversal of this Court by the Court of Appeals
- 28 -
for the Third Circuit in PNC Bancorp requires a finding that
respondent was not substantially justified in seeking to
capitalize ACC’s loan origination/ acquisition costs. We do not
believe so.
At the time the notices of deficiency were issued to
petitioners, capitalization of employee salaries allocable to
capital transactions had, in various instances, been upheld by
the Supreme Court in Commissioner v. Idaho Power Co., 418 U.S. 1,
13 (1974), by other U.S. Courts of Appeals (e.g., NCNB Corp. v.
United States, 651 F.2d 942, 963 (4th Cir. 1981), vacated on
other grounds 684 F.2d 285 (4th Cir. 1982); Cagle v.
Commissioner, 539 F.2d 409, 415-416 (5th Cir. 1976) (fee paid to
managing partner of a partnership), affg. 63 T.C. 86 (1974);
Briarcliff Candy Corp. v. Commissioner, 475 F.2d 775, 781 (2d
Cir. 1973), revg. and remanding T.C. Memo. 1972-43), by the Court
of Claims in S. Natural Gas Co. v. United States, 188 Ct. Cl.
302, 412 F.2d 1222, 1265 (1969), and by the Tax Court (e.g.,
Norwest Corp. v. Commissioner, 112 T.C. 89 (1999); PNC Bancorp,
Inc. v. Commissioner, 110 T.C. 349 (1998); Perlmutter v.
Commissioner, 44 T.C. 382, 404 (1965), affd. 373 F.2d 45 (10th
Cir. 1967)).
The cases cited by petitioners, in which attorney’s fees
were awarded under section 7430, are readily distinguishable. In
Allbritton v. Commissioner, supra, the Commissioner’s position
- 29 -
had been previously rejected by three U.S. Courts of Appeals, by
this Court (upon reconsideration of a decision that had been
reversed on appeal), and by “several” U.S. District Courts. The
Court of Appeals stated that it had been unable to “find a single
published opinion supporting the Commissioner’s position.”
Allbritton v. Commissioner, id. at 184. In Estate of Perry v.
Commissioner, supra at 1046, the Commissioner had lost “identical
appeals in two other circuits”, and the Court of Appeals for the
Fifth Circuit rejected the Commissioner’s argument that a
contrary decision by that same court justified his litigating
position merely because that decision had not been specifically
overruled. The Court of Appeals noted that, in the context of an
amendment to the Code, “the clear and unequivocal language of
which unmistakably overrules” its earlier decision, “the absence
of a new decision * * * does not equate with unsettled law or
first impression”. Id. Unlike the circumstances present in
Allbritton and Estate of Perry, respondent in the consolidated
cases can point to numerous cases that reasonably support his
litigating position.
We conclude that the decisions of the Courts of Appeals in
PNC Bancorp, Inc. v. Commissioner, supra, and Wells Fargo & Co.
and Subs. v. Commissioner, supra, did not preclude respondent’s
reliance on inconsistent Supreme Court, Courts of Appeals, Court
of Claims, and Tax Court authority (buttressed in May 2001, by
- 30 -
our decision in Lychuk) in litigating the deductibility of the
loan origination/acquisition costs. Therefore, those cases do
not require us to decide that respondent was not substantially
justified in seeking to capitalize those costs.
D. Controlling Effect of Rev. Rul. 99-23, the ANPRM,
Announcement 2002-9, and U.S. Freightways Corp.
1. Rev. Rul. 99-23
Petitioners argue that respondent’s issuance of Rev. Rul.
99-23, 1999-1 C.B. 998, and his concession based on that ruling
in Wells Fargo & Co. and Subs. v. Commissioner, supra, of the
deductibility of the costs attributable to the “investigatory
stage” of the transaction results in a presumption under section
7430(c)(4)(B)(ii) of no substantial justification for
respondent’s litigating position with respect to the loan
origination/acquisition costs.
As noted supra note 11, Rev. Rul. 99-23, 1999-1 C.B. at
1000, classifies as an expense eligible for amortization as a
startup expenditure under section 195 (and, in the context of a
business expansion, as a deductible expense) “investigatory
costs” that are “paid or incurred in order to determine whether
to enter a new business and which new business to enter”.
Although there is an undeniable similarity between the
“investigatory costs” described in Rev. Rul. 99-23, supra, as
eligible for amortization under section 195 and the credit
analysis activities performed by ACC’s employees preparatory to
- 31 -
ACC’s purchase of any installment contract, we find that
respondent’s refusal to concede the deductibility of the loan
origination/acquisition costs in light of Rev. Rul. 99-23, supra
was substantially justified.
Respondent does not address the relevance of Rev. Rul. 99-
23, 1999-1 C.B. 998, to the deductibility of the loan
origination/acquisition costs in his objection to the motions.
He does, however, address the applicability of that ruling to
costs incurred in connection with the acquisition of credit card
receivables in an IRS field service advice memorandum to the
Associate Area Counsel (LMSB), Philadelphia (Field Service Advice
200136010 (Sept. 7, 2001)) (the FSA), which we assume expresses
respondent’s position on that issue.14 The costs in question are
described as “expenses of determining whether to acquire certain
loans, and which loans to acquire”, a description that resembles
the credit analysis activities of ACC’s employees. In the FSA,
respondent concludes that “no expression of congressional intent,
and neither * * * [section] 195 nor its legislative history,
suggest [sic] that costs of investigating the acquisition of a
specific capital asset are currently deductible”. Respondent
concludes that “the holdings in Rev. Rul. 99-23 are not
14
Although they have no precedential status, field service
advice memoranda may be cited as an expression of the
Commissioner’s position. See Rhone-Poulenc Surfactants &
Specialities, L.P. v. Commissioner, 114 T.C. 533, 543 (2000),
appeal dismissed and remanded 249 F.3d 175 (3d Cir. 2001).
- 32 -
inconsistent with the capitalization of the acquisition costs at
issue [in the FSA]”.
The legislative history of section 195 lends support to
respondent’s position in the FSA that that provision was not
intended to apply to the cost of investigating the acquisition of
a specific capital asset. H. Rept. 96-1278, 1980-2 C.B. 709, is
the report of the Committee on Ways and Means (the committee)
that accompanied H.R. 7956, which, when enacted in the
Miscellaneous Revenue Act of 1980, Pub. L. 96-605, sec. 102, 94
Stat. 3522, added section 195 to the Code. In describing the
pre-section 195 law, the committee makes the following
observation:
Expenditures made in acquiring or creating an
asset which has a useful life that extends beyond the
taxable year normally must be capitalized. These costs
ordinarily may be recovered through depreciation or
amortization deductions over the useful life of the
asset. However, costs which relate to an asset with
either an unlimited or indeterminate useful life may be
recovered only upon a disposition or cessation of the
business. [H. Rept. 96-1278, 1980-2 C.B. at 712.]
Under the heading “Reasons for change”, the committee expresses
its belief that providing “for the amortization of business
startup and investigatory expenses will encourage formation of
new businesses and decrease controversy and litigation arising
under present law with respect to the proper income tax
classification of startup expenditures.” Id. Those statements,
when read together, indicate that the committee viewed
- 33 -
investigatory and startup costs in connection with the
acquisition of a new business as particularly apt candidates for
amortization because the taxpayer’s recovery of those costs
otherwise would not be available until disposition or abandonment
of the new business. The committee, thus, appears to view
section 195 as an exception to the rule that the costs of
“acquiring or creating an asset which has a useful life that
extends beyond the taxable year normally must be capitalized”, a
rule that the committee views as intrinsically fair when the
costs are not incurred in connection with the acquisition of a
business, since, in that situation, the costs are normally
recovered over the useful life of the asset. Id.
Also, because (1) ACC was in the business of acquiring
dealer installment contracts and (2) the credit analysis
activities related to specific installment contracts that had
been selected for acquisition, solely contingent on the debtor’s
creditworthiness, it is not at all clear that those activities
are not akin to the post- “final decision” “‘due diligence’
and/or ‘investigatory’ expenses” capitalized by the Court of
Appeals for the Eighth Circuit in Wells Fargo & Co. and Subs. v.
Commissioner, 224 F.3d at 889.
In light of the foregoing, we find that respondent was
substantially justified in not considering Rev. Rul. 99-23,
supra, to be controlling published guidance requiring the loan
- 34 -
origination/acquisition costs to be treated as deductible in the
year incurred.
2. The ANPRM and Announcement 2002-9
Petitioners suggest that, after the January 24, 2002,
issuance of the ANPRM and the February 15, 2002, issuance of (the
identical) Announcement 2002-9, which indicate the future
adoption of the 12-month rule, respondent was not substantially
justified in taking the position, expressed in the LMSB-SB/SE
memorandum, that IRS examiners should pursue the capitalization
of expenses that would be deductible under the 12-month rule
provided the issue had already been raised in a revenue agent’s
report or in a notice of proposed adjustment. Petitioners also
suggest that the LMSB-SB/SE memorandum is indicative of an
improper IRS policy (pursued in the consolidated cases) “to
continue with a case based on a litigating position that
Respondent will soon change, unless it is decided to be an
inefficient use of their resources.” We interpret petitioners’
position to be that, after the issuance of the ANPRM and
Announcement 2002-9, respondent was no longer substantially
justified in litigating the capitalization of either the
professional fees or the loan origination/acquisition costs.
The ANPRM and Announcement 2002-9 do not advise taxpayers of
an IRS decision to cease capitalizing costs related to
intangibles that had been previously subject to capitalization by
- 35 -
the Commissioner. Rather, as noted supra, they describe “rules
and standards” that the IRS and Treasury “expect to propose” (not
final rules and standards), and they invite public comments
“regarding those standards”. Although they suggest that a
deduction for “all employee compensation” (which would include
ACC’s loan origination/acquisition costs) might be proper, that
approach is only one of several alternative approaches to the
treatment of employee compensation suggested therein; and
deductibility of ACC’s professional fees under the 12-month rule
is, at best, unclear, as those costs are not among the costs
specifically referred to as deductible when they fall within the
12-month rule. Moreover, to conclude that the ANPRM and
Announcement 2002-9 constitute “applicable published guidance”
under section 7430(c)(4)(B)(iv), binding on respondent with
respect to the capitalization rules discussed therein, would be
to negate the December 31, 2003, effective date provided in the
final INDOPCO regulations and anticipated in the proposed
regulations, a date that respondent has uniformly enforced in
connection with requests to change to a method of accounting
provided by the final regulations (and, in particular, by section
1.263(a)-4(f)(1), Income Tax Regs., which sets forth the 12-month
rule). See Rev. Proc. 2004-23, sec. 2.07, 2004-1 C.B. 785, 786.
Under section 7430(c)(4)(B)(iv), “notices” and
“announcements” are included in the list of IRS pronouncements
- 36 -
that constitute “applicable published guidance” for purposes of
establishing a rebuttable presumption of “no justification” under
section 7430(c)(4)(B)(ii). Proposed regulations are not included
in that list. As an “advance notice of proposed rulemaking”,
both the ANPRM and Announcement 2002-9 are no more than “advance
notice” of a future issuance (proposed regulations) that, when
issued, will not constitute “applicable published guidance”.
Therefore, it is not clear that such pronouncements can, under
any circumstances, constitute “applicable published guidance”.
It is not necessary to resolve that issue in this case, however,
because the ANPRM and Announcement 2002-9 do not constitute
“guidance” in any sense of that term. They merely suggest
principles of expense capitalization or deductibility that may be
adopted in the future. They do not purport to change existing
administrative positions. Therefore, they did not negate the
authorities under the then existing law (discussed supra) that
render respondent’s litigating position with respect to loan
origination/acquisition costs and professional fees substantially
justified.
Moreover, we find no inequity or impropriety in respondent’s
decision, reflected in the LMSB-SB/SE memorandum, to capitalize
selectively expenses that otherwise would be deductible under the
12-month rule, if and when adopted, in order to accomplish an
“efficient utilization of * * * resources”. The IRS is not
- 37 -
precluded from challenging the tax treatment of an item with
respect to less than all similarly situated taxpayers subject to
such challenge. As stated by the Court of Federal Claims in City
of Galveston v. United States, 33 Fed. Cl. 685, 707-708 (1995),
affd. 82 F.3d 433 (Fed. Cir. 1996):
The mere fact that another taxpayer has been treated
differently from the plaintiff does not establish the
plaintiff’s entitlement. The fact that all taxpayers
or all areas of the tax law cannot be dealt with by the
Internal Revenue Service with equal vigor and that
there thus may be some taxpayers who avoid paying the
tax cannot serve to release all other taxpayers from
the obligation. The Commissioner’s failure to assess
deficiencies against some taxpayers who owe additional
tax does not preclude the Commissioner from assessing
deficiencies against other taxpayers who admittedly owe
additional taxes on the same type of income. A
taxpayer cannot premise its right to an exemption by
showing that others have been treated more generously,
leniently or even erroneously by the IRS. The fact
that there may be some taxpayers who have avoided
paying a tax does not relieve other similarly situated
taxpayers from paying their taxes. [Fn. refs.
omitted.]
Accord Austin v. United States, 611 F.2d 117, 119-120 (5th Cir.
1980); Kehaya v. United States, 174 Ct. Cl. 74, 355 F.2d 639, 641
(1966).
3. U.S. Freightways Corp.
We also conclude that the adoption of the 12-month rule by
the Court of Appeals for the Seventh Circuit in U.S. Freightways
Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001), revg. 113
T.C. 329 (1999), does not require a finding that respondent was
not substantially justified in seeking to capitalize expenses
- 38 -
otherwise deductible under that rule (in this case, the
professional fees) after the issuance of that decision on
November 6, 2001. U.S. Freightways Corp. is inconsistent with
the decision of this Court, which it reversed, and with the
decisions of other U.S. Courts of Appeals, which have held or
suggested that expenses that give rise to property with a life
extending beyond the taxable year in which the expense is
incurred must be capitalized. See, e.g., Jack’s Cookie Co. v.
United States, 597 F.2d 395, 402 (4th Cir. 1979); Am. Dispenser
Co. v. Commissioner, 396 F.2d 137, 138 (2d Cir. 1968), affg. T.C.
Memo. 1967-153; Sears Oil Co. v. Commissioner, 359 F.2d 191, 197
(2d Cir. 1966), affg. in part, revg. in part, and remanding T.C.
Memo. 1965-39; Commissioner v. Boylston Mkt. Association, 131
F.2d 966, 968 (1st Cir. 1942), affg. a Memorandum Opinion of the
Board of Tax Appeals. Those cases provide substantial
justification for respondent’s attempt to capitalize the
professional fees, despite the decision of the Court of Appeals
in U.S. Freightways Corp.
E. Timeliness of Respondent’s Concessions
Respondent’s initial published guidance that he would no
longer contest or litigate the deductibility of employee
compensation (here, the loan origination/acquisition costs)
appeared on March 15, 2002, with the issuance of CCN 2002-21, and
his initial published guidance adopting the 12-month rule
- 39 -
(applicable to the professional fees) was the promulgation of
section 1.263(a)-4(f)(1), Income Tax Regs., as part of the final
INDOPCO regulations, effective December 31, 2003.15 Respondent’s
concession with respect to the deductibility of the professional
fees was obviously timely as it preceded respondent’s adoption of
the 12-month rule. The only remaining issue is whether
respondent’s April 19, 2002, concession with respect to the
deductibility of the loan origination/acquisition costs was
timely.
Respondent’s concession with respect to the deductibility of
the loan origination/acquisition costs occurred 1 month and 4
days after issuance of CCN 2002-21. Respondent argues that “he
should be allowed a reasonable period of time, following his
change in position * * * to concede * * * [the deductibility of
the loan origination/acquisition costs] in pending cases”, and
that the slightly more than 1 month between the issuance of CCN
2002-21 and his concession is reasonable. We agree.
15
The 12-month rule was also contained in the proposed
regulations issued on Dec. 19, 2002. Although proposed
regulations do not constitute “applicable published guidance”
under sec. 7430(c)(4)(B)(ii) and (iv), we have considered them as
representing respondent’s position on an issue (but lacking the
effect of law). See, e.g., F.W. Woolworth Co. v. Commissioner,
54 T.C. 1233, 1265-1266 (1970); Allen v. Commissioner, T.C. Memo.
1988-166 n.44. We are not at this time required to decide
whether proposed regulations constitute a position against which
respondent may not litigate, consistent with the rationale of
Rauenhorst v. Commissioner, 119 T.C. 157, 170-173 (2002), because
the proposed INDOPCO regulations, like the final regulations,
postdate respondent’s concessions in the consolidated cases.
- 40 -
In Stieha v. Commissioner, 89 T.C. 784, 791 (1987), we
stated that the Commissioner must review the taxpayer’s case,
following adverse, controlling litigation, “in a reasonable and
timely manner”. Accord Mid-Del Therapeutic Ctr., Inc. v.
Commissioner, T.C. Memo. 2000-383. Correspondingly, respondent
must demonstrate that he acted “in a reasonable and timely
manner” after the issuance of CCN 2002-21 preparatory to
conceding the deductibility of the loan origination/acquisition
costs. We find that he so acted. Respondent’s counsel, Mr.
Skinner, was under instructions to confirm his office’s position
with respect to the consolidated cases in light of CCN 2002-21,
and immediately upon obtaining confirmation that he should
concede the deductibility of the loan origination/acquisition
costs, he contacted petitioners’ counsel to concede that issue.
The same or even longer periods between the event requiring the
Commissioner to concede an issue and the actual concession have
been held to be reasonable. See Harrison v. Commissioner, 854
F.2d 263, 265 (7th Cir. 1988) (Government’s conduct considered
“reasonable” where, after being advised that the partnership in
which the taxpayer was a limited partner had received a “no-
change” letter, the Government’s counsel conceded the case
“within a month” during which time counsel “verified information
demonstrating that that was the proper course”), affg. T.C. Memo.
1987-52; Ashburn v. United States, 740 F.2d 843, 846, 850-851
- 41 -
(11th Cir. 1984) (Government’s conduct considered “reasonable”
and “substantially justified” where it took 11 months after the
taxpayer filed his complaint for Government counsel to obtain
from the IRS and review the relevant administrative files and,
after deciding to concede the Government’s case, an additional 40
days to obtain permission to concede from the IRS and the Review
Section of the Department of Justice); White v. United States,
740 F.2d 836, 842 (11th Cir. 1984) (Government’s concession of an
issue less than 3 months after taxpayer raised it in an amended
complaint considered “reasonable” behavior and, therefore,
“substantially justified”); Shifman v. Commissioner, T.C. Memo.
1987-347 (Government’s concession within 2 months after the
petition was filed considered “reasonable” thereby barring
taxpayer’s recovery of litigating costs under section 7430).16
16
Harrison v. Commissioner, 854 F.2d 263 (7th Cir. 1998),
affg. T.C. Memo. 1987-52 and Shifman v. Commissioner, T.C. Memo.
1987-347, were decided under sec. 7430 before it was amended by
the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(d)(1), 100
Stat. 2752, to substitute “was not substantially justified” for
“was unreasonable” in describing a Government position that could
give rise to an award of reasonable litigation costs under that
provision. As we noted in Shifman v. Commissioner, supra at note
5: “this Court has previously held that the test of whether a
Government action is ‘substantially justified’ is essentially one
of reasonableness” (citing Baker v. Commissioner, 83 T.C. 822,
828 (1984)), vacated and remanded on another issue 787 F.2d 637
(D.C. Cir. 1986). Ashburn v. United States, 740 F.2d 843 (11th
Cir. 1984), and White v. United States, 740 F.2d 836 (11th Cir.
1984), were decided under the Equal Access to Justice Act (EAJA),
28 U.S.C. sec. 2412 (2000). A principal reason for the enactment
of sec. 7430 was to extend the relief afforded by EAJA to
proceedings in this Court so that “one set of rules * * * [would]
(continued...)
- 42 -
Petitioners reliance on Stieha v. Commissioner, supra, is
misplaced. In that case, after this Court issued a dispositive
decision that caused the Commissioner’s position to no longer be
substantially justified, the Commissioner continued to oppose the
taxpayer’s motion to dismiss, ignoring our decision. The
Commissioner ultimately conceded the case more than 4 months
after the release of our decision. Under the circumstances, we
found that the Commissioner’s “failure to review petitioners’
case in a reasonable and timely manner” caused the taxpayer to
incur “more attorneys fees than should have been necessary.”
Stieha v. Commissioner, 89 T.C. at 791. Here, after the issuance
of CCN 2002-21, respondent’s counsel took no steps other than to
confirm his office’s position in the consolidated cases in light
of that notice, and immediately upon being told to concede the
deductibility of the loan origination/acquisition costs at issue,
he did so.
We conclude that respondent was substantially justified in
not conceding the deductibility of the loan origination/
acquisition costs until April 19, 2002, or the deductibility of
the professional fees until he filed his trial memorandum on May
31, 2002, or, alternatively, until the Stipulation of Settled
16
(...continued)
apply to awards of litigation costs in tax cases whether the
action is brought in a U.S. District Court, the Court of Claims,
or the U.S. Tax Court.” H. Rept. 97-404, at 11 (1982).
- 43 -
Issues was submitted to the Court on June 10, 2002.
IV. Conclusion
Respondent was substantially justified in seeking to
capitalize the loan origination/acquisition costs and
professional fees at issue in the consolidated cases until the
dates on which he conceded those issues as determined herein.
An appropriate order denying
petitioners’ motions for costs
under section 7430 will be issued.