T.C. Memo. 2006-135
UNITED STATES TAX COURT
SCOTT AND SORAYA MALOWNEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19262-03. Filed June 27, 2006.
O. Christopher Meyers, for petitioners.
William F. Castor, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: This matter is before the Court on
petitioners’ motion for litigation and administrative costs
pursuant to section 74301 and Rule 231. The Court held for
1
Unless otherwise indicated, all section references are to
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.
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petitioners in a bench opinion dated January 11, 2005. We
incorporate herein the facts set forth in that opinion.
Background
In 1996, Soraya Malowney decided to start a business
involving the rehabilitation and sale of real estate. Mrs.
Malowney had previous experience in the design and refurbishing
of several homes, some of which were her former personal
residences. After researching and evaluating several properties,
she purchased, for $110,000, property located at 215 Northwest
74th Street in Lawton, Oklahoma. After purchasing the property,
she discovered that it required an extensive amount of work. In
October 1996, she began the renovation process and substantially
completed the project by June 1997.
In 1997, petitioners hired a real estate agent and listed
the property for $214,000. In 1999, after hiring another agent
and reducing the sales price, petitioners sold the property for
$162,667. On Schedule C, Profit or Loss From Business, of their
1999 Federal income tax return, petitioners claimed a $52,046
business loss (i.e., sales proceeds of $162,500 less purchase
price of $110,000, improvements of $95,736, commissions of
$7,625, and other expenses of $1,185).
On August 28, 2003, respondent issued petitioners a notice
of deficiency relating to 1999 and determined that petitioners
were not in a trade or business. On November 12, 2003,
petitioners, while residing in Abilene, Texas, filed their
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petition with the Court. After a brief trial on January 10,
2005, the Court determined that petitioners were engaged in a
trade or business. On March 14, 2005, the Court filed
petitioners’ motion for litigation and administrative costs. The
Court, on May 4, 2005, filed respondent’s response to
petitioners’ motion for litigation and administrative costs.
Discussion
Petitioners contend that they meet the requirements of
section 7430 and, thus, are entitled to recover litigation and
administrative costs. Respondent, however, contends that
petitioners failed to meet the requirements of section
7430(c)(4)(B) because respondent’s position was substantially
justified and petitioners failed to delineate sufficiently the
nature and amount of each item of cost.
The prevailing party in a Tax Court proceeding may recover
administrative or litigation costs. See sec. 7430(a); Rule 231.
Petitioners bear the burden of proving that they substantially
prevailed and meet each requirement of section 7430. Rule
232(e). Petitioners, however, will not be treated as the
prevailing party if respondent’s position was substantially
justified (i.e., had a reasonable basis in law and fact). Sec.
7430(c)(4)(B); see Pierce v. Underwood, 487 U.S. 552, 565 (1988).
Substantial justification is based upon respondent’s position on
the date he issued the notice of deficiency and after filing his
answer with this Court. Maggie Mgmt. Co. v. Commissioner, 108
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T.C. 430, 442 (1997) (citing Huffman v. Commissioner, 978 F.2d
1139, 1147 (9th Cir. 1992), affg. in part, revg. in part and
remanding T.C. Memo. 1991-144).
On the date respondent issued the notice of deficiency and
after filing his answer, respondent maintained the position that
petitioners were not, in 1999, in the business of refurbishing or
selling real estate. As a result, respondent contends that
petitioners’ “house should have been treated as investment
property and the loss from the sale should have been treated as a
capital loss.” Indeed, in previous years, petitioners claimed,
but subsequently acquiesced to respondent’s disallowance of,
certain reported business expenses. Thus, respondent’s position
was substantially justified and reasonable based upon the
information available to him at the time he took a position in
the administrative and judicial proceedings. The fact that
petitioners established at trial that they were engaged in a
trade or business does not diminish the reasonableness of
respondent’s position. See Wasie v. Commissioner, 86 T.C. 962,
969 (1986).
The second basis for respondent’s objection to petitioners’
motion to recover litigation costs is that petitioners failed to
provide a detailed affidavit setting forth the nature and amount
of each cost. A motion for award of costs must be accompanied by
a “detailed affidavit * * * which sets forth distinctly the
nature and amount of each item of costs for which an award is
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claimed.” Rule 231(d); see also Cassuto v. Commissioner, 93 T.C.
256, 271 (1989), affd. in part, revd. in part on other grounds
and remanded 936 F.2d 736 (2d Cir. 1991). Petitioners’ affidavit
does not describe the specific nature of the work performed by
their attorney, the number of hours their attorney worked on each
matter, or the date such work was performed. Accordingly,
petitioners are not entitled to recover administrative and
litigation costs. Rule 231(d).
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
An appropriate order and
decision will be entered.