T.C. Memo. 2006-222
UNITED STATES TAX COURT
MICHAEL AND TANYA NEYLAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16443-05. Filed October 23, 2006.
Lowell E. Mann, for petitioners.
David A. Breen, for respondent.
MEMORANDUM OPINION
WELLS, Judge: The instant matter is before the Court on
petitioners’ motion for reasonable administrative and litigation
costs1 pursuant to Rule 2312 and section 7430. The issue we must
1
Although petitioners titled the instant motion “MOTION FOR
AWARD OF REASONABLE ADMINISTRATIVE COSTS”, the attached list of
costs includes both administrative and litigation costs. We
(continued...)
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decide is whether petitioners were the prevailing party. For the
reasons stated below, we deny petitioners’ motion for reasonable
costs.
Background
At the time of filing the petition in the instant case,
petitioners resided in Roebling, New Jersey. Vanya Tyrrell (Mrs.
Tyrrell) prepared petitioners’ 2003 Form 1040, U.S. Individual
Income Tax Return (tax return).3
In the spring of 2005, respondent sent a letter to
petitioners requesting that they submit documentation to support
certain deductions claimed on their 2003 tax return. This was
the initial contact letter and did not provide petitioners with
an opportunity for administrative review with respondent’s Office
of Appeals. Petitioners did not respond with the requested
documentation. Instead, petitioners’ attorney, Lowell E. Mann
(Mr. Mann), sent a letter protesting respondent’s proposed
1
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treat petitioners’ motion as a motion for both administrative and
litigation costs.
2
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.
3
Petitioners’ tax return was one of approximately 175 tax
returns that were prepared by Vanya Tyrrell and chosen for
examination by respondent’s Correspondence Examination Unit. All
such cases involve similar unsubstantiated deductions. Lowell E.
Mann represents the petitioners in all such cases and has filed
virtually identical petitions for each such case.
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adjustments and requesting that the case be transferred to
respondent’s Appeals Office. Because petitioners failed to
submit the requested documentation substantiating the disputed
deductions, respondent determined a deficiency of $1,830 in
income for 2003 and sent petitioners a notice of deficiency on
June 13, 2005.
Mr. Mann sent a letter to respondent requesting that
respondent rescind the notice of deficiency. Respondent did not
rescind the notice of deficiency, and petitioners timely filed
their petition in this Court on September 6, 2005. Respondent
filed his answer on October 17, 2005. By notice dated November
10, 2005, the instant case was placed on the April 3, 2006,
calendar in Philadelphia, Pennsylvania.
On March 15, 2006, Ms. Tyrrell sent documentation to support
the deductions in question to Mr. Mann. Respondent’s Appeals
officer received the documentation from petitioners’ counsel on
March 21, 2006. At the call of the instant case from the
Philadelphia trial session calendar on April 3, 2006, the parties
filed a stipulation of settled issues, which indicated
respondent’s concession and a reduced deficiency of $473. In the
instant motion, petitioners now seek $3,437.50 in administrative
and litigation costs.
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Discussion
The prevailing party in a Tax Court proceeding may be
entitled to recover administrative and litigation costs. See
sec. 7430(a); Rule 231. However, a taxpayer will not be treated
as the prevailing party if the Commissioner’s position was
substantially justified. Sec. 7430(c)(4)(B); see Pierce v.
Underwood, 487 U.S. 552, 565 (1988). The fact that Commissioner
concedes is not determinative of the reasonableness of
Commissioner’s position. Wasie v. Commissioner, 86 T.C. 962, 969
(1986). The taxpayer bears the burden of proving the elements in
section 7430 required for an award of costs, except that the
taxpayer will not be treated as the prevailing party if the
Commissioner establishes that the position of the Commissioner
was substantially justified.4 See Rule 232(e).
The Court determines the reasonableness of respondent’s
position as of the time respondent took respondent’s position.
Sec. 7430(c)(7). In the administrative proceeding here,
respondent took a position as of the date of the notice of
deficiency. Sec. 7430(c)(7)(B). In the judicial proceeding,
respondent took a position when respondent filed respondent’s
answer. Sec. 7430(c)(7)(A); Huffman v. Commissioner, 978 F.2d
1139, 1144-47 (9th Cir. 1992), affg. in part, revg. in part on
4
The elements of sec. 7430 other than those relevant to
whether petitioners were the prevailing party are not discussed.
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other grounds and remanding T.C. Memo. 1991-144. Respondent’s
administrative and litigation positions are substantially
justified if they have a reasonable basis in both law and fact.
Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997).
In the instant case, we conclude that respondent’s position
was both reasonable and substantially justified in both the
administrative and judicial proceedings. Petitioners failed to
provide the requisite documentation until after respondent issued
the notice of deficiency and filed an answer. Deductions are a
matter of legislative grace, and petitioners must prove they are
entitled to the deductions. Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). In the absence of any proof
of entitlement to the disputed deductions, respondent was
reasonable to maintain his position that the disputed deductions
were not allowed. Prouty v. Commissioner, T.C. Memo. 2002-175.
It was not until March 21, 2006, that respondent received the
documentation relating to the disputed deductions, at which time
respondent conceded the propriety of the deductions.5
5
Respondent also contends that petitioners protracted the
instant proceedings and are therefore ineligible for cost
recovery. Sec. 7430(b)(3). Although we do not address that
issue, since we have disposed of the instant motion on other
grounds, we note that petitioners did not provide the required
documentation to support their claimed deductions until less than
2 weeks before trial. Once in possession of the requested
documentation, respondent presumably would have conceded the
deductions at any point in the administrative or litigation
process, as respondent ultimately did on the eve of trial after
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Accordingly, we hold that petitioners are not entitled to recover
their administrative or litigation costs.
We have considered all of petitioners’ contentions,6 and, to
the extent they are not addressed herein, they are irrelevant,
moot, or without merit.
To reflect the foregoing,
An appropriate order and
decision will be entered.
5
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receiving the documentation. Consequently, petitioners forced an
administrative proceeding and litigation, instead of a brief
exchange of correspondence.
6
This includes both arguments made in petitioners’ motion
and subsequent memorandum of law.