T.C. Memo. 2007-211
UNITED STATES TAX COURT
WESTERN MANAGEMENT, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12686-99. Filed August 2, 2007.
Robert E. Kovacevich and Richard W. Kochansky, for
petitioner.
Milton B. Blouke and Roger P. Law, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: This matter is before the Court on
petitioner’s motion for award of reasonable litigation costs
pursuant to section 74301 and Rule 231. On June 3, 2003, this
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Unless otherwise indicated, all section references are to
(continued...)
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Court issued its Memorandum Opinion in W. Mgmt., Inc. v.
Commissioner, T.C. Memo. 2003-162, affd. in part and remanded in
part 176 Fed. Appx. 778 (9th Cir. 2006), and we incorporate
herein the facts set forth in that opinion.
Background
In 1981, Robert E. Kovacevich incorporated petitioner, a
Washington C corporation. Petitioner’s only source of income was
from the provision of Mr. Kovacevich’s legal services. Mr.
Kovacevich did not receive predetermined wages from petitioner
but, instead, received funds from petitioner as his needs arose.
In 1994 and the first quarter of 1995, petitioner paid Mr.
Kovacevich $132,000 and $33,250, respectively. Petitioner
classified these payments as “loans” on its corporate ledger and
did not file Forms 1099-MISC, Miscellaneous Income, relating to
the payments.
On April 28, 1999, respondent sent petitioner a notice of
determination in which respondent determined that Mr. Kovacevich
was an employee of petitioner for Federal employment tax purposes
and petitioner was not entitled, pursuant to section 530 of the
Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2885 (Section 530),
to relief from such classification. In addition, respondent
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(...continued)
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
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determined that Mr. Kovacevich, in 1994 and 1995, received from
petitioner $132,000 and $33,250, respectively, in wages that were
subject to taxes pursuant to the Federal Insurance Contributions
Act (FICA) and the Federal Unemployment Tax Act (FUTA) and
petitioner failed to pay the FICA and FUTA taxes relating to
those wages. Respondent also determined that petitioner was
liable for section 6656 and 6662(a) penalties relating to 1994
and 1995.
On June 3, 2003, the Court issued its Memorandum Opinion.
The Court held that Mr. Kovacevich was a statutory employee of
petitioner, and, in 1994 and 1995, Mr. Kovacevich received from
petitioner $132,000 and $33,250, respectively, in wages that were
subject to FICA and FUTA taxes. Petitioner contended that it was
entitled, pursuant to section 530, to relief from the FICA and
FUTA tax liabilities. The Court held, however, that petitioner
did not satisfy the requirements of section 530 and thus, was
liable for FICA and FUTA taxes relating to the wages paid to Mr.
Kovacevich. The Court also sustained respondent’s determinations
relating to the penalties.
Petitioner appealed the Tax Court’s decision to the Court of
Appeals for the Ninth Circuit. The Ninth Circuit “[affirmed] the
decision of the Tax Court in all respects except with regard to
its calculations of the amount of income tax withholding owed
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under 26 U.S.C. § 3402(a)” and remanded the case “for
consideration of the narrow issue of whether 26 U.S.C. § 3402(d)
provides Petitioner with any relief from the collection of those
taxes and, if so, for recalculation of the amounts owed.” See W.
Mgmt., Inc. v. Commissioner, 176 Fed. Appx. at 782.
On March 14, 2007, the Court filed petitioner’s motion for
litigation costs. On April 26, 2007, the Court filed
respondent’s objection.
Discussion
Petitioner may recover reasonable litigation costs if it
establishes that it is the prevailing party, meets the net worth
requirements, has exhausted administrative remedies, has not
unreasonably protracted the court proceedings, and has claimed
reasonable litigation costs. Sec. 7430(a), (b)(1), (3), (c)(4);
Corson v. Commissioner, 123 T.C. 202, 205-206 (2004). These
requirements are conjunctive, and failure to satisfy any one will
preclude an award of costs to petitioner. Minahan v.
Commissioner, 88 T.C. 492, 497 (1987). Petitioner contends that
it is entitled to litigation costs because it substantially
prevailed with respect to the most significant issues. We
disagree.
To be a prevailing party, petitioner must establish that it
substantially prevailed with respect to either the amount in
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controversy or the most significant issues presented. See sec.
7430(c)(4)(A). The Court, in its 2003 opinion, upheld
respondent’s determinations relating to the penalties, Mr.
Kovacevich’s employment status, and petitioner’s failure to
withhold Mr. Kovacevich’s FICA and FUTA taxes.
The Court of Appeals for the Ninth Circuit merely remanded
the case for the Court to recalculate the amounts owed by
petitioner after the application of section 3402(d). W. Mgmt.,
Inc. v. Commissioner, 176 Fed. Appx. 778 (9th Cir. 2006).
Section 3402(d) provides that to the extent Mr. Kovacevich paid
income tax on the wages at issue, respondent cannot collect the
FICA and FUTA taxes from petitioner. See id. The Court of
Appeals, however, affirmed this Court’s determinations relating
to the substantive issues in the case (e.g., Mr. Kovacevich’s
employment status and petitioner’s failure to withhold Mr.
Kovacevich’s FICA and FUTA taxes). Simply put, petitioner did
not substantially prevail and thus, is not entitled to litigation
costs.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
An appropriate order and
decision will be entered.