T.C. Memo. 2007-210
UNITED STATES TAX COURT
DAVID A. DEMETREE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
DAVID A. DEMETREE AND DEBORAH DEMETREE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20833-96, 20834-96. Filed August 1, 2007.
Kenton V. Sands, for petitioners.
Stephen R. Takeuchi, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: This matter is before the Court on
petitioners’ motions for award of reasonable litigation and
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administrative costs pursuant to section 74301 and Rule 231. On
November 24, 2003, this Court issued its memorandum opinion in
Demetree v. Commissioner, T.C. Memo. 2003-323. We incorporate
herein the facts set forth in that opinion.
Background
From 1983 through 1991, David’s parents, Arthur and Naomi,
regularly gave petitioners and their children gifts including
food, property, and money (e.g., groceries, two homes, $900,000
in trust for David’s children, etc.). David’s parents and his
sister, Ms. Hinkle, also made substantial loans, documented by
promissory notes, to David. When David failed to repay the
loans, his parents and sister obtained judgments against him.
From the early 1970s through his death in 1991, Arthur
operated Demetree and Associates, a commercial property
management sole proprietorship. From 1983 to 1991, David
occasionally performed services for Demetree and Associates and
David signed Arthur’s name on Demetree and Associates’ business
deposit slips and checks (e.g., checks payable to himself or to
third parties). Arthur did not deduct the amounts he transferred
to David; issue David Forms W-2, Wage and Tax Statements; or
issue Forms 1099-MISC, Miscellaneous Income.
1
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.
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David did not file a return relating to 1983 through 1985.
He delinquently filed his 1986 through 1989 and 1991 returns in
1993. Petitioners delinquently filed their 1992 joint return.
By notice of deficiency (notice) dated June 25, 1996, respondent
determined deficiencies, additions to tax, and penalties relating
to 1983 through 1989 and 1991. On that same day, respondent sent
petitioners a second notice in which he determined a deficiency
and section 6662 penalty relating to 1992.
On September 30, 2002, the trial was held in Tampa, Florida,
and on November 24, 2003, the Court issued its memorandum
opinion. The Court filed petitioners’ motions for reasonable
litigation and administrative costs on July 8, 2005, and January
25, 2007. The Court, on March 21, 2007, filed respondent’s
objections.
Discussion
Pursuant to section 7430, we may award the prevailing party
in a Tax Court proceeding reasonable litigation and
administrative costs. To be a prevailing party, petitioners must
establish that they have substantially prevailed with respect to
either the amount in controversy or the most significant issues
presented. Sec. 7430(c)(4)(A); Rule 232(e). Petitioners,
however, will not be treated as the prevailing party if
respondent’s position was substantially justified (i.e., had a
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reasonable basis in law and fact). Sec. 7430(c)(4)(B); see
Pierce v. Underwood, 487 U.S. 552, 565 (1988). Respondent
concedes that petitioners have substantially prevailed with
respect to the amount in controversy but contends that his
position was substantially justified.
Respondent’s position on the date he issued the notices of
deficiency and after filing his answers with this Court is
relevant in determining whether respondent was substantially
justified. Grant v. Commissioner, 103 F.3d 948, 952 (11th Cir.
1996), affg. T.C. Memo. 1995-374. The fact that respondent loses
an issue is not determinative of the reasonableness of his
position. Wasie v. Commissioner, 86 T.C. 962, 969 (1986).
On the date respondent issued the notices of deficiency and
after filing his answers, respondent maintained the position that
David failed to report income he received from his parents and
Ms. Hinkle. Indeed, David’s bank statements, relating to the
years in issue, delineated numerous deposits that were not
included in his gross income. Thus, respondent’s position, which
was based upon the information available to him at the time he
took a position in the administrative and judicial proceedings,
was substantially justified and reasonable. The fact that
petitioners established at trial that the transfers from David’s
parents and Ms. Hinkle were gifts and loans to David and his
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family does not diminish the reasonableness of respondent’s
position. See Wasie v. Commissioner, supra. Note also that we
sustained respondent’s determinations that petitioners had
unreported interest income, were not entitled to certain losses,
were liable for self-employment tax, failed to file tax returns,
failed to make estimated tax payments, and failed to maintain
adequate books and records relating to the years in issue.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Appropriate orders and
decisions will be entered.