T.C. Memo. 2007-281
UNITED STATES TAX COURT
RICHARD EDWIN AND EVA RUTH ELDER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7218-06. Filed September 17, 2007.
Richard E. Elder, for petitioners.
Margaret A. Martin, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This matter is before
the Court on petitioners’ motion for an award of administrative
and litigation costs pursuant to section 7430 and Rule 231.1 For
the reasons discussed below, we shall deny petitioners’ motion.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect at relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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Background
At the time the petition was filed, petitioners resided in
Moraga, California. Petitioner Richard Elder is an attorney
admitted to practice before the Tax Court. Petitioner Eva Elder
is not an attorney.
In 2003, petitioners received distributions totaling $6,621
from Roth individual retirement accounts (Roth IRAs).2
Petitioners used the proceeds for first-time homebuyer expenses.
Petitioners did not report the distributions as taxable income on
their joint 2003 Federal income tax return.
The Roth IRAs were held through E Trade Clearing LLC (E
Trade). Forms 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc., issued by E Trade list “J” as the distribution code.
According to the instructions for the Form 1099-R for 2003,
distribution code J indicates:
a distribution from a Roth IRA where * * * there are no
known exceptions. For example, you may not know
whether an exception under section 72(t) applies (such
as medical expenses, first-time homebuyer, etc.) or
whether the distribution is a qualified distribution
2
In general, contributions to a traditional individual
retirement account (IRA) are deductible when made, but
distributions from the IRA are subject to tax. See Orzechowki v.
Commissioner, 69 T.C. 750, 755 (1978), affd. 592 F.2d 677 (2d
Cir. 1979). In contrast, contributions to a Roth IRA are not
deductible, but qualified distributions generally are not subject
to tax. Sec. 408A(c)(1), (d). We discuss the taxation of Roth
IRA distributions in greater detail below.
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because the taxpayer qualifies as a first-time
homebuyer under section 408A(d)(2).
Respondent examined petitioners’ 2003 Federal income tax
return and issued a notice of proposed adjustments, commonly
referred to as a 30-day letter, in August 2005. Respondent
proposed to include the distributions in gross income and impose
a 10-percent early withdrawal penalty. The 30-day letter states
in part: “Our records indicate that the full taxable amount of
your retirement distribution(s) as shown on Form 1099R was not
reported on your tax return. Please complete and return a Form
8606, Nondeductible IRAs, as verification of the taxable amount
of the distribution(s).”
Petitioners disagreed with the proposed adjustments and
indicated that they would provide respondent with Forms 8606,
Nondeductible IRAs. As is relevant here, Form 8606 asks
taxpayers to provide the total distributions from Roth IRAs,
including distributions for qualified first-time homebuyer
expenses. The taxpayer then subtracts from this amount his basis
in his Roth IRA contributions and his qualified first-time
homebuyer expenses. Form 8606 indicates that the remainder, if
any, is the amount of taxable Roth IRA distributions.
In their response to the 30-day letter, petitioners stated
that they were moving and that some of their records were in
storage. Petitioners also questioned the need to provide basis
information for their Roth IRA contributions. Petitioners
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indicated that if basis information was not necessary, they could
provide the Forms 8606 sooner.
Respondent did not receive the Forms 8606 from petitioners
and issued a notice of deficiency in January 2006 determining a
deficiency of $2,681 in petitioners’ joint income tax for 2003.
Respondent determined that the Roth IRA distributions were
includable in gross income and asserted a 10-percent early
withdrawal penalty.
In a letter dated April 1, 2006, petitioners enclosed Forms
8606 indicating that no portion of the Roth IRA distributions was
taxable. The letter states that petitioners used the Roth IRA
distributions for qualified first-time homebuyer expenses. The
letter also states that petitioners had been attempting to
complete the Forms 8606 for some time but had been unable to
obtain basis information. Petitioners wrote in part that
“figuring out what [they] spent on stocks [they] bought as far
back as 1996 has been difficult to impossible.”
The petition herein was filed on April 14, 2006.
Petitioners’ case was assigned to an Appeals officer on May 16,
2006. After reviewing the file and performing research, the
Appeals officer concluded on May 18, 2006, that the notice of
deficiency was correct because a distribution from a Roth IRA
could not qualify for the first-time homebuyer expense exception.
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On July 6, 2006, Mr. Elder and the Appeals officer spoke by
telephone. In a letter dated and sent by facsimile the same day,
Mr. Elder memorialized the conversation. Mr. Elder indicated
that he would perform additional legal research, although he did
not state when he expected to complete the research.
On July 10, 2006, Mr. Elder again spoke to the Appeals
officer by phone and memorialized the conversation in a letter
sent via facsimile the same day. The letter states in part:
I believe that your interpretation of the law is
incorrect and that if you would provide me with a day
or two to complete the research that I have started, I
believe I can present you with authorities from the
code and/or regulations which would convince you to
drop the case. * * *
If the foregoing does not comport with your
recollection * * *, please advise.
On the same day, the Appeals officer closed petitioners’
case and gave the administrative file to her manager. On July
11, 2006, petitioners sent a letter to the Appeals officer
discussing in detail the Internal Revenue Code provisions and
Treasury regulations that govern distributions from Roth IRAs for
first-time homebuyer expenses (July 11 letter). The analysis in
the letter indicates, inter alia, that a distribution from a Roth
IRA can satisfy the exception for first-time homebuyer expenses.
The July 11 letter was date stamped received by the Internal
Revenue Service on July 17, 2007. It is not clear whether the
Appeals officer ever saw the July 11 letter.
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Petitioners’ case was assigned to an attorney for respondent
on December 5, 2006. Over the next 2 weeks, the parties
exchanged correspondence. In a letter dated December 19, 2006,
respondent’s counsel indicated she had read and agreed with the
legal analysis set forth in petitioners’ July 11 letter.
Respondent’s counsel also stated, however, that factual issues
remained unresolved. Respondent’s counsel asked for evidence
establishing that petitioners had held the Roth IRAs for 5 years
and that petitioners had incurred first-time homebuyer expenses.
Petitioners provided the requested information, and on January
10, 2007, respondent conceded that the distributions were not
taxable.
On January 24, 2007, Mr. Elder filed an entry of appearance.
In February 2007, petitioners filed the motion for an award of
administrative and litigation costs. Respondent filed an
objection to the motion, and petitioners filed a reply.
Discussion
I. In General
Section 7430(a) allows a taxpayer to recover reasonable
administrative and litigation costs. Recoverable costs include
reasonable court costs, postage expenses, and attorney’s fees.
Sec. 7430(c)(1) and (2); Dunaway v. Commissioner, 124 T.C. 80
(2005).
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Administrative and litigation costs may be awarded if the
taxpayer (1) is the prevailing party, (2) exhausted available
administrative remedies, (3) did not unreasonably protract the
court proceedings, and (4) claimed reasonable litigation costs.
Sec. 7430(a), (b)(1), (b)(3), (c)(1). The requirements of
section 7430 are conjunctive, and failure to satisfy any one of
the requirements precludes an award of costs. Goettee v.
Commissioner, 124 T.C. 286, 289 (2005), affd. 192 Fed. Appx. 212
(4th Cir. 2006). Furthermore, section 7430 is a waiver of
sovereign immunity and must be strictly construed in the
Government’s favor. Estate of Cervin v. Commissioner, 200 F.3d
351, 355 (5th Cir. 2000), affg. T.C. Memo. 1998-176; Simpson v.
Commissioner, T.C. Memo. 1995-194.
To be the prevailing party, the taxpayer must substantially
prevail with respect to either the amount in controversy or the
most significant issue, or set of issues, presented. Sec.
7430(c)(4)(A)(i). In addition, the taxpayer must meet certain
net worth requirements. Sec. 7430(c)(4)(A)(ii). The taxpayer
will not be treated as the prevailing party, however, if the
Commissioner establishes that the Commissioner’s position was
substantially justified. Sec. 7430(c)(4)(B); see also Pierce v.
Underwood, 487 U.S. 552, 565 (1988).
Respondent concedes that petitioners exhausted all
administrative remedies, did not unreasonably protract the court
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proceedings, prevailed with respect to the amount in controversy,
and met the net worth requirements. Respondent contends,
however, that (1) his position was substantially justified, (2)
petitioners did not pay or incur attorney’s fees, and (3) to the
extent petitioners did pay or incur attorney’s fees, the amounts
claimed are not reasonable.
II. Whether Respondent’s Position Was Substantially Justified
The Commissioner’s position is substantially justified if,
based on all of the facts and circumstances and the legal
precedents relating to the case, the Commissioner acted
reasonably. Pierce v. Underwood, supra; Sher v. Commissioner, 89
T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988). The
Commissioner bears the burden of proving his position had a
reasonable basis in both fact and law. Sec. 7430(c)(4)(B);
Pierce v. Underwood, supra; Rickel v. Commissioner, 900 F.2d 655,
665 (3d Cir. 1990), affg. in part and revg. in part on other
grounds 92 T.C. 510 (1989).
We adopt an issue-by-issue approach to the awarding of costs
under section 7430, apportioning the requested award of fees
among the issues according to whether the Commissioner’s position
on a particular issue was substantially justified. See Swanson
v. Commissioner, 106 T.C. 76, 102 (1996); Hennessey v.
Commissioner, T.C. Memo. 2007-131. Although the notice of
deficiency contained other adjustments, the parties’ disagreement
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centered on the taxation of the Roth IRA distributions. We
therefore limit our discussion to this issue.3
To decide whether the Commissioner’s position was
substantially justified, we first identify the point in time at
which the United States is considered to have taken a position
and then decide whether the position taken from that date forward
was substantially justified. Maggie Mgmt. Co. v. Commissioner,
108 T.C. 430, 442 (1997). The fact that the Commissioner
eventually concedes or loses a case does not establish that his
position was not substantially justified. Estate of Perry v.
Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991); Corkrey v.
Commissioner, 115 T.C. 366, 373 (2000). However, the
Commissioner’s concession is a factor to be considered. Estate
of Perry v. Commissioner, supra.
In general, we bifurcate our analysis and look separately at
the dates that the Government took a position in the
administrative proceeding and in the proceeding in this Court.
Sec. 7430(c)(7)(A) and (B); Huffman v. Commissioner, 978 F.2d
3
In his objection, respondent contends that the petition
did not make clear whether petitioners were also contesting the
other adjustments in the notice of deficiency because “the
petition alleged nothing with respect to [those] adjustments”.
The Appeals Case Memorandum states, however, that petitioners are
“not disputing these issues, as they are di minimus [sic] and the
real issue is the Roth [IRA] distribution.” Furthermore, we have
repeatedly held that issues not raised in the petition are deemed
to be conceded. See Nicklaus v. Commissioner, 117 T.C. 117, 120
n.4 (2001); Evan v. Commissioner, T.C. Memo. 2004-180 n.1.
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1139, 1144 (9th Cir. 1992), affg. in part, revg. in part and
remanding T.C. Memo. 1991-144. We therefore look at the date the
notice of deficiency was issued, sec. 7430(c)(7)(B)(ii), and the
date respondent’s counsel became involved in the case,4 Huffman
v. Commissioner, supra; Estate of Merchant v. Commissioner, 947
F.2d 1390, 1392 & n.6 (9th Cir. 1991), affg. T.C. Memo. 1990-160.
A. The Administrative Proceeding
Respondent’s position in the administrative proceeding was
substantially justified. Gross income includes all income from
whatever source derived unless excluded by a specific provision
of the Internal Revenue Code. Sec. 61(a). A distribution from a
Roth IRA is excluded from gross income to the extent that it is a
return of the owner’s contributions or if it is a qualified
distribution. Sec. 408A(d)(1); Widemon v. Commissioner, T.C.
Memo. 2004-162; sec. 1.408A-6, Q&A-1(b), Income Tax Regs. As is
relevant here, a qualified distribution is one that is made after
a 5-year period and meets the exception for first-time homebuyer
4
The Commissioner generally takes a position in the Court
proceeding when the answer is filed. Corson v. Commissioner, 123
T.C. 202, 206 (2004). This case was originally designated a
small tax case, and therefore no answer was required. See Rule
173(b) as in effect when the petition was filed. Respondent
conceded that the Roth IRA distributions were not taxable on Jan.
10, 2007. Upon petitioners’ motion, we removed the “S”
designation on Jan. 29, 2007. Respondent filed an answer on Apr.
13, 2007.
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expenses. Sec. 72(t)(2)(F); sec. 1.408A-6, Q&A-1(b), Income Tax
Regs.
The Forms 1099-R do not list petitioners’ contributions to
their Roth IRAs and indicate that no known exception excluded the
distributions from gross income. The 30-day letter, which was
issued in August 2005, asked petitioners to establish that the
distributions were nontaxable and to provide Forms 8606, which
petitioners agreed to do. When petitioners failed to provide the
Forms 8606 by January 2006, respondent was substantially
justified in issuing the notice of deficiency. See Uddo v.
Commissioner, T.C. Memo. 1998-276; sec. 301.7430-5(c)(1) and (h),
Example 1, Proced. & Admin. Regs.
Petitioners concede they had not yet provided the Forms 8606
when the notice was issued. But they contend that other
documents in respondent’s possession, such as prior years’ tax
returns and prior years’ Forms 5498, IRA Contribution
Information,5 “showed that the distributions were qualified
distributions, not income.” Petitioners are incorrect.
Section 6001 requires a taxpayer to maintain records that
are sufficient to enable the Commissioner to determine his or her
correct tax liability. See also sec. 1.6001-1(a), Income Tax
5
A Form 5498, IRA Contribution Information, is issued by a
third party that maintains a Roth IRA for the taxpayer. As its
name suggests, the Form 5498 shows the amount of contributions
the taxpayer made during the taxable year to the Roth IRA.
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Regs. The books or records required shall be kept at all times
available for inspection by authorized internal revenue officers
or employees. Sec. 1.6001-1(e), Income Tax Regs. Thus,
respondent was not required to maintain records on petitioners’
behalf.
Furthermore, even if respondent did have prior years’
records indicating that the distributions were nontaxable, each
taxable year stands on its own, and the Commissioner may
challenge in a succeeding year what was overlooked in previous
years. See Rose v. Commissioner, 55 T.C. 28, 31-32 (1970); Hahn
v. Commissioner, T.C. Memo. 2007-75. Accordingly, respondent was
not required to accept information reported on previous years’
tax returns and Forms 5498. We therefore conclude that
respondent’s position in the administrative proceeding was
substantially justified.
B. The Court Proceeding
Costs incurred in connection with the filing of a petition
and costs incurred thereafter are considered litigation costs.
McGowan v. Commissioner, T.C. Memo. 2005-80; sec.
301.7430-4(c)(3) and (4), Example 2, Proced. & Admin. Regs.
Because petitioners dealt with the Office of Appeals after the
petition was filed, any costs relating to such activity are
litigation costs rather than administrative costs. See Goertler
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v. Commissioner, T.C. Memo. 2003-136 n.7; sec. 301.7430-4(c)(4),
Example 2, Proced. & Admin. Regs.
In support of their view that respondent’s position was not
substantially justified, petitioners discuss at length the
Appeals officer’s actions and the erroneous legal conclusion that
she reached. We are not unsympathetic to the delay and
frustration caused by the Appeals officer’s misinterpretation of
the law. Furthermore, we agree with petitioners that it should
not be “[the taxpayer’s] job to help employees of the Internal
Revenue Service understand the tax code”, as petitioners
attempted to do in their July 11 letter. Nevertheless, the
Government’s litigating position is formed only after the
Government’s attorney becomes involved in the case. See Huffman
v. Commissioner, supra; Estate of Merchant v. Commissioner,
supra; Andary-Stern v. Commissioner, T.C. Memo. 2002-212.
Petitioners’ discussions with the Appeals officer occurred before
respondent’s counsel became involved in the case. The Appeals
officer’s conclusion does not represent respondent’s litigating
position and does not prevent that position from being
substantially justified. We therefore focus on the actions taken
by respondent’s counsel.
As discussed above, respondent did not initially file an
answer. See supra note 4. Respondent’s counsel was assigned
this case on December 5, 2006. Approximately 2 weeks later,
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respondent’s counsel acknowledged the Appeals officer’s mistake
and requested additional substantiation. Once petitioners
provided the requested information, respondent’s counsel promptly
conceded. Under the circumstances, we conclude that respondent’s
position in the court proceeding was substantially justified.
See Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir. 1991)
(upholding the denial of litigation costs where the
Commissioner’s attorney settled the case “with reasonable
dispatch”); Andary-Stern v. Commissioner, supra (the Commissioner
is given a reasonable period of time to resolve factual issues
after receiving all relevant information); see also Estate of
White v. Commissioner, T.C. Memo. 2007-54 (and cases cited
therein).
Because respondent’s position was substantially justified,
petitioners are not entitled to recover administrative costs or
litigation costs. Accordingly, we need not decide whether
petitioners paid or incurred attorney’s fees or whether the
claimed fees are reasonable. In reaching our holding, we have
considered all arguments made by the parties, and to the extent
not mentioned above, we find them to be moot, irrelevant, or
without merit.
To reflect the foregoing,
An appropriate order and
decision will be entered.