T.C. Memo. 2007-317
UNITED STATES TAX COURT
GABINO DIAZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1853-06. Filed October 23, 2007.
Jeffrey D. Moffatt, for petitioner.
John D. Faucher, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: This matter is before the Court on
petitioner’s motion for an award of litigation costs under
section 7430(a)(2) and Rule 231.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at all relevant times, and
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all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
At the time the petition was filed, petitioner resided in
Newhall, California.
On approximately February 10, 2004, petitioner timely filed
his 2003 Federal income tax return.
During respondent’s audit of petitioner’s 2003 Federal
income tax return, petitioner submitted to respondent certain
documentation. The documents included various checks and
mortgage interest statements to petitioner and to one other
individual. Printed on the checks as owners of the bank account
on which the checks are drawn are the names of petitioner and two
other individuals. The checks are made payable to various
companies and individuals. The signatures on most of the checks
are illegible. None of the checks appears to be signed by
petitioner. The record does not indicate the relationship
between petitioner and the other individuals whose names appear
on the checks and on the interest statements.
Also during respondent’s audit, petitioner submitted
additional documentation which included an automobile lease
agreement in petitioner’s name, Form W-2, Wage and Tax Statement,
relating to wages paid to petitioner, and copies of three
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additional checks. Again, the signatures on the checks are
illegible.
Respondent, concluding that the above documentation was
inadequate, disallowed all $36,182 of the deductions claimed on
Schedule A, Itemized Deductions, of petitioner’s 2003 Federal
income tax return ($23,885 in home mortgage interest, $8,673 in
state income tax, $363 in contributions, and $3,261 in
miscellaneous expenses).
Petitioner protested respondent’s audit adjustments to
respondent’s Appeals Office but did not explain to respondent’s
Appeals Office the confusing checks and signatures that
petitioner had provided to respondent.
On November 28, 2005, respondent determined a deficiency of
$6,077 in petitioner’s 2003 Federal income taxes. The deficiency
was based on a disallowance by respondent of the $36,182 claimed
Schedule A deductions.
On January 25, 2006, petitioner filed a petition regarding
respondent’s November 28, 2005, notice of deficiency. In the
petition, petitioner claimed that the documentation petitioner
submitted to respondent during the audit adequately substantiated
the deductions respondent had disallowed.
On March 7, 2006, respondent filed an answer in which
respondent argued that the documentation petitioner submitted to
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respondent during the audit did not adequately substantiate
petitioner’s claimed deductions.
Before the scheduled trial date, the case was referred back
to respondent’s Appeals Office, and petitioner submitted
additional documentation relating to petitioner’s claimed
deductions. A number of conferences occurred in which
petitioner’s counsel met with respondent’s Appeals officer and
discussed the deductions in question and explained the
documentation that had been submitted.
On February 16, 2007, respondent agreed to settle, and
petitioner and respondent stipulated that $30,905 of the total
$36,182 claimed Schedule A deductions that had been disallowed
were allowable and that all other issues were resolved.
On March 12, 2007, petitioner filed a motion for litigation
costs requesting reimbursement for legal fees incurred by
petitioner.
Discussion
Generally, under section 7430 a taxpayer may recover from
respondent costs relating to litigation in which the taxpayer
substantially prevails.
Recoverable litigation costs include court costs and
reasonable attorney’s fees. Sec. 7430(c)(1); Dunaway v.
Commissioner, 124 T.C. 80 (2005). Litigation costs may be
awarded if, among other things, the taxpayer: (1) Is the
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prevailing party; (2) exhausted available administrative
remedies; and (3) did not unreasonably protract the court
proceedings. Sec. 7430(a) and (b)(1), (3).
Under section 7430(c)(4)(A), a “prevailing party” is defined
as a party who has substantially prevailed with respect to the
amount in controversy or who has substantially prevailed with
respect to the most significant issue or set of issues and who
meets certain net worth requirements. Sec. 7430(c)(4)(A). If
respondent establishes that respondent’s position in the
proceeding was substantially justified, the taxpayer will not be
treated as a prevailing party. Sec. 7430(c)(4)(B). Whether
respondent’s position was substantially justified depends on
whether his position was supported by a reasonable basis in law
and fact. Pierce v. Underwood, 487 U.S. 552 (1988); 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).
The fact that respondent eventually loses or concedes an
issue or issues does not by itself establish that respondent’s
position was unreasonable. Maggie Mgmt. Co. v. Commissioner, 108
T.C. 430, 443 (1997).
Whether respondent acted reasonably turns largely on the
basis of the available information used to form respondent’s
position and whether respondent knew or should have known that
his position was invalid at the time respondent took the position
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in the litigation. Coastal Petroleum Refiners, Inc. v.
Commissioner, 94 T.C. 685, 688-690 (1990).
Respondent’s position in a judicial proceeding is that which
is set forth in respondent’s answer to the petition. Sec.
7430(c)(7)(A); see Huffman v. Commissioner, 978 F.2d 1139, 1147-
1148 (9th Cir. 1992), affg. in part and revg. in part T.C. Memo.
1991-144; Maggie Mgmt. Co. v. Commissioner, supra at 442.
Respondent concedes that petitioner substantially prevailed
with respect to the amount in controversy and exhausted all
administrative remedies. Respondent argues, however, that
respondent’s position was substantially justified and that
therefore petitioner does not qualify as a prevailing party for
purposes of section 7430.
Relying on an unpublished opinion, McKee v. Commissioner,
209 Fed. Appx. 691 (9th Cir. 2006) (holding that respondent’s
position was not substantially justified where respondent
admitted that key errors were made in calculating the taxpayer’s
deficiency), revg. T.C. Memo. 2004-115, petitioner argues that
respondent’s position was not substantially justified.
We conclude that on the record before us respondent was
substantially justified in asserting in his answer that
petitioner’s claimed deductions were not substantiated. A number
of individuals in addition to petitioner were referenced on
checks and other documentation that were provided to respondent.
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Most of the signatures on the checks were illegible. The
signatures that were legible were not those of petitioner. Prior
to litigation it certainly is understandable that it was unclear
to respondent who actually paid the expenses in question.
Further, in his answer, respondent acted reasonably in
contesting the claimed deductions. At the time respondent filed
his answer respondent neither knew nor should have known that
respondent’s position was incorrect.
Petitioner’s claim for reimbursement of litigation costs
will be denied.
To reflect the foregoing,
An appropriate order and
decision will be entered for
respondent.