T.C. Memo. 2008-164
UNITED STATES TAX COURT
BERNARD P. AND LORRAINE C. BALCK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10905-03. Filed July 3, 2008.
Dennis W. Hartley, for petitioners.
David W. Sorensen and Paul C. Feinberg, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: This matter is before us on petitioners’
motion for recovery of $5,534 in litigation costs, plus $750 in
legal fees relating to this motion. A hearing was held on
petitioners’ motion on October 30, 2007, in Las Vegas, Nevada.
Unless otherwise indicated, all section references are to
the Internal Revenue Code.
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Background
Petitioners resided in Wyoming at the time the petition was
filed.
In 2001, petitioner Lorraine C. Balck (Balck) was charged
with and pleaded guilty to a Federal felony of filing with
respondent a false 1995 Federal income tax return in violation of
section 7206(1).
In the criminal tax prosecution of Balck, the indictment
alleged that on her and her husband’s 1995 joint individual
Federal income tax return, Balck reported a negative taxable
income of $41,069 and no “Other income” even though Balck knew
that she had received in 1995 “Other income” of approximately
$225,000.
After her guilty plea and entry of judgment in the criminal
case, on April 9, 2003, respondent mailed to Balck and to her
husband a notice of deficiency for 1995 in which respondent
charged Balck with “Other Income” of $246,851, which included the
omitted income that had been involved in the criminal case.
Based thereon, respondent’s notice of deficiency to petitioners
determined a deficiency in petitioners’ 1995 Federal income tax,
an addition to tax, and penalties as follows:
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Additions to Tax/Penalties
Year Deficiency Sec. 6651(a)(1) Penalties Penalties
1995 $74,664 $11,199 $14,932 $55,998
On July 8, 2003, petitioners filed their petition in which
they disputed the income adjustment, the tax deficiency, the
addition to the tax, and the penalties.
This case was set for trial in Las Vegas, Nevada, in
December 2004, in June 2005, and in February 2006. However, each
of the scheduled trials was continued, generally on respondent’s
request.
In January 2006, “due to [respondent’s] problems with the
case” respondent’s trial counsel encouraged petitioners to submit
to respondent an offer-in-compromise (OIC) under which
petitioners were to pay a total of $100 in full settlement of
their 1995 Federal income tax deficiency, addition to tax,
penalties, and interest.
By memorandum dated February 16, 2006, respondent’s trial
counsel forwarded petitioners’ OIC for review and approval to
respondent’s OIC processing group in Memphis, Tennessee, with a
strong recommendation for approval. In his transmittal note,
respondent’s trial counsel stated as follows:
Pursuant to some Grand Jury problems, it has been
decided by my national office that we cannot try this
matter. It was suggested that we secure an OIC from
the petitioners, as the petitioners assert that they
are in their late 50's and 60's and are now retired and
living off a social security pension, and that the OIC
be forwarded with our recommendation that it be
accepted.
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During 2006, petitioners’ OIC languished in Memphis without
approval. On January 2, 2007, respondent’s trial counsel
returned petitioners’ OIC to petitioners with the $150 OIC filing
fee petitioners had paid, and respondent’s counsel explained in a
cover letter to petitioners in relevant part as follows:
After further review of this matter, the I.R.S. has
determined that it is prudent to concede this matter.
Therefore, the Offer in Compromise that you submitted
to this office is being returned. In addition, in
order to finalize our settlement [sic], we must file
with the Tax Court a decision document which shows no
deficiency or liability.
On February 2, 2007, an agreed decision that petitioners and
respondent submitted to the Court was entered reflecting a zero
tax deficiency and zero additions to tax for petitioners for
1995.
Thereafter, petitioners filed the instant motion for
litigation costs, and on October 30, 2007, petitioners’ new
counsel entered his appearance and filed a motion to supplement
petitioners’ motion for litigation costs by adding to the record
an affidavit from petitioners as to their financial net worth
showing total assets of $1,750, total liabilities of $138,826,
and a negative net worth of $137,076.
Discussion
For purposes of petitioners’ motion for litigation costs
under section 7430, respondent does not dispute that petitioners
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exhausted all administrative remedies, did not protract the
proceedings, substantially prevailed, and satisfy the net worth
limitation of section 7430.
Respondent, however, argues that petitioners’ motion for
litigation costs should be denied because respondent’s position
was substantially justified and therefore petitioners do not
qualify as the prevailing party, and because petitioners have not
adequately established the reasonableness of the litigation costs
they seek to recover.
Substantial Justification
A party in this Court will not be treated as the prevailing
party in a case for purposes of the recovery of litigation costs
under section 7430 where respondent establishes that his position
in the case was substantially justified. Sec. 7430(c)(4)(B)(i).
Substantial justification for respondent’s tax deficiency
and penalty determinations exists where his determinations had a
reasonable basis in fact and law. Pierce v. Underwood, 487 U.S.
552, 565 (1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987),
affd. 861 F.2d 131 (5th Cir. 1988).
Respondent’s eventual and delayed notice to petitioners that
their OIC (which respondent had requested from petitioners) would
not be processed and that respondent would concede this case
outright–-deficiency, addition to tax, and penalties--not only
triggers our curiosity but calls for a meaningful, credible, and
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specific explanation from respondent in order to satisfy
respondent’s burden under section 7430(c)(4)(B)(i) to establish
that his position was substantially justified. The vague
statement in respondent’s correspondence that there existed some
grand jury problems with the case is inadequate to satisfy
respondent’s burden.1
In light of respondent’s outright concession, the facts that
Balck was criminally prosecuted for 1995, the year involved
herein, and that Balck was charged with omitting from her
reported 1995 income $225,000 in taxable income and pleaded
guilty thereto do not establish that respondent’s position was
substantially justified. Quite to the contrary, if there were
unspecified grand jury problems that necessitated respondent’s
concession of this case in 2007 (as respondent admits), those
grand jury problems could well have occurred back in 2001,
preceding the issuance of respondent’s notice of deficiency in
April 2003, and they perhaps should have prevented respondent’s
notice of deficiency from ever being mailed to petitioners.
1
At the Oct. 30, 2007, hearing on petitioners’ motion for
litigation costs, respondent called no witnesses to explain the
nature or extent of the grand jury problems or concerns that
caused respondent to concede, not settle, this case.
Respondent’s trial counsel attempted to provide an explanation,
but what was needed was the testimony of a Government fact
witness who could testify as to the facts surrounding
respondent’s concession (e.g., testimony as to what the problems
were, when they came to respondent’s attention, and how they were
dealt with), not an argument from respondent’s trial counsel that
does not constitute evidence.
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Respondent has not made an adequate effort to explain or to
acknowledge the underlying nature of the grand jury problems,
when or how they arose, and when respondent’s trial counsel and
other personnel of respondent first became aware thereof.
Without more information as to the grand jury problems, we
conclude that respondent has not established that his position
herein was substantially justified and that petitioners qualify
as the prevailing party under section 7430.
Reasonableness of Litigation Costs
Although petitioners seek recovery of litigation costs of
$5,534, they have bills totaling $12,207--$8,867 for the services
of a forensic accountant and $3,340 for the services of a
certified public accountant (C.P.A.). Additionally, petitioners
seek recovery of $750 in legal fees relating to the instant
motion.
Billing statements from the accountant have been submitted
documenting her services to petitioners during the almost 5-year
duration of this case and the modest $8,867 billed to petitioners
therefor. Also, for the $3,340 the C.P.A. billed to petitioners,
a billing statement has been submitted. Respondent makes no
specific argument as to why these expenses should be regarded as
unreasonable under section 7430. The explanation for the
difference between the $12,207 total reflected in the billing
statements and the $5,534 for which recovery is sought may be
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that some of the billable hours appear to involve tax return
preparation, rather than matters relating directly to this case.
On the rather sparse record before us, petitioners’ request
for an award of $5,534 in litigation costs, plus $750 relating to
this motion, is reasonable.
For the reasons stated, petitioners’ motion for litigation
costs will be granted.
An appropriate order and
decision will be entered.