T.C. Memo. 2008-248
UNITED STATES TAX COURT
WILLIAM AND LISA BRUNSELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11763-06. Filed November 3, 2008.
Jeffrey D. Moffatt, for petitioners.
Scott B. Burkholder, for respondent.
MEMORANDUM OPINION
KROUPA, Judge: This case is before the Court on
petitioners’ motion for litigation costs including attorney’s
fees pursuant to section 74301 and Rule 231.
1
All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
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We are asked to decide whether petitioners are entitled to
recover litigation costs. We hold that they are not.
Background
Petitioners reside in California. Respondent issued
petitioners a Letter 566-B EZ (30-day letter), notifying
petitioners that respondent was examining their income tax return
for 2004, specifically with respect to the claimed dependency
exemptions and child tax credit.2 The 30-day letter requested
documentation to support petitioners’ claiming exemptions and
credits for three children listed on the return for 2004 and
informed petitioners that respondent would issue a deficiency
notice if petitioners failed to provide the necessary
documentation.
Petitioners timely submitted additional documentation,
including school records for the children showing the children’s
address as petitioners’ address, the entry of judgment finalizing
petitioner wife’s divorce from her ex-husband, and the marital
settlement agreement giving sole physical custody of the three
children to petitioner wife.
Respondent mailed petitioners a Letter 692 on March 6, 2006,
stating that even though respondent had received petitioners’
earlier mailing, petitioners still needed to provide additional
2
Petitioners still mistakenly believe that respondent’s
deficiency notice denied the earned income credit (EIC).
Petitioners did not seek the EIC for 2004.
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information to claim the three dependency exemptions and the
child tax credit. Respondent gave petitioners 15 days to submit
this additional information. The letter also advised petitioners
that they could appeal the proposed changes to the Appeals Office
and included a copy of Publication 3498-A, The Examination
Process, which explained how to appeal respondent’s proposed
determination.
Petitioners neither provided more information within the
15-day period nor made an appeal or protest to the Appeals
Office. Respondent issued a deficiency notice on April 17, 2006,
disallowing the three dependency exemptions and the child tax
credit. Petitioners did not request an Appeals Office conference
or file a protest before the deficiency notice was mailed, nor
did they participate in an Appeals Office conference before
filing the petition with this Court.
Respondent conceded, after petitioners filed the petition
with this Court, that petitioners owed no deficiency.
Petitioners filed a motion for reasonable litigation costs
seeking $4,916 in fees paid to their attorney, $60 in court
costs, and an additional $10,084 in fees that they have not yet
paid their attorney but which they seek from the Court.3
3
Petitioners did not file an additional affidavit containing
detailed information regarding fee arrangements, hours spent,
etc., as required by Rule 232(d).
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Respondent objects to this motion. Neither party requested a
hearing.
Discussion
We now address whether petitioners may recover any of the
$15,060 in litigation costs. The prevailing party may be awarded
reasonable litigation costs in any court proceeding by or against
the United States. Sec. 7430(a)(2). If the Government
establishes that its position was substantially justified, the
moving party will not be treated as having prevailed. Sec.
7430(c)(4)(B). A prevailing party must establish, to obtain such
an award, that (1) the party has exhausted the administrative
remedies available; (2) the party has substantially prevailed in
the controversy; (3) the party satisfies certain net worth
requirements; (4) the party has not unreasonably protracted the
proceedings; and (5) the amount of costs is reasonable.4 Sec.
7430(b) and (c). The requirements of section 7430 are
conjunctive, and the failure to satisfy any one of the
requirements precludes an award of costs. See sec. 7430(b) and
(c); see also Rule 232(e); Swanagan v. Commissioner, T.C. Memo.
2000-294.
4
Respondent contends that petitioners’ evidence of the costs
they incurred is inadequate to satisfy this requirement. It is
not necessary, however, to reach this issue because petitioners
do not satisfy the threshold requirement of exhausting their
administrative remedies.
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A threshold requirement exists for the recovery of
litigations costs. The taxpayer must have exhausted the
available administrative remedies before filing a petition. Sec.
7430(b)(1); Burke v. Commissioner, T.C. Memo. 1997-127; sec.
301.7430-1(a), Proced. & Admin. Regs. A taxpayer exhausts his or
her administrative remedies where an Appeals Office conference is
available only if the taxpayer participated in such a conference
before filing a petition. Burke v. Commissioner, supra; sec.
301.7430-1(b)(1), (g), Example (11), Proced. & Admin. Regs.
Petitioners did not request an Appeals Office conference or file
a protest before the deficiency notice was mailed, nor did they
participate in an Appeals Office conference before filing the
petition with this Court. None of the limited exceptions applies
to relieve petitioners of the requirement that they participate
in an Appeals Office conference to be treated as having exhausted
available administrative remedies. See Shaw v. Commissioner,
T.C. Memo. 2005-106.
The Appeals Office’s mission “is to resolve tax
controversies, without litigation.” 4 Administration, Internal
Revenue Manual (CCH), pt. 8.1.1.1(1), at 27,003 (Oct. 23, 2007).
The Internal Revenue Service is seeking facts during the Appeals
phase to decide whether it should determine a deficiency and
thereby force a taxpayer to incur litigation costs or pay the
tax. See, e.g., Shaw v. Commissioner, supra. This Court has
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previously warned taxpayers and their counsel that waiving the
opportunity for an Appeals Office conference does not comply with
the exhaustion-of-administrative-remedies requirement or preserve
a right to recover litigation costs. Haas & Associates
Accountancy Corp. v. Commissioner, 117 T.C. 48, 62 (2001), affd.
55 Fed. Appx. 476 (9th Cir. 2003). This Court seeks to preserve
the role that the administrative appeal process plays in
resolving tax disputes by requiring taxpayers to participate in
an Appeals Office conference before litigation. See Burke v.
Commissioner, supra (citing H. Rept. 97-404, at 13 (1981) and
Senate Comm. on Finance, Technical Explanation of Committee
Amendment, 127 Cong. Rec. 32070 (Dec. 16, 1981)).
We have considered all the arguments of the parties, and, to
the extent we have not addressed them, we find them to be
irrelevant, moot, or meritless. We hold that petitioners did not
exhaust their administrative remedies by participating in an
Appeals Office conference, and, therefore, petitioners are not
entitled to an award of litigation costs. Accordingly, we need
not, nor do we, address whether petitioners satisfied any of the
remaining requirements of section 7430.
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To reflect the foregoing,
An order will be issued
denying petitioners’ motion
for litigation costs, and
decision will be entered for
petitioners.