T.C. Summary Opinion 2009-102
UNITED STATES TAX COURT
NICHOLAS AND KERRI A. FITZPATRICK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25821-07S. Filed July 8, 2009.
Nicholas and Kerri A. Fitzpatrick, pro se.
Daniel P. Ryan, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to the provisions of section 7463 of the Internal
Revenue Code in effect when the petition was filed.1 Pursuant to
section 7463(b), the decision to be entered is not reviewable by
1
Unless otherwise indicated, section references are to the
Internal Revenue Code as amended, Rule references are to the Tax
Court Rules of Practice and Procedure, and amounts are rounded to
the nearest dollar.
- 2 -
any other court, and this opinion shall not be treated as
precedent for any other case.
This case is before the Court on petitioners’ motion under
section 7430 and Rule 231 for recovery of litigation costs.
Background
Petitioners timely filed their 2005 Form 1040, U.S.
Individual Income Tax Return. They resided in Massachusetts when
they filed the petition.
1. Administrative Proceedings
The Internal Revenue Service (IRS) issued a Notice CP2000
dated March 19, 2007, to petitioners. The notice proposed
adjustments to petitioners’ 2005 Federal income tax for three
unreported items: $1,000 in gambling income reported on a Form
W-2G, Certain Gambling Winnings, issued by the Massachusetts
State Lottery Commission; and $22,581 reported on two Forms SSA-
1099, Social Security Benefit Statement, issued in the amounts of
$22,388 and $192, respectively, by the Social Security
Administration (SSA).2 The total proposed deficiency in the
notice was $2,872, plus statutory interest.
Petitioners responded to the notice with a letter dated
March 25, 2007. In this letter petitioners agreed that they
2
With respect to the proposed adjustment resulting from
payments reported by the Social Security Administration (SSA),
the Notice CP2000 indicated that $18,163 was includable in
income.
- 3 -
omitted the gambling income from their 2005 return but disputed
the proposed adjustment for Social Security income. Petitioners
stated that they did not qualify for or receive any benefits from
the SSA in 2005.
In a reply dated May 14, 2007, the IRS acknowledged
petitioners’ March 25, 2007, letter and instructed them to obtain
written verification from the SSA of the correct amount paid to
them in 2005.
Petitioners sought correction from the SSA with letters and
telephone calls. Petitioners discovered that the SSA mailed one
or more Forms SSA-1099 for 2005 to an old address where
petitioner Nicholas Fitzpatrick had not lived since 2001.
Further investigation by petitioners’ representative indicated
that Mr. Fitzpatrick was entitled to a check from the SSA in the
amount of $196 in 2005 to correct errors in amounts due him as
survivor’s benefits between 1995 and 2000. Petitioners did not
receive any checks or other benefits from the SSA in 2005.
During the period of April through August 2007, the IRS was
aware that petitioners had made attempts to obtain information
from the SSA, had not received an informed response from the SSA,
and continued to seek documentation from the SSA to resolve this
issue. The IRS issued a notice of deficiency on August 13, 2007,
- 4 -
determining a deficiency of $2,872 (the same amount proposed in
the March 19, 2007, Notice CP2000).3
2. Petition and Pretrial Proceedings
Petitioners filed their petition on November 9, 2007. In
the petition they asserted: (1) That they did not receive any
benefits from the SSA in 2005; rather, the SSA erroneously
reported income paid to Mr. Fitzpatrick, the SSA was
investigating the issue, and the SSA would correct the error; and
(2) that they inadvertently omitted gambling income of $1,000 and
agreed with that adjustment.
Respondent filed his answer December 19, 2007, denying for
lack of sufficient information or knowledge that the SSA
erroneously reported income paid to Mr. Fitzpatrick and admitting
that petitioners inadvertently omitted gambling income.
Respondent assigned petitioners’ case to an Appeals officer
(AO) and mailed a letter explaining the Appeals process to
petitioners on January 3, 2008. The AO’s activity log indicates
that she received the case on January 15, 2008, and worked on the
case on 5 different days between January and July 2008.
Petitioners’ representative, an enrolled agent with power of
attorney, wrote the AO on January 15, 2008, stating that he had
3
The 3-year period of limitations for assessment as to
petitioners’ timely filed 2005 Federal income tax return would
normally expire on Apr. 15, 2009.
- 5 -
information that might resolve the case and asking the AO to
contact him.
The AO’s activity log contains the following notes:
Date Notes
1/15/08 Analyzed case file. Timely filed. No prior
involvemt. Petitioners state they disagree w/the
Social Security in the amt of $22,388. However, the
unreported gambling income is in fact accurate. The
petitioners state taht the SSA income is the tps
mother. The SSA is looking into this matter and
will be makg the appropriate corrections. Reviewd
CP2000 notice and acct transcript. Reqtg docs fr
SSA to substantiate claim.
2/29/08 Conference ltrs issued.
5/29/08 Pc to POA and left message. Pc to petitioners to
determine if M Casey was representg them. Left
message.
6/18/08 Pc to petitioners. Phone rang. Contacted POA
Michael Casey and left message for ret call. Pc fr
POA stag that petitioners are in the process of
correcting info with SSA. Discussed the Appeals
process and taxpayer rights. No addtl info has been
provided to correct the SS income. POA will be faxg
addtl info when recd. If addtl info is recvd
forward to counsel.
6/18/08 Sustain compliance
6/18/08 ACM.
6/18/08 Closg docs for trial.
6/18/08 Email recd fr paralegal in the Boston Counsel
office. This case is scheduled on the September and
she reqtd an update if possible on the case status.
6/18/08 Pc to paralegal statg the petitioners can not get
the needed docs such as the corrected 1099 fr the
SSA. It appears that no setlemt will be reached.
POA is currently tryg to resolve this with SSA mgr
in local office but so far no success. Informed her
that the petitioners have conceded the gambling
income and not the SSA benefits.
- 6 -
Date Notes
6/19/08 Closing docs.
7/01/08 Pc to POA to state that I recd faxd copies of docs
provided to explain the issues and how they have
been attempting to get correctd 1099 fr SSA. The
docs stated that they were still in the process and
a corrected copy has not been issued as of yet.
Informd POA that the case will be closed sustaing
Compliance. Informd POA that if the correctd copy
of the 1099 is recvd he can send/fax to me and I
will send it forward to be assocd w/file.
7/01/08 Recd faxed docs fr POA Michael Casey. However,
there is no corrected 1099 fr SSA to substantiate
claim. POA reqts a conference w/supervisor because
he disagrees w/determination.
The AO informed petitioners that without proof from the SSA
that the information reported to the IRS for 2005 was incorrect,
she had to process the case for trial. In his request to meet
with the AO’s supervisor, petitioners’ representative identified
and provided a telephone number for an individual at the SSA who
could explain that the income reported by the SSA was at least
partially inaccurate. The record does not indicate that the AO’s
supervisor met with petitioners’ representative, nor that Appeals
called the SSA contact petitioners provided.
Petitioners and their representative corresponded with the
SSA between March 2007 and July 2008, and, as of July 1, 2008,
they had not received documentation from the SSA describing or
correcting any SSA reporting error.
- 7 -
On July 2, 2008, an IRS paralegal hand-delivered a letter to
the Boston SSA office, together with a request for certification
of records regarding the Forms SSA-1099 issued to Mr. Fitzpatrick
for 2005.
While the IRS paralegal did not directly receive a response,
on July 8, 2008, the SSA issued a letter to petitioners which
stated that the Form SSA-1099 issued to Mr. Fitzpatrick for 2005
was incorrect, that the correct amount appeared to be zero, and
that the corrected Form SSA-1099 was pending as of that date. It
is not clear from the record precisely which query to the SSA
triggered the July 8, 2008, letter.
At a July 14, 2008, meeting with IRS counsel in Boston,
petitioners presented the July 8, 2008, letter from the SSA, and
IRS counsel immediately conceded the entire Social Security
income issue, which was the only remaining issue.
3. Motion for Litigation Costs and Objection
The parties filed a stipulation of settled issues on
September 16, 2008, and petitioners filed a motion for litigation
costs on the same date.
Respondent objects to petitioners’ motion for litigation
costs. In a response filed October 8, 2008, respondent concedes
that petitioners substantially prevailed with respect to the
amount in controversy, did not unreasonably protract the
proceedings, requested reasonable costs, and met the net worth
- 8 -
limitation. Respondent initially objected to petitioners’
request for litigation costs on two grounds: (1) That
petitioners failed to exhaust all available administrative
remedies; and (2) that respondent’s position was substantially
justified.
Petitioners replied to respondent’s response on November 28,
2008, and supplemented their reply on December 8, 2008.
Petitioners assert that they exhausted all available
administrative remedies and challenge respondent’s assertion of
substantial justification, arguing that respondent merely relied
on erroneous SSA reporting without any meaningful investigation
while ignoring petitioners’ challenge to the accuracy of the
information reported.
Respondent concedes in his second response that petitioners
are deemed to have exhausted the available administrative
remedies, pursuant to section 301.7430-1(f)(2), Proced. & Admin.
Regs. Respondent argues that he was substantially justified in
his administrative and litigation position because petitioners
did not assert a reasonable dispute regarding the income reported
by the SSA until they produced the July 8, 2008, SSA letter well
after both the August 13, 2007, notice of deficiency and the
December 19, 2007, answer.
- 9 -
Finally, respondent asserts that petitioners’ claim for
additional costs is not reasonable with respect to petitioners’
filings after the motion for litigation costs.
With their motion for litigation costs petitioners requested
costs and fees of $2,610. They requested additional amounts with
later filings.4 Petitioners claimed the following itemized costs
and fees:
Date Description Amount
11/9/07 Petition filing fee $60
9/16/08 Initial claim (petition through sec. 7430
motion) 2,550
10/27/08 Motion to strike 400
11/28/08 Reply to respondent’s response 700
11/28/08 Postage on envelope containing reply 2
12/8/08 Estimated mailing costs 20
1/28/09 Motion to show cause 100
4/27/09 Motion for summary judgment 150
Total 3,982
Discussion
Reasonable litigation costs may be awarded to a taxpayer if
he satisfies the provisions of section 7430, which require that
he: (1) Qualify as a prevailing party; (2) exhaust all available
administrative remedies; (3) not unreasonably protract the court
proceeding; and (4) demonstrate that the costs claimed are
reasonable litigation costs incurred in connection with the court
4
We denied the three motions petitioners filed after filing
the motion for litigation costs on Sept. 16, 2008.
- 10 -
proceeding. Sec. 7430(a), (c)(4), (b)(1), (3). A taxpayer has
the burden of establishing that he has satisfied each of the
foregoing criteria. See Rule 232(e); Maggie Mgmt. Co. v.
Commissioner, 108 T.C. 430 (1997).
To qualify as a “prevailing party”, a taxpayer must
establish: (1) He substantially prevailed with respect to either
the amount in controversy or the most significant issue or set of
issues presented; and (2) he met the net worth requirements of 28
U.S.C. section 2412(d)(2)(B) at the time he filed the petition.
Sec. 7430(c)(4)(A). A taxpayer shall not be treated as a
prevailing party if the IRS establishes that the Government’s
position in the proceeding was substantially justified. Sec.
7430(c)(4)(B).
Respondent concedes all requirements for petitioners to
qualify for an award of litigation costs except that petitioners
are a prevailing party, on the ground that respondent’s position
was substantially justified.5 Respondent further asserts that
5
Respondent initially asserted that petitioners received a
notice of proposed deficiency (30-day letter). In their motion
and reply, petitioners admitted receipt of a Notice CP2000 but
denied receiving a 30-day letter. In his second response (after
further review and after petitioners’ reply), respondent conceded
that petitioners received only a Notice CP2000 and not a 30-day
letter. This concession implies a distinction between these two
notices. Importantly, a 30-day letter includes instructions for
requesting Appeals Office consideration of the proposed
deficiency. In contrast, the Notice CP2000 in the record did not
provide any such opportunity to request Appeals Office
consideration of the proposed changes.
- 11 -
even if petitioners are entitled to an award, the costs claimed
after they filed the motion for litigation costs are not
reasonable.
A. Substantially Justified
In the Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. 104-168,
sec. 701(a), 110 Stat. 1452, 1463 (1996), Congress amended
section 7430(c)(4), shifting the burden from the taxpayer to the
Government to prove the Government’s position was substantially
justified. Fla. Country Clubs, Inc. v. Commissioner, 122 T.C.
73, 79 (2004), affd. 404 F.3d 1291 (11th Cir. 2005).
In evaluating the Commissioner’s justification we must first
identify when the Commissioner took a position and then decide
whether the position taken from that point forward was
substantially justified. Andary-Stern v. Commissioner, T.C.
Memo. 2002-212. We generally bifurcate our analysis, considering
the Commissioner’s position in the administrative proceeding
separately from his position in the court proceeding. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,
revg. in part on other grounds and remanding T.C. Memo. 1991-144.
The Appeals Office notice of decision or the notice of deficiency
establishes the administrative position (whichever happens
first).6 Sec. 7430(c)(7)(B). The Commissioner’s answer
6
Petitioners seek litigation costs only. Thus, whether
respondent was substantially justified in his administrative
(continued...)
- 12 -
establishes his litigation position. Huffman v. Commissioner,
supra at 1148.
If the Commissioner acted reasonably on all the facts and
circumstances and the legal precedents relating to the case, his
position is substantially justified. Pierce v. Underwood, 487
U.S. 552 (1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987),
affd. 861 F.2d 131 (5th Cir. 1988). The Commissioner’s position
may be substantially justified even if incorrect “‘if a
reasonable person could think it correct’”. Maggie Mgmt. Co. v.
Commissioner, supra at 443 (quoting Pierce v. Underwood, supra at
566 n.2). The Commissioner’s eventually conceding or losing a
case does not establish that his position was not reasonable.
Sokol v. Commissioner, 92 T.C. 760, 767 (1989).
It is well settled that the Commissioner is not obliged to
concede a case until he receives the necessary documentation that
proves the taxpayer’s contentions with respect to any factual
determination. Gealer v. Commissioner, T.C. Memo. 2001-180.
Moreover, after he receives the documentation, the Commissioner
6
(...continued)
position is not directly relevant. We note, however,
respondent’s assertion that his answer adopted the position
stated in the notice of deficiency, which would establish his
administrative position in this case. Finally, to the extent
that the administrative actions form a backdrop for respondent’s
litigation position, that history may prove relevant to our
deciding whether the litigation position was substantially
justified. See Hanson v. Commissioner, 975 F.2d 1150, 1153 (5th
Cir. 1992).
- 13 -
has a reasonable period in which to analyze it and modify his
position accordingly. Id. (citing Sokol v. Commissioner, supra
at 765-766).
In TBOR 2 sec. 602, 110 Stat. 1463, Congress required that
the Government conduct a reasonable investigation of a disputed
information return because of difficulties imposed on a taxpayer
by third parties’ filing fraudulent information returns or
issuing erroneous returns and refusing to correct the
information. H. Rept. 104-506, at 36 (1996), 1996-3 C.B. 49, 84.
In any Court proceeding where a taxpayer asserts a reasonable
dispute with respect to income reported on a third-party
information return and fully cooperates with the IRS, “the
Secretary shall have the burden of producing reasonable and
probative information concerning such deficiency in addition to
such information return.”7 Sec. 6201(d). Full cooperation
7
Because sec. 6201(d) applies only to court proceedings, it
does not bear directly on the Commissioner’s administrative
position, but it does bear directly on his litigation position.
As indicated, petitioners are not seeking administrative costs.
Thus, we need not decide whether the Commissioner’s position qua
administrative position was reasonable. Nevertheless, it is
conceivable that a position could be reasonable at the
administrative stage but less so at the litigation stage as a
result of the sec. 6201 burden of production. Cf. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992) (the
Commissioner’s administrative position, established by the notice
of deficiency, was not substantially justified, but his
subsequent litigation position was substantially justified
because in his answer he conceded the unreasonable position),
affg. in part, revg. in part on other grounds and remanding T.C.
Memo. 1991-144.
- 14 -
requires informing the IRS of the dispute within a reasonable
time. H. Rept. 104-506, supra at 36, 1996-3 C.B. at 84. In
addition, a taxpayer must provide timely “access to and
inspection of all witnesses, information, and documents within
the control of the taxpayer”. Sec. 6201(d).
Respondent argues that he was substantially justified in his
litigation position, on the basis of information reported to the
IRS by the SSA, until July 14, 2008, when petitioners produced
the July 8, 2008, letter from the SSA indicating that the correct
amount of their Social Security income for 2005 was zero. The
parties agree that the IRS promptly conceded this issue upon
receipt of the SSA letter, but they disagree as to whether
petitioners raised a reasonable dispute before producing the July
8, 2008, letter.
Petitioners argue that once they informed the IRS that the
SSA reporting was erroneous, the IRS was not substantially
justified in accepting the veracity of and relying exclusively on
the information return filed by the SSA. The question we must
decide is whether respondent was substantially justified in the
position he adopted in his answer and maintained in this
litigation; namely, denying for lack of sufficient knowledge or
information petitioners’ allegation that the Form SSA-1099 was
incorrect.
- 15 -
We have held that when a taxpayer did not raise an issue
with a Form 1099, the IRS was substantially justified in relying
on the third-party reporting. See McDaniel v. Commissioner, T.C.
Memo. 1993-148. In addition, we have held that where a taxpayer
did not timely furnish information required for the IRS to
concede an issue supported by third-party reporting, the IRS was
substantially justified until the taxpayer provided that
information. See Uddo v. Commissioner, T.C. Memo. 1998-276. In
each situation, we have denied litigation fees to the taxpayer
whose delay prevented more expeditious resolution of his case.
This case fits neither situation and also differs from Spurlock
v. Commissioner, T.C. Memo. 2003-124, where we denied litigation
fees sought by a taxpayer who did not fully cooperate and did not
make her dispute known to the third parties who prepared the
information returns she claimed were fraudulent.
Respondent apparently relies on a vague sentence at the end
of the AO’s activity log entry for January 15, 2008, to show that
the AO requested information from the SSA. This sentence follows
the AO’s statement that she reviewed the Notice CP2000 and the
transcript. It also falls at the end of a paragraph where she
describes petitioners’ position and their contentions about the
SSA. The record does not contain copies of any written request
from the AO to the SSA. Thus, it is far from clear that the AO
was describing her current or intended actions rather than
- 16 -
petitioners’ actions. Furthermore, that entry at most indicates
that someone was in the process of making a request to the SSA.
In contrast, the AO used the past tense to describe her review of
the file, clearly indicating that she had completed that task.
Her activity log does not state that she actually made any
request to the SSA, and it does not contain any followup by the
AO or any evidence that she either noticed or was concerned that
the SSA did not respond to any query during the more than 5
months she had the case.
On April 11, 2008, the Court issued a notice of trial
informing the parties that this case was set for trial at the
trial session beginning on September 15, 2008, in Boston.
It appears that the first time respondent attempted to
obtain information from the SSA was July 2, 2008, when
respondent’s paralegal hand-delivered an inquiry to the SSA.
Thus, on this record, it is clear that between the filing of the
petition on November 9, 2007, and the paralegal’s inquiry on July
2, 2008, respondent did not conduct any independent investigation
despite petitioners’ continuing challenge to the accuracy of the
Form SSA-1099. Rather, respondent relied solely on the
information returns filed by the SSA.
Respondent argues that he had no responsibility to obtain
information in addition to the information return from the SSA.
The necessary inference from this assertion is that the petition
- 17 -
disputing the Form SSA-1099 did not trigger respondent’s burden
of production under section 6201(d). Respondent does not allege
and the record does not indicate that petitioners failed to
cooperate fully. Thus, respondent suggests that petitioners’
dispute was not reasonable and hence respondent’s burden of
production under section 6201(d) did not arise until petitioners
produced the July 8, 2008, SSA letter.8
Petitioners timely raised the issue of erroneous third-party
reporting, both in their Notice CP2000 response and in their
petition, and they, through their representative, diligently
pursued the SSA to clarify the issue. Petitioners provided
respondent with copies of their letters to the SSA, together with
SSA contact information, and they did not withhold any requested
documents, information, or witnesses. Petitioners raised a
specific and credible dispute, and they fully cooperated with
respondent. Thus, we are satisfied that petitioners asserted a
reasonable dispute and that respondent had an obligation to
comply with section 6201(d).
8
In his second response, respondent argues:
In this case, the burden did not shift to respondent to
verify the income reported by the SSA because petitioners
failed to provide documentation from the SSA or any other
independent source rising to the level of a reasonable
dispute before the issuance of the notice of deficiency or
respondent’s answer.
- 18 -
We must decide at what point in this Court proceeding
respondent failed to take steps to procure reasonable and
probative information concerning the deficiency in addition to
the information return issued by the SSA. Another way to
describe the question before us is: Given the existing
administrative record in this case and given that a petition had
been filed with the Court disputing an information return, at
what point would respondent be required to satisfy his obligation
under section 6201(d)?
When he filed his answer, respondent relied on the
presumption of correctness normally afforded his deficiency
notices in adopting his administrative position as his litigation
position, and he placed on petitioners the entire burden of
investigating whether the SSA made a mistake. However, the
statute does not require a taxpayer to provide independent
documentation proving that a disputed information return is
erroneous as a prerequisite to raising a reasonable dispute under
section 6201(d); rather, in response to a reasonable dispute by a
taxpayer in a court proceeding, the statute requires the
Commissioner to produce reasonable and probative information
concerning the deficiency in addition to the disputed information
return.
We conclude that respondent’s obligation arose in this case
soon after the petition was filed with this Court. Petitioners
- 19 -
filed the petition November 9, 2007, respondent filed his answer
December 19, 2007, and Appeals first wrote to petitioners January
3, 2008. However, respondent’s first attempt to procure
reasonable and probative evidence to support the information
return occurred July 2, 2008, approximately 8 months after the
petition was filed.
Section 6201(d) as amended in 1996 requires the Commissioner
to produce independent evidence supporting an information return
reasonably challenged by a cooperating taxpayer, and section
7430(c)(4)(B)(ii) requires him to prove that his position was
substantially justified. We note that the cases discussing the
weight to be given to IRS information documents, in a situation
of omitted income, and the effect on the burden of persuasion are
cases decided before the amendment to section 6201.9
9
In contrast to Portillo v. Commissioner, 932 F.2d 1128,
1133-1134 (5th Cir. 1991) (requiring the IRS to attempt to
substantiate a disputed charge of unreported income by some means
other than the naked assertion of the third-party reporter),
affg. in part, revg. in part and remanding T.C. Memo. 1990-68,
the Court of Appeals for the First Circuit has held that the
burden of going forward and of ultimate persuasion always rests
on the taxpayer and never shifts to the Commissioner. United
States v. Rexach, 482 F.2d 10, 17 (1st Cir. 1973); see also
Delaney v. Commissioner 99 F.3d 20, 23 (1st Cir. 1996), affg.
T.C. Memo. 1995-378. But for the provisions of sec. 7463(b), the
decision in this case would be appealable to the Court of Appeals
for the First Circuit. See sec. 7482(b)(1)(A). This Court
generally applies the law in a manner consistent with the
holdings of the Court of Appeals to which an appeal of its
decision would lie, see Golsen v. Commissioner, 54 T.C. 742, 757
(1970), affd. 445 F.2d 985 (10th Cir. 1971), even in cases
subject to sec. 7463(b).
- 20 -
Respondent argues that awarding costs in this case would
require the IRS to investigate all third-party information
returns, even Forms 1099 issued by other Federal agencies, before
issuing a notice of deficiency or to risk liability for
litigation costs; that such an award would unfairly hold the IRS
responsible for the SSA’s error and untimely response; and that
the administrative burden flowing from such a holding would be
both unreasonable and overwhelming.
As indicated, this case does not address the reasonableness
of the administrative position established in the notice of
deficiency because petitioners have not requested administrative
costs or fees. Furthermore, section 6201(d) does not apply to
prelitigation actions. Thus, respondent’s argument is
misdirected. The issue here is whether respondent was reasonable
in adopting and maintaining the administrative position as his
litigation position, in view of the affirmative duty imposed by
section 6201(d) to produce probative information in this Court
proceeding to verify the disputed information return.
Respondent also complains that awarding litigation costs in
this case holds the IRS liable as a result of third-party errors
and unfairly makes the IRS responsible for another agency’s
untimely response. Neither assertion is accurate; rather, any
award of litigation costs results from respondent’s failure to
act reasonably in adopting a litigation position without
- 21 -
attempting to obtain reasonable and probative information
concerning the deficiency, as required by section 6201(d).
As indicated, the petition was filed in this matter on
November 9, 2007. Petitioners explained in the petition:
The Taxpayer, Nicholas Fitzpatrick, did not at any time in
the year 2005, receive Social Security benefits from the
Social Security Administration. This was an error in
computation of a Workman’s Compensation offset determined to
be attributable to the Taxpayer's mother, Lynda Fitzpatrick.
The Social Security Administration is now looking into this
matter and will be making the appropriate corrections. We
request that the income relating to Social Security be
reduced to zero, and the tax deficiency relating to such
income be eliminated.
Respondent had 60 days to file his answer. See Rules 173(b),
36(a). The answer was filed December 19, 2007. In response to
petitioners’ challenge to the SSA income, respondent asserted:
“Denies for lack of sufficient knowledge or information.”
Rule 33(b) requires inquiry into both the facts and the law
relevant to any pleading at the time the pleading is filed.
Versteeg v. Commissioner, 91 T.C. 339, 342 (1988). In this case
that would entail review of information in the administrative
file. A review of that file would presumably have revealed that
the basis for the determination of omitted income was the
contested Form SSA-1099. The file would also have revealed
petitioners’ consistent position that the information return was
incorrect as well as petitioners’ attempts to get the SSA to
respond to their inquiries. At some point respondent’s counsel
- 22 -
responsible for this case should have become aware of his
verification obligation under section 6201(d).
Considering the particular circumstances of this case, we
conclude that respondent’s denial for lack of knowledge or
information with respect to petitioners’ Social Security income
was not reasonable given his duty under section 6201(d).
Assuming respondent’s counsel had the administrative file, he
should have reviewed the file before filing the answer. Even if
respondent did not have the file and thus was required either to
answer for lack of knowledge or information or to seek additional
time to file the answer, there is nothing in this record to
establish that respondent took any steps before July 2, 2008, to
investigate the disputed Form SSA-1099. Under these particular
facts and circumstances we conclude that respondent was not
substantially justified in continuing this litigation without any
such investigation.10
Accordingly, petitioners are a prevailing party, and we hold
that they are entitled to an award of attorney’s fees and
litigation costs.
10
The SSA issued its July 8, 2008, letter within days of
respondent’s July 2, 2008, hand-delivered query. It is possible
that a timely inquiry to the SSA by respondent’s counsel upon
receipt of the petition could have resolved this case much
sooner, saving petitioners and the Government costs and expenses.
- 23 -
B. Reasonable Litigation Costs
Section 7430(c)(3)(A) provides that
fees for the services of an individual (whether or not an
attorney) who is authorized to practice before the Tax Court
or the Internal Revenue Service shall be treated as fees for
the services of an attorney.
Furthermore, attorney’s fees may not exceed $125 per hour absent
our finding that an increase in the cost of living or a special
factor justifies a higher rate. Sec. 7430(c)(1)(B)(iii).
Petitioners claim attorney’s fees for the services of an
enrolled agent, and the invoices submitted indicate that their
representative charged $100 per hour. The hourly charges for
their representative may be treated as litigation fees without
adjustment, provided the hours claimed are reasonable. See
Cozean v. Commissioner, 109 T.C. 227, 234 (1997).
In his response respondent conceded that petitioners
requested reasonable litigation costs and fees in their motion.
Respondent contends that costs and fees claimed after the
motion are not reasonable. As to petitioners’ reply to
respondent’s response to petitioners’ motion, petitioners argued
convincingly that they did not receive a 30-day letter and were
not afforded an opportunity for pre-petition Appeals Office
consideration of their case. Respondent conceded this issue upon
further consideration and several months after petitioners
submitted their reply. We find that the $700 claimed for
preparing petitioners’ reply was reasonable, as was the $2
- 24 -
postage affixed to the envelope used to mail the reply to the
Court.
Petitioners filed a motion to strike certain assertions in
respondent’s response. This motion served no useful purpose, did
not advance this litigation, and was denied. Petitioners also
claimed $20 in estimated mailing costs but provided no support
for those estimated costs. Thus, the $400 claimed for the motion
to strike and the $20 claimed for estimated mailing costs are not
reasonable.
Petitioners’ motion to show cause concerned petitioners’
proposed stipulation of fact that they did not receive a 30-day
letter. The arguments in petitioners’ previously filed reply and
respondent’s subsequent concession rendered petitioners’ motion
to show cause moot. Finally, petitioners’ motion for summary
judgment was denied. Claimed costs of $100 for the show cause
motion and $150 for the summary judgment motion are not
reasonable.
Conclusion
For the reasons discussed above, petitioners are entitled to
an award of litigation costs and fees totaling $3,312.
An appropriate order and
decision will be entered.