T.C. Summary Opinion 2009-155
UNITED STATES TAX COURT
ELIZABETH B. CHAPMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10030-08S. Filed October 13, 2009.
Elizabeth B. Chapman, pro se.
L. Katrine Shelton, for respondent.
GERBER, 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 any other court, and
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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this opinion shall not be treated as precedent for any other case.
Petitioner seeks to recover the litigation2 and
administrative fees and costs of her proceeding under section
7430. The issues3 for our consideration are: (1) Whether
petitioner was a prevailing party under section 7430(c)(4) and
(2) whether petitioner is entitled to reimbursement beyond the
statutory rate.4
Background
In a July 12, 2007, letter, respondent notified petitioner
that her 2005 Federal income tax return was to be examined.
Petitioner’s accountant, Ms. Hill, represented her before
respondent in the administrative examination. On July 19, 2007,
after respondent’s examiner did not respond to Ms. Hill’s
telephone calls, Ms. Hill sent a facsimile to the examiner to
schedule the examination. On July 23, 2007, Ms. Hill reached the
2
Petitioner initially sought to recover her administrative
fees and costs, but after she was forced to go to trial on that
issue, the Court granted petitioner’s oral motion to amend her
motion to include the costs and fees of litigation.
3
Initially, respondent questioned whether petitioner had met
the net worth requirement for recovery under sec. 7430, but
respondent has conceded that petitioner satisfies that
requirement.
4
The statutory rate was $170 per hour for 2007 and 2008, and
$180 per hour for 2009. See Rev. Proc. 2006-53, sec. 3.40, 2006-
2 C.B. 996, 1003; Rev. Proc. 2007-66, sec. 3.39, 2007-2 C.B. 970,
976; Rev. Proc. 2008-66, sec. 3.38, 2008-45 I.R.B. 1107, 1114.
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examiner and requested that the examination be held within 2
weeks after the normal 4-week period. Although the examiner’s
group manager approved the examination date, respondent’s
personnel chose to issue a 30-day letter setting forth
adjustments and a proposed deficiency, even though petitioner had
not had an opportunity to present documentation to the examiner.
The 30-day letter and confirmation of an examination date were
sent concurrently to petitioner. This placed petitioner in a
position of having to appeal even before she was provided with an
opportunity to present documentation at an examination.
On September 11, 2007, Ms. Hill appeared at the examiner’s
office and presented documentation with respect to the items
respondent questioned. Ms. Hill presented documentation that
substantiated deductions in excess of those that petitioner had
claimed on her 2005 tax return. After reviewing the documents
for 4 hours, the examiner explained to Ms. Hill that she would
have to come back another time. Ms. Hill suggested that the
examiner issue an information document request (IDR) to which
petitioner could respond in order to save her client from
additional billings for Ms. Hill’s time. The examiner agreed and
issued an IDR, to which petitioner promptly responded. After
approximately 1 month Ms. Hill began calling the examiner and the
examiner’s group manager to ask when the examiner would issue a
report.
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The items in question during the examination approximated
$75,000 and would have resulted in an income tax deficiency
approximating $15,000. On November 8, 2007, the examiner issued
her report (a revised 30-day letter) indicating a proposed tax
deficiency of $151. Within a week Ms. Hill sent correspondence
to the examiner and her group manager advising that certain
information submitted had not been appropriately considered and
that there should be no deficiency whatsoever. After there was
no response to the correspondence, Ms. Hill made repeated calls
to the group manager and, at one point, the group manager
indicated that she thought that the examination would result in
no change (no deficiency). In spite of this, a statutory notice
of deficiency determining a $151 income tax deficiency was issued
to petitioner.
After the group manager refused to reconsider the determined
deficiency, petitioner went to the Taxpayer Advocate’s Office
during the 90-day period within which the notice of deficiency
was appealable to this Court. Petitioner filed a petition and
was granted an Appeals conference. At the Appeals conference
petitioner submitted two documents to the Appeals officer, after
which respondent agreed to a zero deficiency for 2005. Those two
documents had been presented to the examiner but could not be
found by the Appeals officer. Following that, petitioner sought
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to recover litigation and administrative fees and costs incurred
with respect to her 2005 tax year.
Discussion
Section 7430(a) authorizes an award to a prevailing party of
reasonable litigation or administrative fees and costs paid or
incurred before or during a court proceeding which is brought by
or against the United States in connection with the
determination, collection, or refund of any tax, interest, or
penalty under the Internal Revenue Code. The taxpayer must
establish that she: (1) Is the prevailing party; (2) has
exhausted the available administrative remedies; (3) has not
unreasonably protracted the court proceedings; and (4) has
claimed litigation costs that are reasonable. Sec. 7430(a) and
(b)(1), (3).
The moving party bears the burden of proving that these
requirements are met. Rule 232(e). A taxpayer is generally the
prevailing party if the taxpayer substantially prevailed with
respect to either the amount in controversy or the most
significant issue or set of issues. Sec. 7430(c)(4)(A). Under
section 7430(c)(4)(B), even if the taxpayer meets the
requirements of a prevailing party under section 7430(c)(4)(A),
the taxpayer will not be treated as a prevailing party if the
Commissioner’s position in the proceeding was substantially
justified.
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Respondent conceded that petitioner satisfied the net worth
requirement. Although respondent argued that petitioner did not
exhaust all administrative remedies, the record amply supports
our holding that petitioner met that requirement. Therefore, we
are left to decide whether: (1) Respondent’s position “was
substantially justified” under section 7430(c)(4)(B)(i); and/or
(2) the amount of costs petitioner claims is reasonable under
section 7430(a)(2) and (c)(1).
It is without doubt that petitioner was the prevailing party
in this proceeding. Accordingly, we must decide whether
respondent’s position was “substantially justified”.
“Substantially justified” is defined as “justified to a degree
that could satisfy a reasonable person” and having a “reasonable
basis both in law and fact”. Pierce v. Underwood, 487 U.S. 552,
565 (1988); Huffman v. Commissioner, 978 F.2d 1139, 1147 n.8 (9th
Cir. 1992), affg. in part, revg. in part and remanding T.C. Memo.
1991-144. It is the Commissioner’s burden to prove that his
position was substantially justified. See sec. 7430(c)(4)(B)(i).
The Commissioner’s position may be incorrect and yet be
substantially justified “if a reasonable person could think it
correct”. See Pierce v. Underwood, supra at 566 n.2. Whether
the Commissioner acted reasonably ultimately turns on the
available information that formed the basis for the
Commissioner’s position as well as on the relevant law. See
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Coastal Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685,
688-690 (1990). The fact that the Commissioner eventually loses
or concedes a case does not by itself establish that the
Commissioner’s position was unreasonable. However, it is a
factor that may be considered. Maggie Mgmt. Co. v. Commissioner,
108 T.C. 430, 443 (1997).
In evaluating the Commissioner’s justification, we 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 analyze the Commissioner’s position in the
administrative proceeding separately from the position taken in
the litigation. Huffman v. Commissioner, supra. In this case,
however, respondent’s position did not change and can be analyzed
concurrently.
Petitioner argues that respondent was not substantially
justified because of the failure to investigate the underlying
facts, resulting in respondent’s erroneous position in the 30-day
letter and, ultimately, in respondent’s answer. Petitioner was
notified during 2007 that her 2005 tax return was under
examination. Normally, the examination would be scheduled within
a 4-week period; however, petitioner asked for a 2-week
extension. The matters under examination were simply questions
of substantiation of deductions. The extension was granted but
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respondent, for reasons that remain unexplained, issued a 30-day
letter proposing to disallow all of the questioned deductions
before affording petitioner an opportunity to substantiate them.
Petitioner provided respondent’s examiner with documentation
that reflected that she was entitled to deductions in an amount
that was in excess of the amount respondent questioned.
Respondent’s examiner issued a revised 30-day letter proposing a
$151 income tax deficiency, and petitioner attempted to persuade
respondent that there was no deficiency for 2005. For reasons
that remain unexplained, respondent’s personnel did not provide
petitioner with the opportunity to show that there was no
deficiency and issued a statutory notice of deficiency
determining a $151 income tax deficiency.
Petitioner attempted to have respondent withdraw the
statutory notice to avoid the expense of filing a petition in
this Court, but petitioner’s efforts were unsuccessful and a
petition was filed. In the petition, petitioner contended that
there was no deficiency and that she had substantiated deductions
in excess of those respondent questioned. Petitioner also
contended that she was entitled to fees and costs. In the answer
respondent generally denied petitioner’s allegations and prayed
that the deficiency should be sustained.
After this proceeding was filed, petitioner met with an
Appeals officer, who agreed that there was no deficiency due from
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petitioner. Respondent argues that the Appeals officer was
exposed to new information that had not been shown to
respondent’s examiner during the administrative proceeding, but
petitioner provided credible testimony showing that respondent’s
argument is incorrect.
A significant factor in determining whether the Commissioner
acted reasonably as of a given date is whether, on or before that
date, the taxpayer presented all relevant information under the
taxpayer’s control. Corson v. Commissioner, 123 T.C. 202, 206-
207 (2004); sec. 301.7430-5(c)(1), Proced. & Admin. Regs. Thus,
whether the Commissioner acted reasonably may turn upon the
available facts which formed the basis for the Commissioner’s
position. Nalle v. Commissioner, 55 F.3d 189, 191-192 (5th Cir.
1995), affg. T.C. Memo. 1994-182; DeVenney v. Commissioner, 85
T.C. 927, 930 (1985).
Accordingly, from the time that respondent’s examiner issued
the revised 30-day letter, respondent had documentation and
information that would have resulted in no deficiency for
petitioner. Petitioner tried, without success, to show the
examiner and the group manager that respondent’s position was
incorrect, but petitioner was ignored and a statutory notice was
issued, forcing petitioner to proceed with litigation.
Respondent’s position and actions from the time of the revised
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30-day letter were not reasonable and resulted in unnecessary
costs and fees to petitioner.
Respondent has presented no evidence showing that it was
reasonable to determine that petitioner had a deficiency for
2005. Likewise, respondent has not explained why it was
necessary to proceed to litigation or to rush the administrative
proceeding (e.g., imminent expiration of the period for
assessment). Respondent has not proven that his position was
substantially justified either in the administrative proceeding
or during the litigation. See, e.g., Powers v. Commissioner, 100
T.C. 457 (1993), revd. in part on other grounds 43 F.3d 172 (5th
Cir. 1995). In Powers, the Commissioner made no effort to
contact the taxpayer before issuing the notice of deficiency.
Petitioner attempted to show respondent that it was unnecessary
to issue a notice of deficiency, and petitioner’s attempts were
ignored.
Accordingly, petitioner is entitled to allowable costs and
fees from November 8, 2007, the time of the issuance of the
revised 30-day letter. See sec. 7430(c)(2). Respondent has also
questioned whether petitioner’s claimed costs are reasonable and
in particular whether the hourly charge for Ms. Hill should be
allowed beyond the statutory rate. Petitioner claims fees for
the services of an accountant at $400 per hour, in excess of the
statutory rate. We must consider whether petitioner is entitled
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to an amount in excess of the statutory rate. We must also
consider whether the hours claimed are reasonable. See Cozean v.
Commissioner, 109 T.C. 227, 234 (1997).
Petitioner has claimed costs of $7.13 that were incurred
during 2008. Petitioner also claimed fees incurred since
November 8, 2007, as follows:
Year Number of Hours Rate Total
2007 .0825 $400 $33
2008 4.5825 400 1,833
1
2009 14.90 400 5,960
1
The fees incurred during 2009 were for professional
assistance during the litigation.
Initially, we find petitioner’s claim for costs of $7.13 to
be reasonable and hold that she is awarded costs of $7.13.
Additionally, we have reviewed detailed hourly billings
petitioner presented and find them to be reasonable for the
nature and type of service provided.
With respect to petitioner’s claim for fees, however, we
must consider whether petitioner is entitled to claim more than
the statutory rates allowed for the professional tax assistance
she received.
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 before the Internal Revenue
Service shall be treated as fees for the services of an
attorney.” Furthermore, reimbursement of petitioner’s
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accountant’s fees may not exceed the statutory rate set for each
year, absent a finding that an increase in the cost of living or
a special factor justifies a higher rate. See sec.
7430(c)(1)(B)(iii). The statutory rate was $170 per hour for
2007 and 2008, and $180 per hour for 2009.
A taxpayer may recover attorney’s fees above the statutory
limit if the Court determines the existence of a special factor
such as: (1) Limited availability of qualified attorneys for the
proceeding; (2) the difficulty of the issues presented in the
case; or (3) the local availability of tax expertise. Id.
General expertise in tax law in itself is not a special factor
warranting a fee award in excess of the statutory rate under
section 7430. Huffman v. Commissioner, 978 F.2d at 1150; Powers
v. Commissioner, supra at 489.
The circumstances did not require specialized expertise.
During the administrative process petitioner was required to
substantiate claimed deductions. There is no indication that
unique or unusual legal or procedural matters arose that would
have presented extraordinary difficulty for or required
specialized expertise of petitioner’s tax professional. Under
those circumstances, petitioner is entitled to be awarded the
recovery of fees at the statutory rate. Accordingly, petitioner
is entitled to be awarded fees as follows:
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Year Number of Hours Hourly Rate Award
2007 .0825 $170 $14.03
2008 4.5825 170 779.03
2009 14.90 180 2,682.00
Total award of fees 3,475.06
To reflect the foregoing,
An appropriate order and
decision will be entered.