Vasquez v. Comm'r , 93 T.C.M. 660 ( 2007 )

T.C. Memo. 2007-6
UNITED STATES TAX COURT
GILBERT VASQUEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16121-03. Filed January 10, 2007.
P claimed earned income credit (EIC) as a refund
of $2,890 on his 2002 tax return. On May 16, 2003, R
sent a packet of materials to P, proposing to disallow
the EIC, stating that the claimed refund was “frozen”,
requiring P to “Return Form 4549 and your payment of
$0.00 in the enclosed envelope by 06/15/2003”,
requesting P to provide documents supporting his
claimed EIC, and warning P that a notice of deficiency
would be sent to him if the documents were not received
by June 15, 2003. P failed to respond, and, on July
18, 2003, R sent the notice of deficiency of $2,890 on
which this case is based. P secured counsel and filed
a petition. R filed an answer embodying the position R
took in the notice of deficiency. Six weeks after the
answer R notified P that P’s case was in R’s Appeals
Office. Three months after the notification (4-1/2
months after the answer) P filed a motion in limine for
an order ruling certain documents are not inadmissible
hearsay. Based on those documents, R eventually
conceded the EIC, and eventually the parties submitted
- 2 -
a proposed decision that P had an overpayment of
$2,890. We entered the decision. P then moved for
litigation costs of $19,100 ($27,000 at “market rate”);
on opening legal memorandum, P contends that awardable
costs on this $2,890 case have risen to $45,225
($75,000 at “market rate”). We vacated the entry of
decision and filed the litigation costs motion.
Held: P’s motion for litigation costs denied; R
established that R’s position in this case was
substantially justified. Sec. 7430(c)(4)(B)(i), I.R.C.
1986. Other contentions evaluated.
Jeffrey D. Moffatt, for petitioner.
Lorraine Y. Wu, for respondent.
MEMORANDUM OPINION
CHABOT, Judge: This matter is before us on petitioner’s
motion for an award of reasonable litigation costs pursuant to
section 74301 and Rule 231.2
Respondent determined a deficiency in individual income tax
against petitioner in the amount of $2,890 for 2002. The
determined deficiency arose from petitioner’s claim of a
refundable earned income credit in that amount under section 32.
1
Unless indicated otherwise, all references to secs. 7430
and 7453 are to those sections of the Internal Revenue Code of
1986 as in effect for proceedings commenced at the time the
petition in the instant case was filed; all other section
references are to sections of the Internal Revenue Code of 1986
as in effect for 2002, the year in issue.
2
Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
- 3 -
The parties settled the disputed deficiency by stipulating that
there is an overpayment of $2,890 for 2002.
Petitioner asks us to award reasonable litigation costs3 of
$45,225 (based on statutory rates for legal fees) or $75,000
(based on “market rate” for legal fees).4
The issues for decision are:
(1) Whether petitioner is entitled to an award of reasonable
litigation costs; and
(2) if the answer to the first issue is “yes”, then what is
the amount of the awardable costs.
Neither petitioner’s motion for award of litigation costs
nor respondent’s response to the motion requested a hearing on
the motion. Rules 231(b)(8) and 232(b) (final flush language).
In his memoranda of law petitioner states that he has been
handicapped by the Court’s indication that it would not authorize
depositions of certain of respondent’s employees. We have
3
Petitioner has requested only litigation costs in the
instant case, so we do not consider the statutory or regulatory
provisions that apply only to administrative costs.
4
These amounts are stated in petitioner’s opening legal
memorandum on the litigation costs motion. Petitioner’s
answering legal memorandum on this motion asserts that, “H.
Preparing this Brief has taken another 30 hours of time, which
Petitioner’s counsel requests to be compensated for.”
Petitioner’s motion for litigation costs, received 16 days after
the Court had entered the parties’ stipulated decision, included
an estimate that litigation costs up to that point would amount
to $19,100 (based on statutory rates for legal fees) or $27,000
(based on “market rate” for legal fees).
- 4 -
examined the parties’ stipulations and memoranda of law, as well
as petitioner’s supplement to the motion and the documents
attached thereto, and conclude that the litigation costs motion
may properly be resolved with neither (1) an evidentiary hearing
nor (2) the authorization of contested depositions. See Rules
232(a)(2) (last sentence), 75(b) (first sentence).
The parties have presented admissibility disputes in certain
of their stipulations. We rule on these evidentiary disputes
infra, as the first items under Discussion.
Background
When the petition was filed in the instant case, petitioner
resided in Lancaster, California.
On his 2002 income tax return (Form 1040A, U.S. Individual
Income Tax Return),5 petitioner showed his filing status as
single, and claimed five dependents--VV, SV, AH, EH, and JH.6
Petitioner reported wage compensation income of $7,200 and
adjusted gross income of $7,200. He claimed the standard
deduction of $4,700, a personal exemptions deduction of $18,000,
and an earned income credit of $2,890. He did not show a section
1 tax liability; he claimed the entire $2,890 as an overpayment
and asked that all of it be refunded by direct deposit into an
5
Neither the stipulated copy of petitioner’s electronically
filed 2002 tax return nor the stipulation indicates when the tax
return was filed. We assume the tax return was filed timely.
6
We refer to the minor children by their initials only.
- 5 -
indicated checking account. To his Form 1040A, petitioner
attached a Form 8862 (Information To Claim Earned Income Credit
After Disallowance) and a Schedule EIC (Earned Income Credit
Qualifying Child Information) with appropriate information as to
VV and SV.
On his tax return, including the Form 8862 and the Schedule
EIC, petitioner stated (1) that VV and SV were his sons, (2) that
VV was born in 1998, and that SV was born in 1997, and (3) that
VV and SV each lived with petitioner in the United States for 12
months.
On May 16, 2003, respondent sent to petitioner a two-page
letter (Letter 566 B-EZ (SC)), to which was attached the
following: A two-page document relating to the earned income
credit (Form 886-H-EIC), a one-page document relating to support
documents for dependency exemptions (Form 886-H-DEP), a two-page
document relating to income tax examination changes (Form 4549),
and a one-page document relating to explanation items (Form 886-
A).7 This letter and the attached documents are hereinafter
sometimes collectively described as the May 16, 2003, letter.
The May 16, 2003, letter informed petitioner that respondent
was examining petitioner’s 2002 income tax return and proposed to
7
The letter also showed that a copy of Publication 3498,
The Examination Process, was enclosed, but the stipulated exhibit
does not include the Publication 3498.
- 6 -
disallow “Exemption(s) Earned Income Credit”; it instructed
petitioner as follows:
If you agree with all the changes listed on the
enclosed Form 4549:
• Please sign and date Form 4549, and
• Return Form 4549 and your payment of $ 0.00
in the enclosed envelope by 06/15/2003. Make
your check or money order payable to United
States Treasury. We may charge interest for
payments received after 06/15/2003. If you
can’t pay the total amount, please return
Form 4549 and contact us at 800-477-1291 to
discuss payment arrangements.
The May 16, 2003, letter then instructed petitioner as follows:
If You Do Not Agree
If you do not agree with all the changes listed on Form
4549, please send us the following information by
06/15/2003
• A letter telling us what item(s) you disagree
with and why, and
• Clear photocopies of the records, information,
and/or supporting documents, listed on the
enclosed Form(s) 886H-DEP, 886H-EIC to
support the items listed above. It is not
necessary to include more than one copy of any
document.
If You Do Not Reply
If we do not receive your supporting documents by
06/15/2003, we will send you a Notice of Deficiency.
This is a legal document explaining the proposed
changes and the amount of the proposed tax increase.
Important Notes If You Do Not Agree
It’s important that we receive your written response by
06/15/2003.
- 7 -
• Please read the enclosed Form(s) 886H-DEP,
886H-EIC , which lists the types of
documents needed to support your claim and
includes helpful information on the Earned
Income Credit, Dependency Exemptions, and
Head of Household Filing Status.
• To speed up your service, please use the
enclosed envelope or address your reply to:
Internal Revenue Service
FIELD COMPLIANCE SERVICES
FRESNO, CA 93888-2222
• Include a copy of this letter with your
response.
• Include a telephone number with the area code
and the best time for us to call you in case
we need more information.
Telephone Number: ( ) Best time to call:
G Home G Work G Cell Phone
After we review what you’ve sent us, we will contact
you with the results. If you still disagree with our
findings, you have the right to file an administrative
appeal as explained in the enclosed Publication 3498,
The Examination Process.
Questions
If you have any questions about this letter, please
call 800-477-1291 for assistance. You can also visit
our web site at www.irs.gov for additional information.
The enclosed Form 886-H-EIC (Supporting Documents for
Taxpayers Claiming EIC on the Basis of a Qualifying Child(ren))
instructed as follows, as relevant to petitioner’s claim:
(1) If the qualifying children are the taxpayer’s
sons or daughters, then the taxpayer is not required to
document the relationship;
- 8 -
(2) If the qualifying children are less than 19
years old, then the taxpayer is not required to
document the age; and
(3) The following must be sent to support the
residency test:
To show that the child lived with you for
more than half of 2002 send:
One of the following: school records, medical
records, daycare records, or Social Services
records that show names, common address and
dates
or
One letter on official letterhead from: the
school, your medical provider, your clergy or
other similar organizations that show names,
common address and dates
** If you send a letter from a relative who
provides your daycare, you MUST send at least
one additional letter from the list above.
** You can send more than one document to
show that the child lived with you for more
than half the year
The enclosed Form 886-H-DEP (Supporting Documents for
Dependency Exemptions) instructed petitioner to provide
information as to the claimed dependents’ support.
The enclosed Form 4549 (Income Tax Examination Changes)
showed that respondent proposed to disallow all five of the
claimed dependency exemptions, as well as the earned income
credit, as a result of which there would be neither a balance due
nor an overpayment of petitioner’s income tax.
- 9 -
The enclosed Form 886-A (Explanation of Items) stated that
the claimed refund was “Frozen”.
Petitioner failed to respond to the May 16, 2003, letter.
On July 18, 2003, respondent issued the notice of deficiency
on which the instant case is based. The notice of deficiency
explanations are as follows:
Earned Income Credit
Per Return: $2890.00
Per Exam: $0.00
Per Adjustment: ($2,890.00)
Since you did not establish that you were entitled to
the earned income credit, we disallowed it.
Exemptions
Per Return: 6
Per Exam: 1
Per Adjustment: 5
Since you did not establish that you are entitled to
the exemptions(s), it/they is/are being disallowed.
Petitioner first consulted with Jeffrey D. Moffatt
(hereinafter sometimes referred to as Moffatt), petitioner’s
counsel in the instant case, on July 26, 2003. Petitioner
retained Moffatt on July 27, 2003.
On September 22, 2003, Moffatt filed a timely petition on
petitioner’s behalf. Paragraph 4 of this petition is as follows:
4. The determination of the tax set forth in the
said notice of deficiency (or liability) is based upon
the following errors:
- 10 -
A. Petitioner was improperly denied his requested
Earned Income Credit, hereinafter referred to as EIC.[8]
B. Petitioner provided the requested
documentation to the Internal Revenue Service to
support his claim of the Earned Income Credit.
C. Petitioner responded to requests for
information within the time deadlines requested by the
Internal Revenue Service?
D. Did Petitioner comply to the amount necessary,
and in the time frame necessary to allow a claim for
legal fees for this present Litigation?
E. Has Petitioner proved his position by a
preponderance of the evidence, which will then allow
for legal fees to be covered by Respondent?
[Reproduced literally.]
The answer was filed on November 20, 2003, by Debra A. Bowe
(hereinafter sometimes referred to as Bowe), Associate Area
Counsel (Small Business/Self-Employed). Paragraph 4 of this
answer is as follows:
4. A., B., C., Denies. D. and E., Alleges these are
not assignments of error susceptible to an admission or
denial by respondent.
The answer denies “for lack of present information” substantially
all of the petition’s fact allegations.
8
The denial of the claimed dependency exemption deductions
does not affect petitioner’s income tax liability. Accordingly,
we treat the earned income credit as the only relevant tax issue
in the instant case.
- 11 -
On November 19, 2003,9 respondent’s counsel’s office sent
documents in petitioner’s case (copies of the petition and the
answer, with a note that the administrative file was available)
to the Appeals Office for consideration.10
On January 2, 2004, the Appeals Office sent a letter to
petitioner11 (1) advising him that his case had been received for
consideration in the Appeals Office, (2) explaining what the
Appeals Office does, (3) suggesting that petitioner “Contact the
‘Person to Contact’ listed above with any questions about the
appeals process or how you can prepare for your hearing,” and (4)
showing Cynthia Ace (hereinafter sometimes referred to as Ace) as
the “Person to Contact”.
The case was assigned to Ace on January 2, 2004.
9
Respondent’s answer was filed on Nov. 20, 2003, when the
Court received it. However, respondent had mailed the answer to
the Court, and had served it on petitioner, on Nov. 19, 2003, the
date of the referral to the Appeals Office. See Rule 21(b)(1).
Moffatt’s records show that he received the answer on Nov. 19,
2003.
10
See Rev. Proc. 87-24, 1987-1 C.B. 720, for respondent’s
procedures, and the division of authority, as to the Appeals
Office and respondent’s counsel before this Court. See also sec.
7452.
11
As we have found, Moffatt filed the petition, thereby
having entered his appearance for petitioner. Rule 24(a)(2).
Respondent’s answer included Bowe’s certificate of service of the
answer on Moffatt. Rule 21(b)(2). The record does not include
an explanation of why the Appeals Office notified petitioner
directly and apparently did not notify Moffatt.
- 12 -
On January 21, 2004, petitioner brought to Moffatt the
January 2, 2004, Appeals Office letter.
On April 5, 2004, petitioner filed a motion in limine for an
order “allowing for the following documents to come in as Hearsay
exceptions and/or Hearsay Exclusions, and/or do not constitute
Hearsay at all.” The documents included birth certificates for
VV and SV, and various school and State court documents relating
to one or more of the claimed dependents. See supra note 6.
Attached to the motion was Moffatt’s certificate of service on
Bowe. See Rule 21(b)(1). The motion did not include any
statement that prior notice had been given to Bowe, or any other
of respondent’s counsel, nor did the motion state whether
respondent objected to the motion. See Rule 50(a). On April 6,
2004, the Court calendared the instant case for hearing on
petitioner’s motion in limine at the Court’s May 17, 2004, Los
Angeles trial session.
On April 9, 2004, respondent’s counsel’s office mailed to
Ace a copy of petitioner’s motion in limine “for consideration of
petitioner’s documentation.”
On April 22, 2004, Moffatt called Ace and asked about the
status of the case. Ace explained to Moffatt that she had not
yet looked at the case because the case was not yet scheduled for
trial. Moffatt wanted to know who was respondent’s counsel on
the case. Ace called Area Counsel and learned that no attorney
- 13 -
had yet been assigned to the case. Ace transmitted this
information to Moffatt. Moffatt asked Ace if he could get
litigation costs if he settled with the Appeals Office. Ace told
him that she did not think so, but that she would find out.
On May 14, 2004, Ace, having evaluated the materials,
concluded that respondent should concede the earned income credit
issue.
On May 17, 2004, the case was called at the calendar call
for the Court’s trial session to deal with petitioner’s motion in
limine. Respondent was represented by Nguyen Hoang (hereinafter
sometimes referred to as Hoang), and petitioner was represented
by Moffatt. Hoang stated that the purpose of petitioner’s motion
in limine could best be achieved during the stipulation process,
which would follow the appeals process. Moffatt stated that he
had subpoenaed 10 government employees to come to the hearing on
the motion, in order to authenticate the documents and support
the documents’ admissibility. Moffatt stated that “if the motion
is heard, and the witnesses are allowed to testify, I think the
case will not need to go further in trial. I think it will be
settled by summary judgment.” The Court directed counsel to
meet, discuss the documents, and report back.
About 1-1/2 hours later, the case was recalled. Hoang
agreed to stipulate all the documents in petitioner’s motion in
limine, as follows:
- 14 -
MS. HOANG: Your Honor, Dan O’Neill, a paralegal
for the Respondent, has looked at the documents. He
has indicated that Respondent will stipulate to all of
the documents, so the next step will be that Mr.
O’Neill will prepare a draft stipulation of facts, and
hopefully, get it out with all due deliberate speed.
We’re shooting for possibly July 1st, and from then on
we will continue the process.
Moffatt presented several additional documents. After a
brief discussion, Hoang agreed to stipulate these documents as
well.
The Court then advised and prompted as follows:
THE COURT: Okay. So based on that presentation,
there should be no difficulty here in the stipulation.
Mr. Moffatt, I encourage you, pursuant to the Tax Court
rules, to proceed informally now there is counsel in
the case, --
MR. MOFFATT: Yes, sir.
THE COURT: -- and if you want other matters
agreed to or stipulated, to present those documents,
have discussion about them rather than file motions
with the Court because I don’t think you really need
them here.
MR. MOFFATT: I wouldn’t have thought it was
necessary either today, Your Honor.
THE COURT: Okay.
MR. MOFFATT: Thank you very much.
THE COURT: On that basis, Mr. Moffatt, do you
want to withdraw your motion?
MR. MOFFATT: I will do so.
THE COURT: Okay. Well, you can do that orally
right now.
MR. MOFFATT: I’ll do that orally.
THE COURT: As soon as you ask for leave to
withdraw your motion in limine, the Court will permit
the motion to be withdrawn.
MR. MOFFATT: I ask for leave to withdraw the
motion.
THE COURT: Okay. Very good. So it’s withdrawn.
Thank you.
- 15 -
The transcript of these May 17, 2004, proceedings does not
indicate that, 3 days earlier, Ace had recommended that
respondent concede the earned income credit issue.
On May 24, 2004, Ace asked respondent’s counsel’s office to
prepare decision documents and stipulation documents to resolve
the case.
Also on May 24, 2004, Ace returned Moffatt’s telephone call
of Friday, May 21. On May 25, 2004, Ace told Moffatt that
respondent’s paralegal was preparing the decision documents and
stipulation documents; at Moffatt’s request, Ace said she would
provide to Moffatt an estimate of the interest on petitioner’s
overpayment.
On June 16, 2004, respondent’s counsel’s office told Ace
that “she needed to consider the issue of petitioner’s request
for attorney’s fees before the case could be completely
resolved.”12
On June 21, 2004, Ace concluded that petitioner was not
entitled to litigation costs because “The Counsel for the
Petitioner does not wish to participate in an Appeals conference.
12
So stipulated. The record does not clarify whether it
was intended that there be a linkage between the earned income
credit issue and the litigation costs issue. Note that two of
the five assignments of error (supra text at note 8) in the
petition relate to petitioner’s claim for an award of reasonable
litigation costs, notwithstanding Rule 233 and the Rules referred
to therein. Note also petitioner’s statements set forth infra in
D. Qualified Offer.
- 16 -
He wants to go directly to Tax Court.” On June 22, 2004, Ace
recommended that, because Moffatt “will not sign the decision
documents unless he is awarded attorney fees”, the case be
forwarded to respondent’s counsel’s office for trial preparation.
The Court, having not received any filing from the parties
after the May 17, 2004, hearing described supra, on July 9, 2004,
calendared the case for trial at the December 13, 2004, session
in Los Angeles.
On August 16, 2004, petitioner filed a motion in limine
similar to the one filed on April 5, 2004, described supra. On
August 19, 2004, the Court conducted a telephone conference with
the parties to discuss this motion. The Court’s order dated
August 23, 2004, states that as a result of the conference, the
Court understood respondent intended “to stipulate without
reservation to certain documents that are the subject of the
motion and that are described in the transcript of a hearing in
this case held on May 17, 2004.” The Court concluded that the
stipulation procedure will better serve petitioner’s aims than
the motion, and so denied the motion in limine.
On August 27, 2004, Lorraine Y. Wu (hereinafter sometimes
referred to as Wu) sent to Moffatt a stipulation of facts. In
her cover letter, Wu noted that she would prepare a stipulation
of settled issues, which she would shortly send to Moffatt.
Moffatt responded on August 30, 2004. Moffatt agreed that the
- 17 -
proposed stipulation of facts “seems to mimic my past Motions In
Limine”. However, he brought up the following items: (1) He
wanted respondent to agree to stipulate without reserved
relevance objection (a) Ace’s case activity record13 and (b) a
June 21, 2004, response to a FOIA (Freedom of Information Act)
request he had made; (2) he wanted to take Ace’s deposition; (3)
he was “looking at filing a motion to transfer this case to the
U.S. Federal Court of Claims, [sic] given that the case is
essentially a refund case”; and (4) he wanted to meet with Wu and
her supervisor “to discuss these issues at my office, thereby
satisfying the Branerton requirements in Branerton Corp. v.
Commissioner, 761 [sic] T.C. 691 (1974).”
On September 8, 2004, Wu sent to Moffatt a proposed
stipulation of settled issues, agreeing that petitioner is
entitled to the claimed earned income credit and that petitioner
has made an overpayment of $2,890. On September 9, 2004, Moffatt
sent to Wu a signed stipulation of facts. In his cover letter,
Moffatt repeated most of the points raised in his August 30,
2004, letter to Wu.
On October 28, 2004, Wu received petitioner’s trial
memorandum. On November 26, 2004, Wu served respondent’s trial
memorandum on Moffatt. (The relevant Standing Pretrial Order
13
In connection with the instant motion, the parties have
stipulated Ace’s case activity record.
- 18 -
required the trial memoranda to be exchanged “not less than 14
days before the first day of the trial session.”) On December
13, 2004, at the calendar call the parties reported a basis of
settlement; they were ordered to submit decision documents by
January 12, 2005. The Court received the decision documents and
on January 12, 2005, entered decision for petitioner that there
was a $2,890 overpayment for 2002.
Petitioner’s litigation costs motion was received after the
Court entered the parties’ stipulated decision. In the exercise
of its discretion, the Court sua sponte vacated the entry of
decision so that petitioner’s motion could be considered and
disposed of in the Court’s decision of the instant case (see Rule
232(f)), and directed that petitioner’s motion then be filed.
See, e.g., Swanson v. Commissioner, 106 T.C. 76, 85 (1996).
When the answer was filed in the instant case, respondent
did not have any documentation supporting petitioner’s claimed
earned income credit.
Respondent first received such documentation as attachments
to petitioner’s first motion in limine, about 4-1/2 months after
the answer was filed.
Respondent’s position in the instant case was substantially
justified.
- 19 -
Discussion
We consider first respondent’s objections to receipt of
certain exhibits, then the general considerations regarding
motions for litigation costs, then whether respondent established
that “the position of the United States in the [instant]
proceeding was substantially justified”, and then several of the
other issues that the parties presented.
A. Evidence
1. National Taxpayer Advocate Report
Exhibit 22-P is Publication 2104B, National Taxpayer
Advocate 2004 Annual Report to Congress, Volume 2, Earned Income
Tax Credit (EITC) Audit Reconsideration Study, dated December 31,
2004. Exhibit 22-P is hereinafter sometimes referred to as the
Report. Respondent objects to receipt of the Report on the
ground of relevance. Petitioner’s position is that this report
“covers errors related to Earned Income Tax Credit this
documented error rate tends to prove errors occurred in
petitioner’s case, therefore relevancy is satisfied.” (Reproduced
literally.) Petitioner cites the Report at numerous points in
his legal memoranda to show that “the IRS regularly makes errors
as to EIC issues.”
Rule 402 of the Federal Rules of Evidence (see sec. 7453)
provides the general rule that all relevant evidence is
admissible, while evidence which is not relevant is not
- 20 -
admissible. Rule 401 of the Federal Rules of Evidence14 provides
that evidence is relevant if it has “any tendency” to make “any
fact” of consequence more likely or less likely than it would be
without the evidence.
In determining whether respondent’s position is
substantially justified, we come to a conclusion as to whether
petitioner provided materials to respondent before November 20,
2003, the date respondent’s answer was filed. The accuracy of
respondent’s records could affect our conclusion as to the
existence of the fact of such providing, especially in light of
petitioner’s declaration on this point, discussed infra (C.
Substantially Justified, 3. What Respondent Knew). This is
clearly a “fact that is of consequence to the determination of
the action”, within the meaning of rule 401 of the Federal Rules
of Evidence. Under these circumstances (although we disagree
with many of petitioner’s characterizations of what the Report
shows), we conclude that the Report is relevant.
We overrule respondent’s relevance objection and receive
Exhibit 22-P into evidence.
14
Fed. R. Evid. 401. Definition of “Relevant Evidence”:
“Relevant evidence” means evidence having any tendency to
make the existence of any fact that is of consequence to the
determination of the action more probable or less probable than
it would be without the evidence.
- 21 -
2. Senatorial Office Press Release
Exhibit 23-P is a February 27, 2002, press release from the
office of Senator Charles E. Schumer of New York, which asserts
that in 2001 respondent lost tax returns and other documents from
about 71,000 people from “upstate” New York and New England. The
press release states that employees at a Pittsburgh,
Pennsylvania, bank “reportedly destroyed or hid thousands of tax
documents * * * because they felt they could not meet the IRS’
processing deadlines.” Respondent objects on the grounds of
hearsay and relevance. Petitioner’s position is:
the document covers error related to lost documents
similar in time to the documents petitioner claimed
were lost by the IRS. As such, this tends to prove the
IRS looses [sic] documents on occasion, which satisfies
the relevancy requirement.
As to the hearsay objection, petitioner directs our attention to
all or part of rules 801, 802, 803, 807, 901(b), 902, 1001, and
1005 of the Federal Rules of Evidence.
The statements as to matters of fact asserted in Exhibit 23-
P relate to documents lost 2 years before the events we deal with
in the instant case, by an office some 2,000 miles from
respondent’s offices in the instant case, and lost because a
private contractor’s employees were concerned about deadlines
imposed on them by respondent. The matter dealt with in Exhibit
23-P is so remote from “any fact that is of consequence to the
determination of the action” before us that we conclude Exhibit
- 22 -
23-P fails even the broadly permissive test of rule 401 of the
Federal Rules of Evidence. See also Fed. R. Evid. 403.
We sustain respondent’s relevance objection to Exhibit 23-P,
and so need not deal with respondent’s hearsay objection.
B. In General
The Congress has provided for the awarding of litigation
costs to a taxpayer who satisfies a series of requirements. Sec.
7430.15
15
Sec. 7430 provides, in pertinent part, as follows:
SEC. 7430. AWARDING OF COSTS AND CERTAIN FEES.
(a) In General.--In any administrative or 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 this title, the prevailing party may be awarded a
judgment or a settlement for--
* * * * * * *
(2) reasonable litigation costs incurred
in connection with such court proceeding.
(b) Limitations.--
(1) Requirement that administrative
remedies be exhausted.--A judgment for
reasonable litigation costs shall not be
awarded under subsection (a) in any court
proceeding unless the court determines that
the prevailing party has exhausted the
administrative remedies available to such
party within the Internal Revenue Service. *
* *
* * * * * * *
(c) Definitions.--For purposes of this section--
(continued...)
- 23 -
15
(...continued)
* * * * * * *
(4) Prevailing party.--
(A) In general.--The term “prevailing party”
means any party in any proceeding to which
subsection (a) applies * * *--
(i) which--
(I) has substantially prevailed
with respect to the amount in
controversy, or
(II) has substantially prevailed
with respect to the most significant
issue or set of issues presented, and
(ii) which meets the requirements of
the 1st sentence of section 2412(d)(1)(B)
of title 28, United States Code * * *
(B) Exception if United States establishes
that its position was substantially justified.--
(i) General rule.--A party shall not be
treated as the prevailing party in a
proceeding to which subsection (a) applies if
the United States establishes that the
position of the United States in the
proceeding was substantially justified.
* * * * * * *
(C) Determination as to prevailing party.--
Any determination under this paragraph as to
whether a party is a prevailing party shall be
made by agreement of the parties or--
* * * * * * *
(ii) in the case where such final
determination is made by a court, the court.
* * * * * * *
(continued...)
- 24 -
In general, the requirements of section 7430 are in the
conjunctive; i.e., the taxpayer must satisfy each of them in
order to succeed. See Goettee v. Commissioner, 124 T.C. 286, 289
(2005), affd. without published opinion 192 Fed. Appx. 212 (4th
Cir. 2006); Corson v. Commissioner, 123 T.C. 202, 205-206 (2004).
Respondent concedes that petitioner (1) substantially
prevailed (sec. 7430(c)(4)(A)(i)) and (2) met the net worth
requirements (sec. 7430(c)(4)(A)(ii)). Respondent contends (1)
petitioner should “not be treated as the prevailing party”
because respondent’s position “was substantially justified” (sec.
7430(c)(4)(B)(i)); (2) petitioner failed to exhaust available
administrative remedies (sec. 7430(b)(1)); (3) petitioner
15
(...continued)
(6) Court proceedings.--The term “court
proceeding” means any civil action brought in
a court of the United States (including the
Tax Court * * *).
(7) Position of United States.–-The term
“position of the United States” means--
(A) the position taken by the United
States in a judicial proceeding to which
subsection (a) applies, and
(B) the position taken in an administrative
proceeding to which subsection (a) applies as of
the earlier of--
(i) the date of the receipt by the
taxpayer of the notice of the decision of
the Internal Revenue Service Office of
Appeals, or
(ii) the date of the notice of
deficiency.
- 25 -
unreasonably protracted proceedings (sec. 7430(b)(3)); and (4)
the amount of costs petitioner claims is not reasonable, and
petitioner neither paid nor incurred the claimed costs (subsecs.
(a)(2) and (c)(1) of sec. 7430).
We consider first whether respondent’s position was
substantially justified.
C. Substantially Justified
To recover costs from respondent, petitioner must establish
he is the “prevailing party” within the meaning of section
7430(c)(4). Petitioner has satisfied the requirements of section
7430(c)(4)(A) (“substantially prevailed” and net worth).
However, under section 7430(c)(4)(B)(i), petitioner shall not be
treated as having satisfied the prevailing party requirement if
respondent “establishes that the position of the United States in
the proceeding was substantially justified.” Although the
overall burden of proof as to “prevailing party” is on
petitioner, the statute itself places on respondent the burden of
proof on the “substantially justified” element. See discussion
in Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 79
(2004), affd. 404 F.3d 1291 (11th Cir. 2005).
Respondent contends that (1) petitioner did not respond to
the May 16, 2003, letter; (2) petitioner did not provide any
supporting documentation in response to the notice of deficiency
before respondent’s answer was filed; and (3) this Court should
- 26 -
not believe petitioner’s declaration that in May 2003 petitioner
sent appropriate documentation to respondent.
Accordingly, respondent concludes, when respondent took a
position in the proceeding respondent’s position was
substantially justified based on what respondent knew at that
time.
In his opening legal memorandum petitioner states as
follows:
B. The position advanced by the Respondent was
substantially unjustified by the facts that
five children were dependants of Petitioner.
To deny the two EIC Deductions when five
children were involved Petitioner believes
was both unjustified, and based on red lining
the area in which Petitioner lives.
1. Respondent, Petitioner contends, was on
notice of the error when Petitioner called
Respondent’s service center on more than
one occasion.
2. Respondent, in documents already in front
of this Court, indicated a recommendation
for qualification of EIC as to Petitioner,
as of 11-19-03.
3. Petitioner also submitted an affidavit
claiming documents were supplied to Fresno
service center.
4. Only recently has Petitioner discovered an
audit, as to Fresno showing 75% of
reviewed cases of disallowed EIC credits
had documents in them supporting EIC
allowance. This same report< Exhibit P22,
showed Fresno service center as having the
highest error rate, with over 54% error
rate, compared to other service centers
processing EIC.
5. Petitioner has obtained a document,
supplied by Respondent, showing the word
Document on it, although mis-spelled, at
or near the time Petitioner claims
- 27 -
documents were supplied to the Fresno
service center.
6. Petitioner requested depositions to be
authorized by this Court to examine the
word document, and or the absence of it
and the use and recollection of statements
made by IRS reps to Petitioner’s Counsel.
This request was denied. Petitioner
instead was forced on relying on
Respondent obtaining statements regarding
this mis-spelled word in Petitioner’s
transcript.
7. Not surprisingly Respondent’s examination
of supposed witnesses produced no smoking
gun or even a recollection of comments
regarding Petitioner’s case, which took
place prior to Petitioner discovering the
P22 showing error rates that are so
staggering, that if those same error rates
were done in private industry, and an
individual was forced to suffer because of
the error rate, civil and criminal charges
would have flown from the egregious 54%
error rate, and 75% of viewed cases having
documentation supporting EIC
qualification. [Reproduced literally.]
In his answering legal memorandum petitioner states as
follows:
PETITIONER HAS ALLEGED THE GOVERNMENT’S POSITION WAS
NOT SUBSTANTIALLY JUSTIFIED.
All agree that §2412(d)(1)(B) requires a fee applicant
to allege that the Government’s position “was not
substantially justified. Scarborough v. Principi, 541
U.S. 401. It is not Petitioner’s responsibility to
prove it was in fact substantially justified, only to
allege that Respondent was not substantially justified.
In this case, the claim Respondent was not
substantially justified has already been made, which is
described in the below paragraphs.
Petitioner’s Motion for Legal Costs, dated 1-21-06,
stated in 1. of the brief, that the dynamics of the
Committee report versus the statute. In this
recitation, Petitioner covered the magic words of
substantially unjustified.
- 28 -
1. Petitioners have been apprised that
RESPONDENT has conceded the case. And a judgment
was issued in favor of Petitioner. As such
Petitioner’s have substantially prevailed on the
issue. This satisfies the litigation element of
Code Section 7430, and the prevailing element.
Under the Congressional Committee Report on P.L.
100-647, the Committee Reports seem to reflect an
intent that one be permitted to recover fees and
costs any time the IRS has issued a 30-day letter.
This however differs from Statute, which states that
the “substantially unjustified position” of the
United States must be asserted as of “the date of
the receipt by the taxpayer of the notice of the
decision of the IRS Appeals Office, or, the date of
the notice of deficiency.” IRS Code 7430(c)(7).
In item 2, of Petitioner’s Motion for Legal Costs,
dated 1-21-06, Petitioner alleged Respondent was
substantial unjustified.
2. “The position advanced by the United States was
substantially unjustified by the facts that 5
children were involved. To deny the two Earned
Income Deductions when this many children were
involved Petitioner believes was both unjustified,
and based on red lining the area in which Petitioner
lives.” [Reproduced literally.]
We agree with respondent that his position in this
litigation 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) (internal quotation marks omitted);16
16
Although the dispute in Pierce v. Underwood, 487 U.S. 552
(1988), arose under the provisions of the Equal Access to Justice
Act (EAJA), 28 U.S.C. sec. 2412(d), the relevant provisions of
this part of the EAJA are almost identical to the language of
this part of sec. 7430. Cozean v. Commissioner, 109 T.C. 227,
(continued...)
- 29 -
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.
Respondent’s position may be incorrect and yet be substantially
justified “if a reasonable person could think it correct”.
Pierce v. Underwood, 487 U.S. at 566 n.2.
Whether respondent acted reasonably in the instant case
ultimately turns on the available information which formed the
basis for respondent’s position, as well as on the law relevant
to the instant case. Coastal Petroleum Refiners v. Commissioner,
94 T.C. 685, 688-690 (1990).
The fact that respondent eventually loses or concedes a case
does not by itself establish that respondent’s position is
unreasonable. Maggie Management Co. v. Commissioner, 108 T.C.
430, 443 (1997). However, it is a factor that may be considered.
Idem.
In determining whether respondent’s position was
substantially justified, the question is whether respondent knew
or should have known that the Government’s position was invalid
16
(...continued)
232 n.9 (1997). Accordingly, we consider the holding in Pierce
v. Underwood, supra, to be applicable to the case before us.
Also, the “substantially justified” standard is not a
departure from the reasonableness standard of pre-1986 law.
Huffman v. Commissioner, 978 F.2d 1139, 1147-1148 (9th Cir.
1992), affg. in part, revg. in part, and remanding T.C. Memo.
1991-144. Accordingly, we consider the holdings of pre-1986 law
on reasonableness to be applicable to the case before us, except
as to the question of which party has the burden of proof.
- 30 -
at the time that respondent took the position in the litigation.
Coastal Petroleum Refiners v. Commissioner, 94 T.C. 689.
Ordinarily, we identify the point at which the United States
is first considered to have taken a position, determine what that
position was, and then decide whether that position, taken from
that point forward, was or was not substantially justified.
Maggie Management Co. v. Commissioner, 108 T.C. 442.
Ordinarily, the position of the United States in the proceeding
in this Court is the position respondent sets forth in the
answer. Huffman v. Commissioner, 978 F.2d at 1147-1148; Maggie
Management Co. v. Commissioner, 108 T.C. 442.
1. Summary and Conclusions
For purposes of section 7430, the position of the United
States in the proceeding in this Court is the position respondent
took in the answer–-that is, (1) petitioner was not entitled to
the earned income credit; (2) petitioner had not provided the
requested documentation to support his claimed earned income
credit; and (3) respondent did not have information as to the
truth of petitioner’s factual assertions as to petitioner’s
eligibility for the earned income credit.
By the time respondent filed the answer, respondent did not
have any documentation supporting petitioner’s claimed earned
income credit. We do not believe petitioner himself provided
such documentation; we do not believe petitioner provided such
- 31 -
documentation through Moffatt until the first motion in limine,
about 4-1/2 months after the answer was filed.
We conclude respondent’s position was substantially
justified at the time the answer was filed, and respondent timely
conceded the case after receiving the documentation attached to
petitioner’s motion in limine. As a result, we conclude
respondent’s position in the litigation was substantially
justified within the meaning of section 7430(c)(4)(B)(i).
We consider first what was the “position of the United
States” that respondent has the burden of proving was
“substantially justified”. Then we consider what respondent knew
when respondent took that position. Then we consider whether
that position was substantially justified.
2. Respondent’s Position
In light of the foregoing, the position of the United States
in the instant case is the position respondent took in the
answer, filed on November 20, 2003.17
In the notice of deficiency, respondent’s explanation for
the earned income credit disallowance is “Since you did not
17
Petitioner contends that the position of the United
States in the instant case is the position taken in the notice of
deficiency. In the instant case, as shown infra, the answer in
effect embraced the notice of deficiency. It is not clear to us
why petitioner appears to reject the Maggie Management approach.
On the record in the instant case, neither our analysis nor our
conclusion would be different if we were to adopt petitioner’s
approach. See Maggie Management Co. v. Commissioner, 108 T.C.
430, 442-443 (1997).
- 32 -
establish that you were entitled to the earned income credit, we
disallowed it.”
The petition’s assignments of error include the following:
B. Petitioner provided the requested documentation to
the Internal Revenue Service to support his claim of
the Earned Income Credit.
C. Petitioner responded to requests for information
within the time deadlines requested by the Internal
Revenue Service? [Sic]
In the answer, respondent denied these assignments of error;
respondent also denied “for lack of present information”
petitioner’s numerous assertions of fact as to the basis for his
claimed earned income credit.
Thus, respondent’s position at the time of the answer was:
(1) Petitioner was not entitled to the earned income credit; (2)
petitioner had not provided the requested documentation to
support his claimed earned income credit; and (3) respondent did
not have information as to the truth of the petition’s factual
assertions as to petitioner’s eligibility for the earned income
credit.
Ultimately, respondent conceded error on the first part of
this position; i.e., respondent conceded that petitioner was
entitled to the earned income credit, and in the full amount
petitioner had claimed on his tax return. This concession came
about after petitioner provided documentation to support his
- 33 -
claim. We proceed to consider what respondent knew as to the
earned income credit issue by November 20, 2003.
3. What Respondent Knew
On May 16, 2003, shortly after petitioner’s 2002 tax return
was filed (supra note 5), respondent notified petitioner that his
tax return was being examined. The May 16, 2003, letter asked
for certain information and documentation. Petitioner does not
contend that respondent already had the information and
documentation at the time of the May 16, 2003, letter.
The parties have stipulated that petitioner failed to
respond to the May 16, 2003, letter. Respondent issued the
notice of deficiency on July 18, 2003. Petitioner first
consulted with Moffatt on July 26, 2003, and retained Moffatt on
July 27, 2003. The petition was filed on September 22, 2003.
The answer was filed on November 20, 2003.
Respondent referred the case to the Appeals Office on
November 19, 2003. Supra note 9. More than 5 weeks later, the
Appeals Office notified petitioner that the office had his case,
and suggested petitioner contact Ace. On January 21, 2004,
petitioner brought the Appeals Office letter to Moffatt. Supra
note 11. On February 10, 2004, Moffatt called someone from
respondent.
- 34 -
On April 5, 2004, petitioner filed a motion in limine that
included documentation which resulted in Ace’s recommending on
May 14, 2004, that respondent should concede the earned income
credit issue.
We conclude, and we have found, that (1) when the answer was
filed respondent did not have any documentation supporting
petitioner’s claimed earned income credit, and (2) respondent
first received such documentation as attachments to petitioner’s
first motion in limine, about 4-1/2 months after the answer was
filed.
In arriving at this conclusion, we have taken into account
the stipulated declaration18 by petitioner “under penalty of
perjury under the laws of the State of California”, as follows:
IV. On or about May 2003, I sent by United
States mail to the Internal Revenue Service,
located in Fresno, California, the following
document at the request of Internal Revenue
Service: All five (5) of my children’s birth
certifications; All five (5) of my children’s
school records; Lease Agreement on the
property that I was renting my fiancée and
our five (5) children; and utility bills,
which included: Electricity, Home Gas bills
and cable. [Reproduced literally.]
Firstly, the May 16, 2003, letter was, indeed, a “request of
the Internal Revenue Service” for relevant documents, but the
parties have stipulated that “3. Petitioner failed to respond to
18
Although the declaration is marked Exhibit 21-R; the
stipulation designates it as Exhibit 21-P. The 21-R marking is
obviously a typographic error that has no effect on our
considerations.
- 35 -
the May 16, 2003, letter.” The May 16, 2003, letter stated in
several places that petitioner should respond by “06/15/2003”.
The notice of deficiency was issued on July 18, 2003, and
petitioner proceeded promptly thereafter to consult and then
retain Moffatt to represent him in this matter. Petitioner has
not identified any other “request of the Internal Revenue
Service” to which he might have been responding “On or about May
2003”.
Secondly, in order to believe that petitioner provided the
documents to respondent as stated in his declaration, it appears
that we also have to believe that petitioner had the documents in
late July 2003, when he retained Moffatt and either (a)
petitioner did not then give the documents to Moffatt or (b)
petitioner did then give the documents to Moffatt but Moffatt
chose to “sit on” the documents for many months until early April
2004, when the first motion in limine was filed.19
Petitioner’s statement in his declaration that he mailed the
indicated documents to respondent on or about May 2003 does not
ring true. See, e.g., Burrill v. Commissioner, 93 T.C. 643, 662
n.24 (1989).
We have also attempted to take into account petitioner’s
contention in his opening legal memorandum as follows:
19
Moffatt’s hourly itemization shows that his first contact
with respondent (apart from a Freedom of Information Act request)
was a relatively brief telephone call “to IRS” on Feb. 10, 2004.
- 36 -
5. Petitioner has obtained a document, supplied
by Respondent showing the word Document on
it, although mis-spelled, at or near the time
Petitioner claims documents were supplied to
the Fresno service center.
6. Petitioner requested depositions to be
authorized by this Court to examine the word
document, and or the absence of it and the
use and recollection of statements made by
IRS reps to Petitioner’s Counsel. This
request was denied. Petitioner instead was
forced on relying on Respondent obtaining
statements regarding this mis-spelled word in
Petitioner’s transcript. [Reproduced
literally.]
We have searched in vain for “a document, supplied by
Respondent showing the word Document on it, although mis-
spelled”. Based on notes of telephone conferences the Court held
with counsel for the parties, we surmise that petitioner intends
to refer to stipulated Exhibit 3-J, “a transcript of petitioner’s
2002 tax account, entitled ‘IMF MCC Transcript - Specific’.”
Based on these notes, we further surmise that the item petitioner
intends to refer to is the following:
290 07282003 0.00 200329 93254-999-05099-3
HC3 ARC-002-071 INTD PC
CORRESPONDDT- CREDIT DT-
REFUND STATUTE CONTROL DT-
AMD CLMS DT- CIS MF IND-O
CSED-
In his answering legal memorandum petitioner asserts as
follows:
Petitioner has submitted documentation indicating he
has submitted proof orally as well as in writing.
Respondent has claimed that the misspelled word
document on Petitioner’s file has no basis, to the fact
Petitioner submitted documents, while not showing
- 37 -
credibly, through deposed witnesses, how the word could
have arrived on Petitioner’s file. Petitioner was
denied subpoena power of representatives at the IRS
whom had previously conveyed to Petitioner’s counsel
that this record could only be accomplished by and a
direct result of receiving correspondence from
Petitioner, as a direct result of Petitioner attempting
to satisfy substantiation that he in fact had five
children. [Reproduced literally.]
Firstly, July 28, 2003, the date of the item we understand
petitioner to be directing our attention to, is 10 days after
respondent issued the notice of deficiency, 2 days after
petitioner first consulted Moffatt, and 1 day after petitioner
retained Moffatt. Moffatt did not provide the documents to
respondent by July 28, 2003 (supra note 19). In order to believe
that this item shows that, on July 28, 2003, respondent received
the documents from petitioner, it appears that we also would have
to believe that either (a) petitioner did not tell Moffatt that
he had just sent the documents to respondent or (b) petitioner
did tell this to Moffatt but Moffatt did not then memorialize
this information in a declaration by petitioner20 but instead let
the supposed communication slip until Moffatt noticed the item on
the stipulated exhibit that respondent provided to Moffatt later
during the course of preparing the stipulations and exhibits in
connection with the instant litigation costs motion.
20
As noted, supra, the stipulated declaration by petitioner
is that he sent the documents to respondent “On or about May
2003”.
- 38 -
Secondly, petitioner asserts that two of respondent’s
employees “had previously conveyed to Petitioner’s counsel that
this record [presumably the July 28, 2003, entry] could only be
accomplished by and a direct result of receiving correspondence
from Petitioner,” and that petitioner could have shown this if he
had been allowed to depose these employees. The parties have
stipulated declarations by these two employees under penalties of
perjury, pursuant to 28 U.S.C. section 1746. One employee,
Gerald R. Franco, declares that (1) (a) the indicated Document
Locator Number and Transaction Code show that “a notice was
generated by the Internal Revenue Service to the taxpayer”, (b)
they do not show that correspondence was received by the Internal
Revenue Service from the taxpayer, and (2) he cannot explain the
term “CORRESPONDDT-”, but he can state that this notation “does
not indicate the receipt of correspondence from a taxpayer.” The
other employee, Barbara M. DeLeo, declares that (1) she is a
customer service representative, (2) her records show that she
spoke on the telephone with someone about petitioner’s case, but
that she has no recollection of having had this telephone
conversation or of what was said, (3) that she is not familiar
with the type of document (the IMF MCC Transcript - Specific) and
does not know the meaning of the term “CORRESPONDDT-”, and (4)
- 39 -
“My statement [in a teleconference with Moffatt and Wu] that it
could indicate correspondence sent in to the Internal Revenue
Service was only intended as a possibility.”
We noted in a telephone conference with counsel for the
parties that (1) neither petitioner nor Moffatt stated that
either of them had sent anything to respondent at such a time
that respondent would have received it on or about July 28, 2003,
(2) in light of the timing (the notice of deficiency and the
absence of any notation in Moffatt’s hourly itemization showing a
communication to respondent around this time) it seemed highly
unlikely that respondent received documents from petitioner on
July 28, 2003, and (3) deposition of these two employees of
respondent would most probably be merely an unproductive fishing
expedition adding to an already extraordinary cost of this $2,890
case--a cost of litigating the motion for costs and not of
litigating the case. We commented that, if a request for
depositions were to be made and opposed, then we would most
likely not order the depositions. Presumably in reliance on that
expression by the Court, petitioner did not formally institute
further discovery by depositions on this point.
We also have taken into account petitioner’s contention in
his opening legal memorandum:
1. Respondent, Petitioner contends, was on
notice of the error when Petitioner called
Respondent’s service center on more than one
occasion.
- 40 -
However, petitioner does not enlighten us as to (1) where in the
record there is support for the statement that petitioner called
respondent’s service center, (2) when those calls, or any of
them, were made, or even (3) what information or documentation
was provided by petitioner to respondent during or as a result of
those calls.
From the foregoing, we conclude that by November 20, 2003,
when the answer was filed, respondent had no more information
than what was on petitioner’s tax return and had none of the
requested documentation or any other documentation that might
have enabled respondent to conclude that petitioner was entitled
to the claimed earned income credit.
As best we can tell from the record before us, it was not
until petitioner filed the first motion in limine, on April 5,
2004, that respondent received the appropriate documentation.
4. Substantially Justified
Ordinarily, taxpayers who claim credits are obligated (when
challenged) to show that they are entitled to the credits that
they claim. Petitioner failed to respond to respondent’s request
for documents to show his entitlement to the claimed earned
income credit. Under these circumstances, respondent was
justified in taking the position that petitioner was not entitled
to this credit. Cf. Welch v. Helvering, 290 U.S. 111, 115
(1933); Rule 142(a).
- 41 -
On April 5, 2004, petitioner finally provided documentation
by the unorthodox (in this Court) device of a motion in limine.
Although the road thereafter was bumpy, on September 8, 2004, Wu
sent to Moffatt a proposed stipulation of settled issues,
agreeing that petitioner is entitled to the claimed earned income
credit and that petitioner had made an overpayment of $2,890; in
essence, respondent conceded the case.
Respondent’s position--that petitioner was not entitled to
the claimed earned income credit unless petitioner could show he
was so entitled--was substantially justified. When petitioner
finally did provide the requested documentation--more than 10
months after respondent first asked for it and more than 4 months
after respondent filed the answer in the instant case--respondent
conceded the case 5 months later. It is evident that this delay
is attributable in significant part to the aggressive postures
presented by those who spoke for both parties. Nevertheless, the
delay was not unreasonably long. See, e.g., cases collected at
Sokol v. Commissioner, 92 T.C. 760, 765 (1989).
We conclude, and we have found, that respondent has
successfully carried the burden of establishing that the position
of the United States in the instant judicial proceeding was
substantially justified.
On answering legal memorandum, petitioner argues as follows:
The burden of establishing that the position of the
United States was substantially justified,
- 42 -
§2412(d)(1)(A) indicates and courts uniformly have
recognized, must be shouldered by the government.
Respondent has not shown how in light of 75% lost
documents in Fresno related to EIC cases, as well as
the worst error rate in the country, over 54% wrong EIC
assessments, Respondent has at the mere threshold
indicated how its position was substantially justified.
[Reproduced literally.]
Petitioner’s reference is to the Report. (Supra A.
Evidence, 1. National Taxpayer Advocate Report.) Apart from our
unwillingness to accept petitioner’s characterization of what the
Report concludes, we hold it is not unreasonable for respondent
to maintain respondent’s position as to a specific taxpayer, and
not concede the case until that taxpayer has presented the
documentation to show that that taxpayer is entitled to the
credit that that taxpayer has claimed on that taxpayer’s tax
return. In the instant case, respondent was justified in
maintaining the position that petitioner was not entitled to the
claimed earned income credit until petitioner provided
documentation showing that he was entitled to that credit.
It follows that petitioner, although he “substantially
prevailed” (section 7430(c)(4)(A)), is not “the prevailing party”
(section 7430(c)(4)(B)), and so petitioner is not entitled to an
award of reasonable litigation costs under section 7430(a)(2).
We so hold.
D. Qualified Offer
Notwithstanding the foregoing conclusory statement, a
taxpayer may nevertheless be treated as the prevailing party if
- 43 -
the taxpayer satisfies the qualified offer provisions of
subsections (c)(4)(E) and (g) of section 7430.
In his motion for an award of reasonable litigation costs
petitioner contended as follows:
4. Petitioner’s filing of their Petition stating that
an EIC was available satisfies the Qualified Offer
Requirements if any needed to obtain Litigation Costs.
The Petition itself satisfies notice to the Director of
the IRS that the Petition was requesting Litigation
costs. The fact that the Appeals office made an
internal ruling that Petitioner’s deserved the EIC
credit, and yet RESPONDENT’s counsel failed to follow
that position satisfies the point that Petitioners
availed themselves of the Appeal process satisfies the
Appeal element with respect to requesting Legal fees
and Costs. [Reproduced literally.]
In a telephone conference, petitioner’s counsel informally
indicated that his contentions as to the qualified offer
provisions were in error and that claim was no longer part of the
dispute in the instant case.21
In his opening legal memorandum, petitioner revisits the
issue, stating as follows:
21
Compare, e.g., Johnston v. Commissioner, 122 T.C. 124,
126 (2004), affd. 461 F.3d 1162 (9th Cir. 2006), with Downing v.
Commissioner T.C. Memo. 2005-73, Item E, regarding the
requirement of sec. 7430(g)(1)(C) that the document he
“designated at the time it is made as a qualified offer for
purposes of this section”. The petition did not include such a
designation. Also, Rule 34(b)(8) provides that a claim for
litigation costs “shall not be included in the petition in a
deficiency or liability action”, so that the petition filing
could not constitute a qualified offer. Finally, sec.
7430(c)(4)(E)(ii)(I) provides that the qualified offer
alternative is not available to “any judgment issued pursuant to
a settlement”; the instant case has been settled.
- 44 -
Respondent contends that Petitioner failed to satisfy
the qualified offer requirement. Amazingly, if
Petitioner goes down that path of qualified offer,
according to IRS Bulletin: 2004-5, Feb 2, 2004 T.D.
9106, Awards of Attorney Feeds and other costs based
upon qualified offers. If a qualified offer had been
made and accepted attorney fees would not be awarded.
As such, why would anyone ever want to submit a
qualified offer, when the position of Respondent is not
to pay legal fees upon such a request, even though Case
law provides for such an award. [Reproduced
literally.]
Substantially the same statement appears in petitioner’s
answering legal memorandum.
The qualified offer provision allows a taxpayer that is not
a “prevailing party under any other provision of this paragraph”
(sec. 7430(c)(4)(E)(iv)) to nevertheless be treated as a
prevailing party to some extent, if the taxpayer has made a
qualified offer, the case was not settled, and the taxpayer’s
liability ends up as less than or equal to the liability under
the qualified offer. Accordingly, the qualified offer provision
does not remove benefits that a taxpayer would otherwise be
entitled to; the provision, rather, adds a possibility of a
benefit where the taxpayer would otherwise not be entitled to any
award. Also, the provision appears to be designed to encourage
the Commissioner to take seriously any taxpayer settlement offer.
See discussion in Haas & Associates Accountancy Corp. v.
Commissioner, 117 T.C. 48, 59 (2001), affd. 55 Fed. Appx. 476
(9th Cir. 2003).
- 45 -
In the instant case the qualified offer provisions do not
provide an alternate route to “prevailing party” status. See
supra note 21. Also, petitioner’s efforts to raise the qualified
offer provision were so clearly inappropriate and poorly
conceived, and petitioner’s determination to further discuss the
issue in both legal memoranda was so wasteful, that, if we had
otherwise determined to award litigation costs, then we would (1)
determine how much of Moffatt’s charged time was allocable to
this diversion and (2) disallow the charges for that time.
E. Other Matters
The foregoing resolves the litigation costs dispute and
requires denial of petitioner’s motion. But the parties have
presented numerous additional matters that may usefully be
commented on.
1. Failure To Exhaust Available Administrative Remedies
Respondent contends that petitioner failed to exhaust
available administrative remedies in that (a) petitioner failed
to respond to the May 16, 2003, letter or otherwise act (file a
protest or ask for an Appeals conference) before the notice of
deficiency was issued, and (b) “after the case was docketed,
petitioner refused to participate in an Appeals conference”.
Petitioner contends:
Section 7430(b)(1) provides that in order to recover
litigation costs, a taxpayer must have taken advantage
of available administrative remedies. The regulations
to this section include within this requirement
- 46 -
participation in an Appeals office conference. See 26
C.F.R. Section 301.7430-1(b)(1)(i). It is undisputed
that, upon receiving the results of the IRS audit,
Petitioner’s Counsel had a conference with the Appeals
division, Cynthia Ace.
Petitioner also contends (a) “a request for legal fees is valid
at the administrative level”, (b) respondent refused to settle
the case unless petitioner waived litigation costs, (c)
“Respondent was arguably also in violation of RRA 98[22] as it
relates to a lack of fairness to Petitioner”, and (d) “The Tax
Court should correctly determine that Petitioner did in fact
exhaust the administrative remedies available to him. Haas &
Associates Accountancy Corp. v. Commissioner, 55 Fed. Appx. 476.”
We agree with petitioner’s conclusion even though we
disagree with petitioner’s analysis.
Section 7430(b)(1) (supra note 15) prohibits the awarding of
litigation costs under subsection (a) in the instant case unless
the Court determines that petitioner exhausted the administrative
remedies available to him within the Internal Revenue Service.
22
We assume petitioner refers to the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
112 Stat. 685. Sec. 3101 of that Act (112 Stat. at 727) makes
numerous amendments to different parts of sec. 7430(c), but we
have not found any amendments made by that Act to sec.
7430(b)(1), relating to the requirement of exhaustion of
administrative remedies, and petitioner has not directed our
attention to any such amendments. Nor has petitioner directed
our attention to any specific provision of that Act (which
extends for 183 pages in the Statutes at Large) that bears on our
consideration of the requirement of exhaustion of administrative
remedies, even though his reference to “RRA 98” appears in the
portion of his answering legal memorandum headed “PETITIONER
EXHAUSTED ADMINISTRATIVE REMEDIES”.
- 47 -
Petitioner has the burden of proof on this issue.
In his second legal memorandum, petitioner points to the
requirements of section 301.7430-1(b)(1)(i), Proced. & Admin.
Regs., and states that Moffatt had a conference with Ace and this
constituted compliance with the requirements of that regulation.
The cited regulation provides as follows:
(i) The party, prior to filing a petition in the
Tax Court or a civil action for refund in a court of
the United States (including the Court of Federal
Claims), participates, either in person or through a
qualified representative described in §601.502 of this
chapter, in an Appeals office conference; * * *
The first communication between Moffatt and Ace was on May 24,
2004, 8 months after September 22, 2003, when the petition was
filed. Plainly, petitioner did not participate in an Appeals
Office conference, either in person or through Moffatt, “prior to
filing a petition in the Tax Court”, and so petitioner has not
complied with the requirements of section 301.7430-1(b)(1)(i),
Proced. & Admin. Regs.
As to petitioner’s additional contentions, items (a) and (b)
seem to relate to the charge that respondent refused to settle
the tax case unless petitioner waived any litigation cost claim.
Although petitioner makes the charge, petitioner does not direct
our attention to any affidavit or other evidence in the record
supporting the charge. Ace’s case activity record, Exhibit 8-J,
indicates that Moffatt told her that he would not agree to a
settlement unless respondent conceded an award of litigation
- 48 -
costs. On this state of the record, we do not conclude that
petitioner’s contentions (a) and (b) justify ruling for
petitioner on the exhaustion of administrative remedies issue.
As we have noted (supra note 22) petitioner’s contention
(c), relating to the Internal Revenue Service Restructuring and
Reform Act of 1998, does not add anything to the force of his
argument.
Finally, we are mystified by petitioner’s citation of the
Haas & Associates opinion, in which the Court of Appeals for the
Ninth Circuit affirmed our holding that the taxpayer therein was
not entitled to an award of litigation costs.
Notwithstanding our rejection of all of petitioner’s
contentions, we conclude that petitioner does qualify under
section 301.7430-1(f)(2), Proced. & Admin. Regs., which provides
as follows:
(f) Exception to requirement that party pursue
administrative remedies. If the conditions set forth
in paragraphs (f)(1), (f)(2), (f)(3), or (f)(4) of this
section are satisfied, a party’s administrative
remedies within the Internal Revenue Service shall be
deemed to have been exhausted for purposes of section
7430.
* * * * * * *
(2) In the case of a petition in the Tax Court--
(i) The party did not receive a notice of proposed
deficiency (30-day letter) prior to the issuance of the
statutory notice and the failure to receive such notice
was not due to actions of the party (such as a failure
- 49 -
to supply requested information or a current mailing
address to the district director or service center
having jurisdiction over the tax matter); and
(ii) The party does not refuse to participate in
an Appeals office conference while the case is in
docketed status.
As respondent concedes, petitioner did not receive a “30-day
letter”. Respondent contends this failure was “because he
[petitioner] failed to supply the supporting information
requested in the May 16, 2003 letter”.
As we have detailed in our findings (supra text at note 7)
the May 16, 2003, letter amounted to eight pages of detailed
directions on four different forms, plus a copy of Publication
3498. The 3-year limitations period would not expire for almost
35 months. We conclude that, applying section 301.7430-
1(f)(2)(i), Proced. & Admin. Regs., to the facts of the instant
case, petitioner’s failure to receive the 30-day letter was not
due to petitioner’s actions but to respondent’s determination to
shortcut the process; it would not be appropriate to allow
respondent to cut off petitioner’s possible entitlement to
benefits by (a) requiring a 30-day letter and (b) refusing to
issue a 30-day letter when there was ample time (almost 35
months) to do so.
We next consider section 301.7430-1(f)(2)(ii), Proced. &
Admin. Regs. In applying this provision to the instant case we
- 50 -
take into account the definitions that appear in section
301.7430-1(b)(2) and (3), Proced. & Admin. Regs., as follows:
(2) Participates. For purposes of this section, a
party or qualified representative of the party
described in §601.502 of this chapter participates in
an Appeals office conference if the party or qualified
representative discloses to the Appeals office all
relevant information regarding the party’s tax matter
to the extent such information and its relevance were
known or should have been known to the party or
qualified representative at the time of such
conference.
(3) Tax matter. For purposes of this section,
“tax matter” means a matter in connection with the
determination, collection or refund of any tax,
interest, penalty, addition to tax or additional amount
under the Internal Revenue Code.
These definitions apply, by their terms, to the entire section,
and so apply to section 301.7430-1(f)(2)(ii), Proced. & Admin.
Regs. In the instant case, Ace had received “all relevant
information regarding the party’s [petitioner’s] tax matter” by
the time of her May 24, 2004, telephone call with Moffatt.
Although there were disputes regarding dependency deductions and
litigation costs, “the determination * * * of [petitioner’s] tax
* * * under the Internal Revenue Code” could be--and, indeed,
was--resolved by the information and documents that Ace had
already received (albeit indirectly) from petitioner.
From the foregoing, we conclude that petitioner has carried
the burden of proving that he satisfied the requirements of the
- 51 -
regulation as to exhaustion of administrative remedies. See
Corson v Commissioner, 123 T.C. 211-212; Swanson v.
Commissioner, 106 T.C. 97-100.23
2. Paid or Incurred
Awards of costs and fees under section 7430(a) are limited
to reasonable litigation costs “incurred”. The attorney fee
component is specifically limited to “fees paid or incurred”.
Sec. 7430(c)(1)(B)(iii).24 Petitioner does not contend that
section 7430(c)(3)(B)’s exception for pro bono services applies
to the instant case.
Respondent contends that “petitioner has not established
that he has actually paid his attorney or is otherwise liable to
his attorney for payment of the litigation costs claimed.”
Petitioner responds by citing provisions of the Equal Access to
Justice Act, and asserts that “Here, the actual time and rate at
which time and expenses were owed was provided. As such the
request for legal fees is valid.” Petitioner does not assert
that he paid to Moffatt any of the costs claimed in the motion
23
Swanson v. Commissioner, 106 T.C. 76, 98 (1996),
interprets sec. 301.7430-1(e), Proced. & Admin. Regs. That
paragraph (e) was redesignated “paragraph (f)” by T.D. 9050, par.
3, 2003-1 C.B. 693, 696. Accordingly, the Swanson analysis
applies now to paragraph (f) of that regulation.
24
Not all fee-shifting statutes are so limited. See
discussion in Frisch v. Commissioner, 87 T.C. 838, 843-844
(1986); see also Corrigan v. United States, 27 F.3d 436, 438 (9th
Cir. 1994).
- 52 -
before us. The instant dispute, then, is whether petitioner
incurred any of the costs.
In order for petitioner to incur a litigation cost, within
the meaning of section 7430, he has to have a legal obligation to
pay that cost. Grigoraci v. Commissioner, 122 T.C. 272, 277-278
(2004); Swanson v. Commissioner, 106 T.C. 101-102. The
corresponding language of EAJA has also been interpreted to
include that requirement. SEC v. Comserv Corp., 908 F.2d 1407,
1414 (8th Cir. 1990).
Petitioner does not direct our attention to, and we have not
found, anything in the record that shows that petitioner is
legally obligated to pay to Moffatt the claimed substantial
amounts. The mere fact that a taxpayer retained counsel who in
fact represented the taxpayer in a proceeding in this Court is
not sufficient to meet this “incurred” requirement of section
7430. See Grigoraci v. Commissioner, 122 T.C. 278-279 (and
cases there cited).
We have not been favored with any evidence as to the
agreement between petitioner and Moffatt. We are not willing to
assume that petitioner and Moffatt entered into an enforceable
agreement which obligates petitioner to pay to Moffatt the
claimed substantial amounts in order to prosecute a $2,890 case.
We conclude that petitioner has failed to carry his burden of
proving that he incurred the claimed Moffatt attorney fees,
- 53 -
within the meaning of section 7430. The Congress has not created
a roving commission to “do justly”. Rather, the Congress enacted
a statute that provides for the awarding of costs if, but only
if, it has been shown that the requirements of the statute are
met. Compare, e.g., Fla. Country Clubs, Inc. v. Commissioner,
122 T.C. 74-75, 80-81, with Downing v. Commissioner, T.C.
Memo. 2005-73.
Accordingly, even if we had determined that petitioner were
the prevailing party, there would not be a basis in the record
for the allowance of any amount of litigation costs.
The parties have locked horns on numerous other matters in
connection with petitioner’s motion. We have examined their
contentions and concluded that, no matter how we resolved any
specific contention, none of them would affect the “bottom line”
as to petitioner’s motion.
An appropriate order and
decision will be entered,
denying petitioner’s motion
for litigation costs, as
supplemented, and deciding
that there is no deficiency
and there is an overpayment in
the amount claimed on
petitioner’s tax return.