Yasuko Ogawa ( 2023 )

United States Tax Court
T.C. Memo. 2023-70HARUKI YAMADA,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
YASUKO OGAWA,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket Nos. 2718-14, 3020-14. 1 Filed June 13, 2023.
—————
Haruki Yamada, pro se in Docket No. 2718-14.
Yasuko Ogawa, pro se in Docket No. 3020-14. 2
Michael W. Tan, Casinova O. Henderson, and Juan M. Sarinana, for
respondent.
1 Petitioner Haruki Yamada filed a Petition at Docket No. 2718-14. Petitioner
Yasuko Ogawa filed a Petition at Docket No. 3020-14. The Court consolidated the
cases on February 12, 2015.
2 Petitioners were represented by Joseph E. Mudd at the time of the filing of
the Motion papers. Mr. Mudd is now deceased. The Court withdrew him as counsel
on May 22, 2020.
Served 06/13/23
2
[*2] MEMORANDUM OPINION
KERRIGAN, Chief Judge: This case is before the Court on
petitioners’ Motion for Reasonable Litigation or Administrative Costs
pursuant to section 7430. Respondent has largely conceded the case, as
noted in the parties’ First Supplemental Stipulation of Settled Issues
and the record of each case. 3 The only issue for consideration is whether
petitioners are entitled to litigation fees for 232 hours of work billed at
the statutory rate plus $1,903 in administrative costs.
Unless otherwise indicated, all statutory references are to the
Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times,
and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
Background
The following facts are derived from the parties’ pleadings and
Motion papers, including the Declarations and Exhibits attached
thereto. Petitioners resided in Japan when they timely filed their
Petitions.
In the early 2000s petitioners were married and living in
Southern California. At that time petitioner Mr. Yamada was a dual
American-Japanese citizen operating a construction business.
Petitioner Ms. Ogawa was a Japanese citizen living with her husband
in the United States on a series of work visas. She worked for a
brokerage company. In 2007 Mr. Yamada’s business began to falter, and
3 The parties filed Stipulations of Settled Issues in both Mr. Yamada’s and Ms.
Ogawa’s cases. In Mr. Yamada’s case, for tax year 2008 the parties agreed that Mr.
Yamada has unreported gross receipts or sales of $36,300 that should have been
reported on Schedule C, Profit or Loss From Business. He is not entitled to attribute
one-half of his self-employment income to Ms. Ogawa as community property for tax
year 2008. For tax year 2009 the parties agreed that Mr. Yamada has unreported
Schedule C1 gross receipts or sales of $23,300. He is not entitled to attribute one-half
of his self-employment income to Ms. Ogawa as community property for tax year 2009.
For tax year 2011 the parties agreed that Mr. Yamada has unreported Schedule C1
gross receipts or sales of $23,600. He is not entitled to attribute one-half of his self-
employment income to Ms. Ogawa as community property for tax year 2011. The
parties agreed that Mr. Yamada is not liable for any additions to tax for 2008, 2009, or
2011 (years in issue).
In Ms. Ogawa’s case, respondent conceded the deficiency as to her for all years
in issue. Respondent also conceded that Ms. Ogawa was not liable for additions to tax
for any of the years in issue.
3
[*3] the couple decided to sell their U.S.-based assets and moved back
to Japan.
Petitioners filed their last U.S. return in 2007. They listed their
residential address in Laguna Niguel, California. On July 20, 2012,
respondent selected Mr. Yamada for audit for the years in issue.
On July 31, 2012, respondent mailed Form 4759, Address
Information Request – Postal Tracer, to the Postmaster in Laguna
Niguel. It requested that the Postmaster verify Mr. Yamada’s last
known address in Laguna Niguel or provide a forwarding address. The
Postmaster indicated that Mr. Yamada’s forwarding address was in
Aliso Viejo, California.
Also on July 31, 2012, respondent mailed Form 4759 to the
Postmaster in Aliso Viejo. It similarly requested that the Postmaster
confirm Mr. Yamada’s last known address. The Postmaster verified that
mail was being delivered to Mr. Yamada’s Aliso Viejo address as of
August 11, 2012.
On August 29, 2012, respondent mailed Mr. Yamada a copy of
Form 2039, Service of Summons, Notice and Recordkeeper Certificates
and Summons, which was sent to Bank of America. Delivery of the
copies by certified mail was accepted at Mr. Yamada’s Aliso Viejo
address as indicated by a signature on the return receipt.
On January 14, 2013, respondent selected Ms. Ogawa for audit
for the years in issue. On April 16, 2013, respondent mailed to each
petitioner Letter 3798 at their Aliso Viejo address. The letter indicated
that petitioners had failed to file tax returns for the years in issue and
scheduled an in-person conference for May 21, 2013, at respondent’s
Laguna Niguel office. Petitioners did not respond to the letter or show
up for the conference.
On June 5, 2013, respondent summoned bank account
information from three banks: Bank of America, U.S. Bank, and Union
Bank. Respondent conducted bank deposit analyses on the information
received from the banks and determined that petitioners had
unreported taxable deposits of $302,360, $494,469, and $324,498 for
taxable years 2008, 2009, and 2011, respectively.
On July 29, 2013, respondent mailed a Letter 950 (30-day letter)
to each petitioner at their Aliso Viejo address. The 30-day letters
included examination reports showing the proposed changes to
4
[*4] petitioners’ tax for the years in issue and indicated that they could
request a conference with Appeals. 4 Petitioners did not respond to the
letters, nor did they request an Appeals conference.
On August 28, 2013, respondent prepared substitutes for returns
for petitioners for the years in issue. On September 17, 2013,
respondent mailed notices of deficiency to both petitioners at their Aliso
Viejo address as well as their address in Yokohama, Japan. The notice
addressed to Mr. Yamada determined deficiencies for the years in issue
and additions to tax under sections 6651 and 6654 as follows:
Additions to Tax
Year Deficiency
§ 6651(a)(1) § 6651(a)(2) § 6654
2008 $53,754 $12,095 $13,439 –
2009 91,450 20,576 –5 $2,190
2011 55,324 12,448 – 1,095
The notice addressed to Ms. Ogawa determined deficiencies for
the years in issue and additions to tax under sections 6651 and 6654 as
follows:
4 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent
Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981,
983 (2019). We will use the name in effect at the times relevant to this case, i.e., the
Office of Appeals or Appeals.
5 The deficiency notice determined that for tax years 2009 and 2011, the section
6651(a)(2) additions to tax would be computed at a later date.
5
[*5] Additions to Tax
Year Deficiency
§ 6651(a)(1) § 6651(a)(2) § 6654
2008 $36,493 $8,211 $9,123 –
2009 69,599 15,660 –6 $1,666
2011 39,364 8,857 – 779
The notices sent to petitioners’ Aliso Viejo address were returned
as undeliverable. Petitioners received the notices mailed to their
address in Japan. Mr. Yamada and Ms. Ogawa filed their Petitions on
February 14 and 18, 2014, respectively.
On April 24 and 25, 2014, Appeals informed petitioners that their
case had been received for consideration. At the December 11, 2014,
Appeals conference, petitioners’ counsel stated that he needed
additional time to obtain documents from petitioners that would prove
they had no U.S.-source income during the years in issue.
On January 27, 2015, petitioners’ counsel moved unopposed to
continue the March 2015 trial session to allow him time to gather
additional documents from petitioners (in Japan) and have them
translated. The Court granted that motion and set a new trial date for
October 5, 2015.
On January 8, 2015, petitioners’ counsel informed respondent
that he had received approximately 100 pages of documents that would
need to be translated. He asserted that the only source of income
petitioners had was not a U.S. source but from a Japanese corporation.
Petitioners’ counsel requested copies of all bank statements and deposit
information that the revenue agent had used to conduct the bank deposit
analyses. Respondent sent counsel the requested information.
On September 16, 2015, respondent moved unopposed to continue
the trial to provide petitioners additional time to obtain translations.
The Court granted that motion and struck the case from the October 5,
2015, trial session.
6 The deficiency notice determined that for taxable years 2009 and 2011 the
section 6651(a)(2) additions to tax would be computed at a later date.
6
[*6] On July 13, 2016, the parties met and conferred over potential
settlement of the cases. Petitioners did not agree to respondent’s
proposed terms. They instead requested audit reconsideration. After
completing the audit reconsideration, respondent discovered that Mr.
Yamada was allowed to deduct additional expenses.
On May 16, 2018, respondent moved unopposed to calendar the
cases for trial. The Court granted that motion and set the cases for trial
on November 26, 2018. On November 26, 2018, the parties came to a
settlement of the cases. On December 20, 2018, they filed a Stipulation
of Settled Issues wherein they agreed to reduce the deficiencies and
eliminate the additions to tax. Petitioners filed the Motion at issue on
January 18, 2019; they seek legal fees and administrative costs
pursuant to section 7430.
Discussion
I. Legal Standards
Section 7430(a) provides that the prevailing party may be
awarded reasonable administrative or litigation costs for any
proceedings brought by or against the United States in connection with
the determination, collection, or refund of any tax, interest, or penalty.
To recover costs, the taxpayer must establish that (1) the taxpayer is the
prevailing party, (2) he or she did not unreasonably protract the
proceedings, (3) the amount of the costs requested is reasonable, and
(4) he or she exhausted the administrative remedies available. Friends
of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. 107,
111–12 (2018).
The “prevailing party” means any party which has substantially
prevailed with respect to the amount in controversy or the most
significant issue or set of issues presented. § 7430(c)(4)(A)(i). The
section 7430 requirements are conjunctive, and the failure to satisfy any
one of them will preclude an award of costs. Minahan v. Commissioner,
88 T.C. 492, 497 (1987). As the moving party, petitioners have the
burden of proving that they satisfy each requirement of section 7430.
See Rule 232(e).
II. Analysis
Respondent conceded that petitioners have substantially
prevailed with respect to the amount in controversy or the most
significant issue or set of issues presented. Respondent also conceded
7
[*7] that petitioners have met the net worth requirement pursuant to
section 7430(c)(4)(A)(ii).
In the Response, respondent argues that petitioners’ Motion
should be denied because respondent was substantially justified in
determining that petitioners had taxable, unreported income for the
years in issue. Pursuant to section 7430(c)(4)(B)(i), a party is not treated
as the prevailing party if the United States establishes that its position
was “substantially justified.”
Respondent bears the burden of showing that respondent’s
position was substantially justified. See § 7430(c)(4)(B)(i); Rule 232(e).
To be substantially justified, respondent’s position must have a
reasonable basis in both fact and law. See Pierce v. Underwood, 487 U.S.
552, 565 (1988). Respondent’s legal position is substantially justified if
based on supportable interpretations of federal tax statutes and
caselaw. See TKB Int’l, Inc. v. United States, 995 F.2d 1460, 1468 (9th
Cir. 1993). The litigation position of the United States is generally
established at the time the Government files its answer in the judicial
proceeding. See § 7430(c)(7); Huffman v. Commissioner, 978 F.2d 1139,
1148 (9th Cir. 1992), aff’g in part, rev’g in part T.C. Memo. 1991-144;
Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997).
Respondent argues that petitioners should not be treated as the
prevailing party because respondent was substantially justified in
respondent’s position that petitioners had unreported income for the
years in issue. Respondent asserts that he formed this position on the
basis of the revenue agent’s bank deposit analyses, which indicated that
petitioners had unreported deposits from various sources. Respondent
contends that because Mr. Yamada was a U.S. citizen—and respondent
assumed Ms. Ogawa was still a lawful permanent resident—it was
justifiable to determine that the income was taxable by the United
States.
Respondent further argues that it was justifiable to maintain this
position because petitioners failed to prove that they were entitled to tax
benefits under the United States-Japan treaty. They also failed to
provide certified translations of the foreign documents they submitted
which allegedly proved that the deposited income was tax exempt.
Respondent contends that petitioners’ own failure to update their
mailing address resulted in their receipt of deficiency notices before any
other communication.
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[*8] Petitioners argue that respondent was not substantially justified
in determining that they had unreported income because there was no
evidence that they were engaged in a U.S. business or income-producing
activity. Because there was no evidence of a U.S. business, petitioners
argue, respondent was not justified in conducting bank deposit analyses.
Petitioners further argue that once they received the deficiency notices,
they provided all requested information. They contend that certified
translations were not necessary to prove the income was tax exempt in
the United States. They claim that the filing itself was sufficient to show
that they had no U.S.-source income.
We agree that respondent was substantially justified in
determining that petitioners had unreported, taxable income. After
summoning account information from Bank of America, U.S. Bank, and
Union Bank on June 5, 2013, respondent discovered that petitioners had
unreported deposits from the years in issue totaling $1,121,327.
At the time the deposits were made, Mr. Yamada was a U.S.
citizen. Although Ms. Ogawa was not a U.S. citizen, respondent believed
her to be a lawful permanent resident at that time because petitioners
never provided respondent with an updated mailing address.
Petitioners concede that they failed to notify respondent of their address
change once they left the United States. Because respondent was under
the belief that petitioners remained U.S. residents at the time the
deposits were made, it was reasonable for respondent to assume that
petitioners remained liable for U.S. tax on their worldwide income. See
Cook v. Tait, 265 U.S. 47, 56 (1924).
Respondent therefore was substantially justified in asserting that
petitioners were liable for tax on the unreported income solely on the
basis of the bank deposit analyses. See Clayton v. Commissioner, 102
T.C. 632, 645 (1994) (“Bank deposits are prima facie evidence of income
. . . and the taxpayer has the burden of showing that the determination
is incorrect.”). Since respondent’s position was substantially justified,
petitioners are not entitled to an award of costs pursuant to section
7430.
We have considered all of petitioners’ arguments, and to the
extent not discussed above, we find them to be irrelevant, moot, or
without merit.
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[*9] To reflect the foregoing,
An appropriate order will be issued, and decisions will be entered
for respondent.