The opinion
T.C. Memo. 1997-214
UNITED STATES TAX COURT
CAROLYN S. EIFERT, A/K/A SUE ARMSTRONG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12155-96. Filed May 7, 1997.
Leland Franks, for petitioner.
Katherine Holmes Ankeny, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ARMEN, Special Trial Judge: This case is before the Court
on petitioner's motion to recover administrative and litigation
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costs1 pursuant to section 7430 and Rule 231.2
Respondent concedes that petitioner substantially prevailed
as to the amount in controversy. See sec. 7430(c)(4)(A)(ii)(I).
The issues remaining for decision are as follows:
(1) Whether respondent's position in the administrative and
court proceedings was substantially justified;
(2) whether petitioner satisfied the net worth requirement
prescribed by section 7430(c)(4)(iii);
(3) whether petitioner exhausted administrative remedies;
(4) whether petitioner protracted the administrative and
court proceedings; and
(5) whether the attorney's fees and other costs that
petitioner seeks to recover are reasonable in amount.
Neither party requested an evidentiary hearing, and the
Court concludes that a hearing is not necessary for the proper
disposition of petitioner's motion. Rule 232(a)(3). We
therefore decide the matter before us based on the pleadings,
petitioner's motion, respondent's response to petitioner's
1
Although petitioner's motion is styled "Motion for Payment
of Litigation Costs", we are satisfied that petitioner intended
to move for an award of both administrative costs and litigation
costs.
2
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue. All references to section 7430 are to such section in
effect at the time that the petition was filed. All Rule
references are to the Tax Court Rules of Practice and Procedure.
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motion, and petitioner's reply to respondent's response, as well
as the various exhibits and affidavits attached thereto.
Carolyn S. Eifert (petitioner) resided in Hobbs, New Mexico,
at the time that her petition was filed with the Court.
FINDINGS OF FACT
In the mid-1980's, petitioner owned an unincorporated
business known as "Eifert's Fashions & Shoes".
In July 1985, petitioner filed a petition in bankruptcy with
the Bankruptcy Court for the District of New Mexico (the
bankruptcy court). Petitioner filed her petition in bankruptcy
under chapter 7 of title 11 of the United States Code.
Petitioner was represented before the bankruptcy court by an
attorney (petitioner's bankruptcy attorney).
Petitioner attached to her petition in bankruptcy a schedule
setting forth all of her liabilities. Among the liabilities set
forth on such schedule was a debt owed to Moncor Bank of Hobbs,
New Mexico, in the amount of $127,960 (the Moncor Bank debt).
In September 1986, petitioner was granted a discharge from
all dischargeable debts by the bankruptcy court (the Discharge of
Debtor). Subsequently, in February 1989, after petitioner's
bankruptcy estate had been fully administered, the bankruptcy
court entered a final decree closing petitioner's bankruptcy case
(the Final Decree).
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At some point in time not clearly disclosed by the record,
but before February 1994, Moncor Bank was taken over by the
Federal Deposit Insurance Corp. (FDIC) and placed in
receivership.
On or about January 31, 1994, petitioner received four Forms
1099-G (the Forms 1099-G). Each of the Forms 1099-G was issued
for the calendar year 1993 and referenced petitioner's tax
identification number. Each of the Forms 1099-G disclosed income
from discharge of indebtedness in the identical amount of
$251,203.73 and stated that such income was being reported to the
Internal Revenue Service (IRS).
Two of the Forms 1099-G were purportedly issued by Arizona
Commerce Bank c/o the FDIC in Denver, Colorado (the original
Forms 1099-G).3 The original Forms 1099-G disclosed the employer
identification number (EIN) of the issuer of such forms as 86-
0381653. The other two Forms 1099-G were marked "correction" and
were purportedly issued by "c/o" the FDIC in Denver, Colorado
(the corrected Forms 1099-G). The corrected Forms 1099-G did not
disclose the EIN of the issuer of such forms.
One of the original Forms 1099-G was issued to petitioner
and referenced account number 2495-2495000186271AB, whereas the
other such form was issued to "Eifert's Fashions/Shoes" and
referenced account number 2495-2495000186271AA. Similarly, one
3
The record does not disclose what relationship, if any,
Arizona Commerce Bank may have had to Moncor Bank.
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of the corrected Forms 1099-G was issued to petitioner and
referenced account number 2495-2495000186271AB, whereas the other
such form was issued to "Eifert's Fashions/Shoes" and referenced
account number 2495-2495000186271AA.
On or about January 31, 1994, petitioner also received two
letters dated January 28, 1994, from the FDIC in Dallas, Texas.
One letter was addressed to petitioner and the other letter was
addressed to "Eifert's Fashions & Shoes". Each letter referenced
account number 2495000186271 and the FDIC office in Denver,
Colorado. Both letters stated as follows:
You will, or have already received Internal
Revenue Service form 1099G which reports to IRS the
full or partial discharge of your indebtedness with
respect to the debt obligation noted above. The filing
of this report with the IRS is required by section
6050P of the Internal Revenue Code of 1986. The
reporting requirement applies to all debts discharged
in full or in part, on or after the effective date of
August 10, 1993. The amount discharged may or may not
be taxable income to you, depending upon your own
circumstances. You should consult with your tax
advisor to determine whether you must report this
amount as taxable income.
In 1993, a Form 1099-G was used to report certain government
payments. In particular, box 5 of such form was used to report
discharge of indebtedness by a Federal government agency, such as
the FDIC. See sec. 6050P(c)(1)(B). The "Instructions for
Recipient" for box 5 provided in pertinent part as follows:
Box 5.--Shows your indebtedness to a Federal government
agency that was discharged this year as no longer
collectible. This debt generally becomes taxable
income to you at the time the debt is discharged.
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There are exceptions to this rule--for example, if you
are insolvent or have declared bankruptcy.
Upon receipt of the Forms 1099-G, petitioner contacted her
bankruptcy attorney, who advised her to disregard the Forms 1099-
G because petitioner had previously been granted a discharge in
bankruptcy in September 1986. Petitioner accepted her bankruptcy
attorney's advice and did not, at that time, pursue the matter
any further.
Petitioner did not file a Federal income tax return for the
taxable year 1993 because her income for that year did not exceed
the filing threshold. See sec. 6012(a)(1).
Information returns (i.e., Forms 1099-G) reporting the
receipt of discharge-of-indebtedness income by petitioner for the
taxable year 1993 were filed with respondent (the information
returns). Data from the information returns, as compiled by
respondent, revealed the following:
Payor Payor's EIN Payee Amount
(1) Stockmen's Bk & Eifert's
Tr Co. c/o FDIC1 XX-XXXXXXX Fashions/Shoes $251,203
(2) Stockmen's Bk & Eifert's
Tr Co. c/o FDIC XX-XXXXXXX Fashions/Shoes 251,203
Eifert's
(3) FDIC XX-XXXXXXX Fashions/Shoes 251,203
(4) FDIC XX-XXXXXXX Petitioner 251,203
1
The record does not disclose what relationship, if
any, Stockmen's Bank and Trust Co. may have had to
Moncor Bank.
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On or about November 20, 1995, respondent's service center
in Austin, Texas (the Austin service center) sent a 30-day letter
to petitioner (the 30-day letter). The 30-day letter stated that
respondent had no record of receiving an income tax return from
petitioner for the taxable year 1993. The 30-day letter then
proposed a deficiency in petitioner's income tax and additions to
tax for 1993 based on income reported to respondent by third
parties. Such income included discharge-of-indebtedness income
in the amount of $1,004,812, i.e., the sum of the amounts
appearing on the information returns as set forth above.4 The
30-day letter stated that petitioner could appeal "the proposed
assessment" to the IRS Appeals Office.
The 30-day letter was mailed to petitioner at her former
address in Albuquerque, New Mexico (the Albuquerque address).5
The Albuquerque address was petitioner's address as it appeared
in respondent's computer records at the time that the 30-day
letter was sent (i.e., on or about November 20, 1995). Prior
thereto, on October 23, 1995, petitioner filed a Federal income
tax return for the taxable year 1994. Petitioner listed her
address on her 1994 return as P.O. Box 405, Hobbs, New Mexico
4
The proposed deficiency was also based on $5,003 of
unreported interest, dividends, and gain from the sale of
securities. A single individual having only such amount of
income in 1993 was not required to file an income tax return for
that year. Sec. 6012(a)(1).
5
Petitioner moved from the Albuquerque address in June
1993.
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88240 (the Hobbs address). Respondent did not post the Hobbs
address to respondent's computer records until December 25, 1995.
Petitioner did not receive the 30-day letter.
On March 29, 1996, the Austin Service Center mailed a notice
of deficiency to petitioner at both the Hobbs address and the
Albuquerque address. The notice of deficiency determined a
deficiency in petitioner's income tax and additions to tax in the
same amounts, and on the same basis, as proposed in the 30-day
letter. Thus, the notice of deficiency determined a deficiency
in petitioner's income tax for the taxable year 1993 in the
amount of $377,365 and additions to tax in the amounts of
$94,341.25 under section 6651(a) and $15,809.68 under section
6654(a).6
Petitioner received the notice of deficiency shortly after
it was mailed to her.7 Petitioner promptly contacted an IRS
representative at the "800" number set forth on the notice of
deficiency. Petitioner explained that the amounts reported on
the Forms 1099-G referred to a single debt owed by petitioner to
Moncor Bank and that such debt was discharged by the bankruptcy
6
The notice of deficiency also advised petitioner that she
was liable for interest (calculated through Dec. 20, 1995) in the
amount of $74,934. Thus, according to the notice, the total
amount due from petitioner (calculated through Dec. 20, 1995) was
$562,450.
7
Petitioner received the copy of the notice of deficiency
that was mailed to her at the Hobbs address. The other copy was
returned to respondent by the Postal Service as undeliverable.
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court in September 1986. The IRS representative told petitioner
that petitioner needed to "respond" to the notice of deficiency
in order to "correct the problem" and avoid assessment of the
deficiency, additions to tax, and interest.
Thereafter, petitioner contacted her accountant and asked
him to resolve the matter for her. The accountant ultimately
advised petitioner to retain a lawyer.
Petitioner contacted several lawyers but ultimately decided
to retain Leland Franks (petitioner's counsel).
On May 29, 1996, petitioner's counsel telephoned the Austin
service center and spoke with Molly Ramirez (Ms. Ramirez), a tax
examiner. Petitioner's counsel advised Ms. Ramirez that the
notice of deficiency erroneously determined income for 1993 in
respect of the Moncor Bank debt that had been discharged in
bankruptcy in September 1986. Immediately following the
conversation, petitioner's counsel faxed two documents to Ms.
Ramirez: (1) a Form 2848 (Power of Attorney and Declaration of
Representative) authorizing petitioner's counsel to represent
petitioner before the IRS, and (2) the Final Decree from
petitioner's bankruptcy proceeding.8
8
The fax log report generated by petitioner's counsel's fax
machine indicates that the Final Decree was in fact transmitted
to Ms. Ramirez. Respondent's counsel states that a copy of the
Final Decree was not received by Ms. Ramirez. However, in view
of the fact that Ms. Ramirez never contacted petitioner's counsel
to advise that she had not received all of the documents that had
been transmitted, and because respondent's counsel's statement is
unsupported in the record, we do not accept it.
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On or about June 5, 1996, petitioner mailed to the Court a
petition for redetermination (the petition) in respect of the
notice of deficiency. The petition was received and filed by the
Court on June 12, 1996.
In the petition, petitioner alleged, in part, that the Forms
1099-G were duplicates of a single indebtedness owed by
petitioner and that such indebtedness had been discharged in
petitioner's prior bankruptcy case.
At the time that the petition was filed, petitioner's net
worth did not exceed $2,000,000.
On June 18, 1996, petitioner's counsel contacted Pat Joiner,
an employee of the FDIC, and requested a letter explaining the
Forms 1099-G that had been sent to petitioner.
On June 19, 1996, Marsha Kish (Ms. Kish), a tax examiner at
the Austin service center to whom petitioner's case had been
assigned, contacted petitioner's counsel. Petitioner's counsel
explained that the discharge of indebtedness reflected on the
Forms 1099-G represented a single debt incurred by petitioner to
Moncor Bank and that this debt was discharged in bankruptcy in
September 1986. Petitioner's counsel told Ms. Kish that he had
requested the FDIC to send him a letter explaining the Forms
1099-G. Ms. Kish asked petitioner's counsel to send her a copy
of such letter as soon as possible; petitioner's counsel agreed
to forward her a copy upon receipt.
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Also on June 19, 1996, petitioner's counsel faxed Ms. Kish a
copy of the Discharge of Debtor that the bankruptcy court had
issued in September 1986 and a copy of the bankruptcy schedule on
which petitioner had set forth all of her liabilities. On the
fax transmittal page, petitioner's counsel directed Ms. Kish's
attention to the Moncor Bank debt.
As of July 3, 1996, Ms. Kish had not received a copy of the
anticipated FDIC letter. On that date she telephoned the office
of petitioner's counsel and stated that she was unable to retain
the file in petitioner's case any longer. Ms. Kish then
transferred the file so that it would be available to
respondent's District Counsel office in Phoenix, Arizona, for
preparation of an answer to the petition.
On July 22, 1996, respondent filed an answer (the answer).
In the answer, respondent denied all of the substantive
allegations made in the petition.
As of August 9, 1996, petitioner's counsel had not received
the FDIC letter that he had requested on June 18, 1996.
Accordingly, petitioner's counsel telephoned Pat Joiner and again
requested that the FDIC send him a letter explaining the
relationship of the Forms 1099-G to the Moncor Bank debt.
On August 12, 1996, petitioner's counsel sent a letter to
Alfonso Romero (Mr. Romero), the Appeals Officer in respondent's
Appeals Office in Albuquerque, New Mexico, to whom petitioner's
case had been assigned. Petitioner's counsel attached to his
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letter copies of the Discharge of Debtor, the bankruptcy schedule
on which petitioner had set forth all of her liabilities, the
Forms 1099-G, and the letters dated January 28, 1994, from the
FDIC.
On August 14, 1996, petitioner's counsel received a
communication dated August 9, 1996, from the FDIC regarding the
relationship of the Forms 1099-G to the Moncor Bank debt. The
FDIC communication, in the form of a "Corrected Paid Information
Statement", confirmed that indebtedness in the amount of
$251,203.73 was discharged in 1993 and that such indebtedness
related to Moncor Bank. The FDIC letter offered no explanation
why petitioner had received four Forms 1099-G; it offered no
explanation why petitioner had received those forms more than 7
years after the Moncor Bank debt had been discharged in
bankruptcy; and it offered no explanation why 1993 was identified
as the year in which the indebtedness was discharged.9
Attached to the FDIC communication was a "corrected" Form
1099-C (Cancellation of Debt) for the taxable year 1995 that had
been altered by hand to reference the taxable year 1993. That
9
The FDIC first became subject to the reporting
requirements relating to the cancellation of indebtedness in
1993. See sec. 6050P, as enacted by sec. 13252(a), Omnibus
Budget Reconciliation Act of 1993 (OBRA), Pub. L. 103-66, 107
Stat. 312, 531-532. Insofar as the FDIC was concerned, reporting
was only required in respect of indebtedness discharged after
Aug. 10, 1993, the date of OBRA's enactment. OBRA sec.
13252(d)(2), 107 Stat. 532. Prior to the enactment of sec.
6050P, the FDIC did not report the cancellation of indebtedness.
H. Conf. Rept. 103-213, 1993-3 C.B. 393, 549.
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form showed that a debt in the amount of $251,203.73 was canceled
in 1993. That form also identified: (1) The creditor as the FDIC
(as receiver for Moncor Bank); (2) the creditor's EIN as 85-
0096874; (3) the debtor as Eifert's Fashions & Shoes/Carolyn Sue
Eifert: and (4) the account number as 2495-00018627-1.
By letter dated August 16, 1996, petitioner's counsel sent
Mr. Romero a copy of the FDIC communication dated August 9, 1996.
By letter dated August 26, 1996, Mr. Romero sent
petitioner's counsel a form of decision for the latter's review
and signature. The form of decision provided that petitioner was
not liable for any deficiency in income tax or additions to tax
for the taxable year 1993.
Upon receipt, petitioner's counsel promptly signed the form
of decision and, by letter dated August 29, 1996, returned it to
Mr. Romero.
A supervisor in respondent's District Counsel office in
Phoenix, Arizona, signed the form of decision on October 8, 1996.
The form of decision was then mailed to the Court in Washington,
D.C.
On October 16, 1996, the Court entered a decision in this
case (the decision) utilizing the form of decision furnished by
the parties.
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On November 8, 1996, petitioner submitted her motion for
costs.10 Thereupon, by Order dated November 19, 1996, the Court
vacated the decision previously entered and filed the form of
decision as a stipulation of settlement. See Rule 232(f).
OPINION
We apply section 7430 as amended by the Technical and
Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec.
6239(a), 102 Stat. 3342, 3743-3746.11
Under section 7430(a), a judgment for costs may only be
awarded if a taxpayer: (1) Is the "prevailing party"; (2) has
exhausted his or her administrative remedies within the IRS with
respect to an award of litigation costs; and (3) did not
unreasonably protract the proceedings. Sec. 7430(a), (b)(1),
10
In her motion, petitioner prayed for an award of costs in
the amount of $4,419.91. Petitioner subsequently revised this
amount to include actual costs incurred after the motion was
filed. Petitioner now requests an award of costs in the amount
of $4,577.22, consisting of the following:
Attorney's fees (32.4 hours at $130/hour) $4,212.00
Filing fee/other costs and expenses 365.22
4,577.22
11
Technical and Miscellaneous Revenue Act of 1988, (TAMRA)
Pub. L. 100-647, sec. 6239(d), 102 Stat. 3746 is generally
applicable to proceedings commenced after Nov. 10, 1988. TAMRA
sec. 6239(d), 102 Stat. 3746. Congress amended sec. 7430 most
recently in the Taxpayer Bill of Rights 2 (TBOR2), Pub. L. 104-
168, secs. 701-704, 110 Stat. 1452, 1463-1464. However, the
amendments made by TBOR2 apply only in the case of proceedings
commenced after July 30, 1996. TBOR2 secs. 701(d), 702(b),
703(b), and 704(b), 40 Stat. 1463-1464. Inasmuch as the petition
was filed on June 12, 1996, the amendments made by TBOR2 do not
apply in the present case.
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(4). A taxpayer must satisfy each of these three requirements in
order to be entitled to a judgment under section 7430. Rule
232(e).
I. Prevailing Party
In order to qualify as the "prevailing party", a taxpayer
must establish: (1) The position of the United States in the
proceeding was not substantially justified; (2) the taxpayer has
substantially prevailed with respect to the amount in controversy
or the most significant issue or set of issues presented; and (3)
the taxpayer satisfies the applicable net worth requirement.
Sec. 7430(c)(4)(A).
Respondent concedes that petitioner substantially prevailed
with respect to the amount in controversy. See sec.
7430(c)(4)(A)(ii)(I). However, respondent contends that the
position taken by respondent in both the administrative and court
proceedings was substantially justified. Respondent also
contends that petitioner must prove that she satisfies the
applicable net worth requirement.
A. Respondent's Position in the Administrative and Court
Proceedings
Petitioner bears the burden of proving that respondent's
position in the administrative and court proceedings was not
substantially justified. Rule 232(e); Dixson Corp. v.
Commissioner, 94 T.C. 708, 714-715 (1990); Ganter v.
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Commissioner, 92 T.C. 192, 197 (1989), affd. 905 F.2d 241 (8th
Cir. 1990).
Whether respondent's position is substantially justified is
a question of fact. We resolve such issue by the application of
a reasonableness standard. See Pierce v. Underwood, 487 U.S.
552, 565 (1988) (construing similar language in the Equal Access
to Justice Act (EAJA), 28 U.S.C. sec. 2412 (1988)); see also
Sokol v. Commissioner, 92 T.C. 760, 763 n.7 (1989); Sher v.
Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir.
1988). In considering the reasonableness of respondent's
position, we take into account what respondent knew at the time
that she took the position based on the information available to
her at that time. See Rutana v. Commissioner, 88 T.C. 1329, 1334
(1987).
As relevant herein, the position of the United States that
must be examined against the substantial justification standard
with respect to the administrative proceeding is the position
taken by the Commissioner as of the date of the notice of
deficiency. Sec. 7430(c)(7)(B)(ii). The position of the United
States that must be examined against the substantial
justification standard with respect to the court proceeding is
the position taken by the Commissioner in her answer to the
petition. Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir.
1991); Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir.
1988), affg. 89 T.C. 79 (1987); see sec. 7430(c)(7)(A).
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In this case, respondent's position on each of these dates
was the same. More specifically, until Mr. Romero conceded the
case in response to the FDIC communication dated August 9, 1996,
the position of respondent was that the discharge of indebtedness
reported on the information returns filed with respondent
represented taxable income to petitioner.
(1) The Administrative Proceeding
We begin with petitioner's contention that respondent's
position was not substantially justified at the time that the
notice of deficiency was issued. Respondent contends to the
contrary. We agree with petitioner.
Our conclusion that respondent's position was not
substantially justified at the time that the notice of deficiency
was issued is not based on any one particular factor; rather, our
conclusion is based on the totality of the facts and
circumstances present in this case. The following facts and
circumstances are those that we think are particularly
significant in cumulatively tipping the scales in petitioner's
favor.
The deficiency determined by respondent in the notice of
deficiency is predicated on an adjustment to income in the amount
of $1,009,815. Virtually all of this amount, i.e., $1,004,812,
represents discharge-of-indebtedness income. Such discharge-of-
indebtedness income originates from four Forms 1099-G, each of
which is for the exact same amount, i.e., $251,203. Under these
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circumstances, respondent should have regarded the Forms 1099-G
with skepticism.
In addition, the Forms 1099-G showed the payor as the FDIC
in combination with different financial institutions having
different EINs, notwithstanding the fact that each Form 1099-G
reported exactly the same amount of income. Again, respondent
should have regarded such forms with skepticism.
Moreover, two of the four Forms 1099-G were "corrected"
forms. At the very least, this fact constituted evidence of a
duplication, and respondent should have regarded the Forms 1099-G
with skepticism.
We also think that respondent should have taken into account
the identity of the issuer of the Forms 1099-G and the character
of the "income" reported therein. First, box 5 of Form 1099-G
was used to report discharge of indebtedness by a Federal
government agency. There is nothing in the record to suggest why
respondent, the Commissioner of Internal Revenue, could not have
contacted the Federal government agency that issued the Forms
1099-G in order to determine the basis on which such forms were
issued given the dubious nature of such forms.
Second, section 108(a)(1) excludes from gross income an
amount otherwise includable therein if the discharge of
indebtedness occurs in a bankruptcy case or when the taxpayer is
insolvent. Indeed, the "Instructions for Recipient" for box 5 of
Form 1099-G expressly acknowledged this provision. Again, there
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is nothing in the record to suggest why respondent could not have
contacted the FDIC in order to determine the basis on which the
Forms 1099-G were issued given the dubious nature of such forms.
Further, respondent issued the notice of deficiency after
only one attempt to contact petitioner. We again take note of
the fact that the notice determined a million dollar adjustment
to petitioner's income. As a consequence of this million dollar
adjustment, the notice determined a deficiency in petitioner's
income tax in the amount of $377,365, and additions to tax under
sections 6651(a) and 6654(a) in the amounts of $94,341.25 and
$15,809.68, respectively. The notice also advised petitioner
that she was liable for interest (calculated through December 20,
1995) in the amount of $74,934. Thus, according to the notice,
the total amount due from petitioner (calculated through December
20, 1995) was $562,450. Given a liability of this magnitude, and
in view of the dubious nature of the Forms 1099-G, we question
whether respondent should have issued the notice of deficiency
after making only one attempt to contact petitioner.
Indeed, we take note of the fact that respondent originally
proposed the liability of $562,450 in the 30-day letter that was
sent to petitioner in November 1995. Again, given the magnitude
of such liability, and in view of the dubious nature of the Forms
1099-G, we question whether respondent should have even proposed
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such a liability without first attempting to contact
petitioner.12
In view of the foregoing, we conclude that it was
unreasonable for respondent, in the context of this case and
without further investigation, to determine a million dollar
adjustment to petitioner's income. We therefore hold that
respondent's position was not substantially justified at the time
that the notice of deficiency was issued.
(2) The Court Proceeding
We also hold that respondent's position was not
substantially justified at the time that the answer was filed.
Again, our holding is based on the totality of the facts and
circumstances present in this case. In addition to the factors
that we have already discussed, the facts and circumstances that
support our holding are as follows:
Shortly after receiving the notice of deficiency, petitioner
contacted an IRS representative at the "800" number set forth on
the notice of deficiency and explained that the amounts reported
on the Forms 1099-G referred to a single debt and that such debt
was discharged in a bankruptcy proceeding in September 1986.
12
In any event, we suspect that if respondent had processed
petitioner's 1994 income tax return more promptly, petitioner
would have received and responded to the 30-day letter. Here it
should be recalled that petitioner listed the Hobbs address on
her 1994 income tax return, and that respondent did not post the
Hobbs address to respondent's computer records until after the
1994 return had been processed.
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The IRS representative told petitioner that petitioner needed to
"respond" to the notice of deficiency in order to "correct the
problem".
In May 1996, petitioner's counsel spoke with Ms. Ramirez and
advised her that the notice of deficiency erroneously determined
income for 1993 in respect of a debt that had been discharged in
bankruptcy in September 1986. Petitioner's counsel also
transmitted by facsimile: (1) A power of attorney authorizing him
to represent petitioner before the IRS; and (2) the Final Decree
from petitioner's bankruptcy proceeding. Ms. Ramirez took no
action, but waited instead for petitioner's counsel to furnish
additional evidence.
Despite the foregoing contacts and the information furnished
by petitioner and petitioner's counsel, as well as the
infirmities evident on the face of the Forms 1099-G, and
notwithstanding the fact that the statute of limitations on
assessment for 1993 had not yet even begun to run, see sec.
6501(c)(3), respondent did not offer to rescind the notice of
deficiency. See sec. 6212(d).
After petitioner filed the petition but before respondent
filed the answer, petitioner's counsel transmitted to Ms. Kish a
copy of the Discharge of Debtor that the bankruptcy court had
issued in September 1986 and a copy of the bankruptcy schedule on
which petitioner had set forth all of her liabilities,
specifically including the Moncor Bank debt. Petitioner's
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counsel directed Ms. Kish's attention to the latter.
Nevertheless, Ms. Kish took no action, and instead transmitted
the file, presumably including the foregoing documents, to
respondent's District Counsel office for preparation of the
answer.
When respondent filed the answer in July 1996, respondent
should have been aware of all of the infirmities, as previously
described, that were evident on the face of the Forms 1099-G.
Respondent should also have been aware of petitioner's position
that the Forms 1099-G related to a single debt that had been
discharged by the bankruptcy court in September 1986. Indeed,
respondent's administrative file should have included the
operative documents related to petitioner's bankruptcy case.
Nevertheless, respondent denied all of the substantive
allegations made in the petition and thereby permitted this case
to proceed.
Finally, we observe that respondent did not concede this
case until after petitioner's counsel furnished the FDIC
communication dated August 9, 1996. Although the FDIC
communication did confirm the existence of indebtedness owed by
petitioner to Moncor Bank, the FDIC continued to maintain that
indebtedness in the amount of $251,203.73 was discharged in 1993.
We question, therefore, whether the FDIC communication was
actually the definitive piece of evidence that "allowed"
respondent to concede.
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B. Petitioner's Net Worth
The record demonstrates that petitioner satisfies the
applicable net worth requirement of sec. 7430(c)(4)(A)(iii).
Here we note that petitioner attached to her motion for costs an
affidavit averring that she satisfied such net worth requirement.
Petitioner subsequently furnished an additional affidavit in
which she set forth her assets and liabilities. Respondent has
never challenged or otherwise questioned either of petitioner's
affidavits.
Based on petitioner's affidavits, as well as the record as a
whole, we have found as a fact that petitioner's net worth did
not exceed $2,000,000 at the time that the petition was filed.
We therefore hold that petitioner satisfies the applicable net
worth requirement.
C. Conclusion
In view of the foregoing, we hold that petitioner was the
prevailing party in both the administrative and court
proceedings.
II. Exhaustion of Administrative Remedies
Respondent contends that petitioner failed to exhaust
administrative remedies because petitioner failed to appeal the
proposed deficiency to the IRS Appeals Office as stated in the
30-day letter. We disagree.
The short answer to respondent's contention is that
petitioner never received the 30-day letter because the letter
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was sent to an address where petitioner no longer lived.13 We
infer that petitioner would have appealed the proposed deficiency
if petitioner had known about it. Taking into account the fact
that petitioner did not receive the 30-day letter, we reject
respondent's contention that petitioner failed to exhaust
administrative remedies. See sec. 301.7430-1(e)(2), Proced. &
Admin. Regs.
III. Protraction of Proceedings
Respondent contends that petitioner unreasonably protracted
the court proceeding because petitioner failed to provide
"relevant information immediately after the issuance of the
Notice of Deficiency". In respondent's view, if petitioner had
provided such information, then respondent could have rescinded
the notice of deficiency.
As previously discussed, respondent did not offer to rescind
the notice of deficiency in spite of (1) the infirmities evident
on the face of the Forms 1099-G, and (2) the information
furnished by petitioner and petitioner's counsel after the notice
was issued. Thus, we reject respondent's contention that
petitioner unreasonably protracted the court proceeding.
IV. Reasonableness of the Amount of Costs Claimed
13
See supra note 12.
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In her motion, petitioner prays for an award of costs in the
amount of $4,577.22.14 Respondent suggests that an award of
attorney's fees at a rate in excess of $75 per hour (plus the
appropriate COLA) would be unreasonable. Respondent does not
suggest that the number of hours billed by petitioner's counsel
is unreasonable, nor does respondent suggest that the other costs
and expenses that petitioner seeks to recover are either
unrecoverable or unreasonable in amount.
Section 7430(c)(1) defines reasonable costs, in part, as
reasonable fees paid or incurred for the services of attorneys in
connection with the administrative and court proceedings.
Section 7430(c)(1)(B)(iii) limits the hourly rate for attorney's
fees to $75, with allowances for an increase in the cost of
living and other special factors.
This Court's position is that the cost of living adjustment
(COLA) applicable to an award of attorney's fees should be
measured from October 1, 1981, i.e., the same date from which
COLA's are measured under the EAJA. Bayer v. Commissioner, 98
T.C. 19 (1992); see Harris v. Railroad Retirement Board, 990 F.2d
519, 521 (10th Cir. 1993)(applying the EAJA analogously).
Inasmuch as petitioner's counsel billed petitioner at the rate of
$130 per hour for 1996 and 1997, we award petitioner attorney's
14
See supra note 10 for the breakdown of this amount.
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fees at that rate. See Austin v. Commissioner, T.C. Memo. 1997-
157, (slip op. at 24).
V. Conclusion
In summary, we hold that petitioner qualifies as a
"prevailing party" within the meaning of section 7430(c)(4)(A)
and that she is entitled to an award of costs under section 7430
in the amount of $4,577.22.
In order to reflect the foregoing,
An appropriate order and
decision will be entered for
petitioner.