The opinion
T.C. Memo. 2002-282
UNITED STATES TAX COURT
TAN DANG & KE T. CHAW DANG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6715-00. Filed November 14, 2002.
Joyce Rebhun, for petitioners.
Michael W. Berwind, for respondent.
MEMORANDUM OPINION
COLVIN, Judge: This matter is before the Court on
petitioners’ motion for litigation costs under section 7430 and
Rule 231. After concessions, the issues for decision are:
1. Whether respondent’s position in the underlying
proceeding was substantially justified. We hold that it was not.
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2. Whether petitioners are entitled to an award of
attorney’s fees at an hourly rate higher than $140. We hold that
they are not.
The parties submitted memoranda and affidavits supporting
their positions. We decide the motion based on those memoranda
and affidavits. We conclude that a hearing is not necessary to
decide this motion. Rule 232(a)(2).
Section references are to the Internal Revenue Code in
effect for the years in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
A. Petitioners
Petitioners are husband and wife who resided in California
when they filed the petition.
B. Dang v. Commissioner, T.C. Memo. 2002-117
Petitioners owned a grocery store (Manwah) that was failing
in 1995, 1996, and 1997. About half of the purchases at Manwah
were made with food stamps. Manwah was located in an
economically depressed area of Los Angeles. Six of the seven
grocery stores in that area had closed by the time of trial.
Petitioners gave respondent’s agent daily summaries or tapes
of Manwah’s sales for 331 days for 1995, 6 months for 1996, 9
months for 1997, and all of 1998.
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The following table shows the costs of goods sold and gross
receipts petitioners reported, and the amount of gross receipts
determined by respondent:
Costs of goods Gross receipts Gross receipts
sold reported reported by determined by
Year by petitioners petitioners respondent
1995 $869,270 $1,088,298 $1,123,087
1996 862,277 1,074,289 1,111,182
1997 881,352 1,077,288 1,118,467
Respondent determined that petitioners understated Manwah’s
gross receipts solely by applying Dun & Bradstreet average gross
profit percentage data for U.S. grocery stores with annual gross
receipts of up to $1 million to their reported costs of goods
sold. Respondent’s agent also estimated Manwah’s gross receipts
by annualizing the amounts shown on daily records that
petitioners had given him, but the record does not show the
results of that analysis. Finally, respondent’s agent used some
of petitioners’ records to estimate the markups of an unknown
number of unspecified products sold in Manwah in 1998. However,
as stated above, respondent’s determination was based solely on
Dun & Bradstreet average gross profit data. In Dang v.
Commissioner, T.C. Memo. 2002-117, we held that the Dun &
Bradstreet data did not provide a reliable basis to estimate
gross profit percentages because petitioners’ store was below
average.
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C. Petitioners’ Litigation Costs
Petitioners incurred attorney’s fees for services performed
in the underlying case from January 20, 2000, to July 8, 2001, as
follows:
Date Attorney services Attorney hours
Jan. 20, 2000 Filed petition 2.46
July 2, 2000 Developed case 6.00
Mar. 4, 2001 Prepared for trial 2.00
Apr. 3, 2001 Prepared for trial 6.00
May 2, 2001 Tried case 4.00
June 4, 2001 Prepared brief 10.00
July 8, 2001 Prepared brief 4.00
Total hours 34.46
Multiplied by the attorney’s hourly rate $285.00
1
Total hourly fees 9,821.10
Client costs for copying respondent’s files $151.00
Client costs for filing petition 60.00
Total costs 10,032.10
1
Petitioners attached to their motion a document entitled
“Billing Schedule” which erroneously stated that the total hourly
costs of 34.46 hours at $285 per hour was $9,761.
Discussion
A. Motion for Litigation Costs
Generally, a taxpayer who has substantially prevailed in a
Tax Court proceeding may be awarded reasonable litigation costs.
Sec. 7430(a), (c).1 To be entitled to an award, the taxpayer
must:
1
We apply sec. 7430 as amended by sec. 3101 of the
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, 112 Stat. 685, 727, effective for costs incurred
or services performed after Jan. 18, 1999. Sec. 7430 was amended
most recently by the Community Renewal Tax Relief Act of 2000
(CRTRA 2000), Pub. L. 106-554, sec. 319(25), 114 Stat. 2763A-647,
effective Dec. 21, 2000. The petition was filed on June 15,
2000, and thus the CRTRA 2000 amendment (which was purely
clerical in nature) does not apply here.
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1. Exhaust administrative remedies. Sec. 7430(b)(1).
Respondent concedes that petitioners meet this requirement.
2. Substantially prevail with respect to the amount in
controversy. Sec. 7430(c)(4)(A)(i)(I). Respondent concedes that
petitioners substantially prevailed.
3. Be an individual whose net worth did not exceed $2
million when the petition was filed. Sec. 7430(c)(4)(A)(ii); 28
U.S.C. sec. 2412(d)(2)(B) (1988). Petitioners meet this
requirement.
4. Not unreasonably protract the proceedings. Sec.
7430(b)(3). Respondent concedes that petitioners meet this
requirement.
5. Establish that the amount of costs and attorney’s fees
claimed are reasonable. Sec. 7430(a), (c)(1). Respondent
concedes that the number of attorney hours and other costs
claimed by petitioners are reasonable.
The taxpayer is not entitled to an award for reasonable
litigation costs if the Commissioner shows that the position of
the United States in the proceeding was substantially justified.
Sec. 7430(c)(4)(B)(i).
B. Whether Respondent’s Position Was Substantially Justified
1. Background
The parties dispute whether respondent’s position in the
underlying proceeding was substantially justified.
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The Commissioner’s position is substantially justified if
that position could satisfy a reasonable person. Pierce v.
Underwood, 487 U.S. 552, 565 (1988). To be substantially
justified, the Commissioner’s position must have a reasonable
basis in both fact and law. Id.; Hanover Bldg. Matls., Inc. v.
Guiffrida, 748 F.2d 1011, 1015 (5th Cir. 1984); Powers v.
Commissioner, 100 T.C. 457, 470, 473 (1993), affd. on this issue,
revd. in part and remanded on other issues 43 F.3d 172 (5th Cir.
1995). A position has a reasonable basis in fact if there is
relevant evidence which a reasonable person might accept as
adequate to support a conclusion. Pierce v. Underwood, supra at
565. For a position to be substantially justified, there must be
substantial evidence to support it. Id. at 564-565; Powers v.
Commissioner, supra at 473.
2. Whether Respondent Had a Reasonable Basis in Fact
Respondent contends that respondent reasonably used
statistical data to estimate Manwah’s gross receipts because
petitioners lacked complete records for the years in issue, and
that the Dun & Bradstreet average gross receipts data provided a
reasonable basis for respondent’s estimate of Manwah’s gross
receipts. It is clear that the Commissioner may, in the absence
of records, use a reasonable method to reconstruct a taxpayer’s
income. Holland v. United States, 348 U.S. 121, 131 (1954).
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However, respondent’s use of statistical data here was not
reasonable because Manwah was clearly below average.
Respondent relies on Estes v. Commissioner, T.C. Memo. 2000-
96, in which we held that the Commissioner’s reconstruction of
the taxpayers’ income based on partial records provided by the
taxpayers was reasonable. However, unlike the situation in Estes
v. Commissioner, supra, where the determination was based
primarily on partial records provided by the taxpayers,
respondent’s method of reconstruction in the instant case relied
too little on petitioners’ records and too much on statistical
data from noncomparable stores.
3. Conclusion
We conclude that respondent lacked a reasonable basis in
fact for respondent’s position that petitioners understated
Manwah’s gross receipts for the years in issue. The
substantially justified standard requires that respondent’s
position have a reasonable basis in both law and fact. Pierce v.
Underwood, supra at 565. Thus, respondent’s position in this
case was not substantially justified, and petitioners are
entitled to an award for reasonable litigation costs.
C. Whether the Attorney’s Fees and Costs Claimed Are Reasonable
Petitioners seek an award of attorney’s fees and
miscellaneous costs totaling $10,032.
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1. Applicable Hourly Rate for Attorney’s Fees
The parties dispute whether “special factors” are present
which warrant reimbursement at an hourly rate above $140.
Section 7430(c)(1)(B)(iii) provides an hourly rate for attorney’s
fees of $125, adjusted based on increases in the cost of living
since 1996. The hourly rate for 2000 and 2001 is $140. Rev.
Proc. 2001-13, sec. 3.26, 2001-1 C.B. 341; Rev. Proc. 99-42, sec.
3.26, 1999-2 C.B. 572; see Human v. Commissioner, T.C. Memo.
1998-65. That rate applies unless a special factor is present
that justifies a higher rate.
2. Whether a Special Factor Is Present
A special factor, such as the limited availability of
qualified attorneys for the proceeding, the difficulty of the
issues in the case, or the local availability of tax expertise,2
may justify payment of a higher hourly rate. Sec.
7430(c)(1)(B)(iii); Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, sec. 3101(a), 112 Stat. 727;
see H. Conf. Rept. 105-599, at 242-244 (1998), 1998-3 C.B. 747,
996-998; S. Rept. 105-174, at 47-49 (1998), 1998-3 C.B. 537, 583-
585; H. Rept. 105-364 (Part 1), at 57-59 (1997), 1998-3 C.B. 373,
2
There is no evidence relating to whether there is limited
availability of qualified attorneys for the proceeding or the
local availability of tax expertise, nor do petitioners make any
argument based on those factors.
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429-431. Petitioners contend that special factors are present
that justify an award of attorney’s fees at a rate higher than
$140 per hour.
Tax expertise, in itself, is not necessarily a special
factor in a tax case. Cassuto v. Commissioner, 936 F.2d 736, 743
(2d Cir. 1991), affg. on this issue, revg. in part and remanding
on other issues 93 T.C. 256 (1989); Bode v. United States, 919
F.2d 1044, 1051 (5th Cir. 1990); Regimbal v. United States, 88
AFTR 2d 2001-5330, 2001-2 USTC par. 50,583 (E.D. Wash. 2001)
(applying post-1998 law, tax expertise is not a special factor).
Petitioners contend that petitioners’ counsel’s unique background
warrants an award of fees at a rate higher than $140. We
disagree. Rebhun has a bachelor of arts degree with highest
honors, a law degree, a master’s degree in business
administration, and a doctorate. She is a certified public
accountant, and she has been the subject of articles in the New
York Times, Los Angeles Times, Los Angeles Daily Journal,
Washington Post, Chicago Sun-Times, Money, Glamour, Savvy Woman,
and Sylvia Porter’s Personal Finance. Those articles describe
Rebhun as a “tax therapist” who helps people with emotional
problems to deal with the Internal Revenue Service.
Neither Rebhun’s education nor the fact that she has been
recognized as a “tax therapist” in several magazine and newspaper
articles warrants our finding that a special factor is present.
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This case did not appear to require those skills in order for
petitioners to prevail. Publicity that Rebhun received from the
articles apparently did not play any role in the underlying
litigation. The issues in the underlying case were not
particularly difficult. We do not minimize Rebhun’s
accomplishments in this case, but winning a case does not
automatically mean a special factor is present. We find that no
special factor is present which justifies an award of attorneys’
fees at an hourly rate greater than $140.
D. Conclusion
Respondent concedes that Rebhun spent a reasonable amount of
time on the underlying case. We award petitioners attorney’s
fees of $4,824.40 (34.46 hours at $140 per hour), and costs of
$60 for filing the petition and $151 for photocopying of
respondent’s files.
To reflect the foregoing,
An appropriate order and
decision will be entered.