The opinion
T.C. Summary Opinion 2006-126
UNITED STATES TAX COURT
GARY C. AND MARU E. JOHANSEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6643-05S. Filed August 10, 2006.
Gary C. and Maru E. Johansen, pro sese.
Gavin L. Greene, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code of 1986, as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure. The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
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This matter is before the Court on petitioners’ motion for
administrative and litigation costs under section 7430 and Rule
231 (motion).
Although petitioners’ motion sought an award for both
litigation and administrative costs, petitioners do not appear to
have any administrative costs. The first time entry on the
billing statement submitted by petitioners’ certified public
accountant (C.P.A.) was “Prepare Tax Court petition”. This time
entry and the nine time entries that followed were not dated.
Based on the descriptions, the Court concludes that these entries
represent costs that were incurred in connection with either the
preparation or the filing of the petition with the Court. Hence,
they are litigation costs. See sec. 7430(c)(1); sec. 301.7430-
4(c)(3), Proced. & Admin. Regs. The remaining time entries are
also litigation costs, because they were dated after the
petition’s filing date. Sec. 301.7430-4(c)(3), Proced. & Admin.
Regs. Accordingly, the Court will treat petitioners’ motion as a
motion for the recovery only of litigation costs.
Respondent agrees that petitioners: (1) Have not
unreasonably protracted the court proceedings; (2) have claimed a
reasonable amount of costs; (3) have substantially prevailed with
respect to the amount in controversy and with respect to the most
significant issue presented in the court proceedings; and (4)
have met the net worth requirements as provided by law.
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Respondent does not agree: (1) That petitioners have
exhausted their available administrative remedies within the
Internal Revenue Service (IRS), and (2) that petitioners are a
“prevailing party”, because (i) the qualified offer provision
does not apply, and (ii) respondent’s position in the court
proceedings was substantially justified.
The parties have not requested a hearing in this case, and
the Court concludes that a hearing is not necessary to decide
this motion. See Rule 232(a)(2). Accordingly, the Court rules
on the motion based on the parties’ submissions and the record in
this case.
Background
At the time the petition in this case was filed, petitioners
resided in Los Angeles, California.
For the year in issue, petitioners were self-employed,
operating a small consulting business. Petitioners jointly filed
a Form 1040, U.S. Individual Income Tax Return, for 2002, which
they prepared without the assistance of a professional.
By letter dated August 10, 2004, Tax Compliance Officer Mark
Harris (TCO Harris) notified petitioners that their 2002 return
had been selected for examination. At the same time, TCO Harris
sent to petitioners Form 4564, Information Document Request, to
request documentation establishing certain expense deductions
that petitioners claimed on their Schedule A, Itemized
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Deductions, and on their Schedule C, Profit or Loss From
Business.
By letter dated September 14, 2004, respondent sent to
petitioners a letter of proposed deficiency (30-day letter),
along with an examination report. The 30-day letter notified
petitioners that they had a right to request a conference with an
Appeals officer if they did not agree with the changes shown on
the examination report.
By letter dated September 27, 2004, TCO Harris informed
petitioners that he was reluctant to issue a statutory notice of
deficiency without a reply to the proposed changes from
petitioners. He offered petitioners an opportunity to discuss
the proposed adjustments in the examination report. TCO Harris
also stated in the letter that he would recommend the issuance of
a notice of deficiency if petitioners failed to respond.
By a notice of deficiency dated January 4, 2005, respondent
determined for 2002 a deficiency in petitioners’ Federal income
tax of $14,220 and a section 6662(a) accuracy-related penalty of
$2,844. The notice also asserted computational adjustments for
tuition and fees, self-employment adjusted gross income, self-
employment deduction, and an additional tax for early withdrawal
from an individual retirement account.
In early January of 2005, petitioners retained a C.P.A.,
Martin A. Kapp (Mr. Kapp), to file a petition with the Court and
to assist them in negotiating with respondent.
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By letter dated April 1, 2005, Mr. Kapp, on behalf of
petitioners, sent to respondent a “qualified offer” pursuant to
section 7430(g), in which petitioners offered to settle the 2002
deficiency for $500.
On April 8, 2005, petitioners filed a petition with the
Court, challenging respondent’s determinations in the notice of
deficiency. Shortly thereafter, petitioners received from the
Appeals Office a letter dated May 12, 2005, in which an Appeals
officer noted that petitioners “did not have the opportunity to
present documents, books, records” to support the deductions
claimed on their return.
On February 6, 2006, the parties settled all of the disputed
tax adjustments, and the terms of the settlement were read into
the record by respondent. Petitioners subsequently filed their
motion, in which they seek to recover the fees for services
performed by Mr. Kapp and his accounting firm. Concurrently with
the motion, the parties filed with the Court a stipulation of
settled issues that reflects the resolution of petitioners’
Federal income tax liabilities for 2002.
Discussion
Requirements Under Section 7430
Section 7430(a) authorizes the award of reasonable
litigation costs incurred in a court proceeding that is brought
by or against the United States in connection with the
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determination, collection, or refund of any tax, interest, or
penalty under the Internal Revenue Code.
Litigation costs may be awarded only if the taxpayers
satisfy all of the requirements set forth in section 7430.
Goettee v. Commissioner, 124 T.C. 286, 289 (2005). The taxpayers
must establish that they: (1) Are the prevailing party, (2) have
exhausted available administrative remedies, (3) have not
unreasonably protracted the court proceedings, and (4) have
claimed litigation costs that are reasonable. Sec. 7430(a) and
(b)(1), (3).
To be a prevailing party, the taxpayer must substantially
prevail with respect to either the amount in controversy or the
most significant issue or set of issues presented and must
satisfy the applicable net worth requirements under 28 U.S.C.
section 2412(d)(2)(B) (2000). Sec. 7430(c)(4)(A). Even if the
taxpayer satisfies all of the stated requirements, the taxpayer
shall not be treated as a prevailing party if the Commissioner’s
position in the court proceeding was substantially justified.
Sec. 7430(c)(4)(B). The Commissioner has the burden of proving
that his position was substantially justified. See sec.
7430(c)(4)(B)(i); Rule 232(e).
Subject to certain limitations, under section 7430(c)(4)(E),
a party shall be treated as the prevailing party if “the
liability of the taxpayer pursuant to the judgment in the
proceeding (determined without regard to interest) is equal to or
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less than the liability of the taxpayer which would have been so
determined if the United States had accepted a qualified offer of
the party under subsection (g).” Sec. 7430(g). The qualified
offer provision of section 7430(c)(4)(E) applies without regard
to whether the Commissioner’s position in the proceeding is
substantially justified. See Haas & Associates Accountancy Corp.
v. Commissioner, 117 T.C. 48, 59 (2001), affd. 55 Fed. Appx. 476
(9th Cir. 2003); McGowan v. Commissioner, T.C. Memo. 2005-80.
The issues in this case are: (1) Whether petitioners
exhausted their available administrative remedies, (2) whether
the qualified offer provision applies, and (3) whether
respondent’s position in the court proceeding was substantially
justified.
Exhaustion of Available Administrative Remedies
Section 7430(b)(1) requires that taxpayers take advantage of
all available administrative remedies to be eligible for an award
of litigation costs. Haas & Associates Accountancy Corp. v.
Commissioner, supra at 57.
Section 301.7430-1(b)(1), Proced. & Admin. Regs., provides:
A party has not exhausted the administrative remedies
available within the Internal Revenue Service with
respect to any tax matter for which an Appeals office
conference is available under §§601.105 and 601.106 of
this chapter (other than a tax matter described in
paragraph (c) of this section) unless–-
(i) The party, prior to filing a petition in the
Tax Court * * * participates * * * in an Appeals office
conference; or
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(ii) If no Appeals office conference is granted,
the party, prior to the issuance of a statutory notice
in the case of a petition in the Tax Court * * *
(A) Requests an Appeals office conference in
accordance with §§601.105 and 601.106 * * *; and
(B) Files a written protest if a written protest
is required to obtain an Appeals office conference.
Petitioners do not meet the requirement under section
301.7430-1(b)(1)(i), Proced. & Admin. Regs., because they did not
participate in an Appeals Office conference prior to filing a
petition. Petitioners did not expressly advance an argument
under section 301.7430-1(b)(1)(ii), Proced. & Admin. Regs.
Instead, petitioners argue that they are deemed to have exhausted
their available administrative remedies, because they meet the
exception under section 301.7430-1(f)(2), Proced. & Admin. Regs.
The Court will nevertheless address first the requirements under
section 301.7430-1(b)(1)(ii), Proced. & Admin. Regs., for
completeness of discussion.
Whether a Written Protest Is Required
Section 601.105(d)(2)(i), Statement of Procedural Rules,
provides that a written protest or brief written statement of
disputed issues is not required to obtain an Appeals conference
in office interview cases and correspondence examination cases.
The written requirement applies only in field examination cases.
See sec. 601.105(d)(2), Statement of Procedural Rules; see also
Images in Motion, Inc. v. Commissioner, T.C. Memo. 2006-19.
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For office interview cases and correspondence examination
cases, an oral request is sufficient. Sec.
601.106(a)(1)(iii)(a), Statement of Procedural Rules. Since this
was an office interview case, petitioners were not required to
file a written request or a brief written statement of disputed
facts.
Whether Petitioners Orally Requested
an Appeals Office Conference
Petitioners contend that prior to the issuance of the
statutory notice, they orally requested an Appeals Office
conference, but TCO Harris never returned their calls. TCO
Harris, in turn, stated in his affidavit to the Court that, as of
October 20, 2004, the only contact that he received from
petitioners was a voice mail message on August 30, 2004. TCO
Harris also stated that he called petitioners and left them a
message requesting that they return his call, but petitioners did
not do so.
It is difficult to conclude that petitioners’ voice mail
message in August was an oral request for an Appeals Office
conference, because petitioners were not offered an opportunity
for administrative review with the Appeals Office until September
14, 2004, the date of the 30-day letter.
The burden is on petitioners to prove that they have
exhausted their available administrative remedies within the IRS.
Rule 232(e). Petitioners have not presented any evidence to show
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that they made an oral request for an Appeals Office conference
prior to the issuance of the notice of deficiency.
Whether an Exception Applies
Section 301.7430-1(f), Proced. & Admin. Regs., provides
certain limited exceptions to the requirement that taxpayers
participate in an Appeals Office conference in order to be
treated as having exhausted available administrative remedies.
Haas & Associates Accountancy Corp. v. Commissioner, supra at 58.
Section 301.7430-1(f)(2), Proced. & Admin. Regs, applies only
where the taxpayers did not receive a 30-day letter prior to the
issuance of the statutory notice.
Petitioners argue that under section 301.7430-1(f)(2),
Proced. & Admin. Regs., they are deemed to have exhausted their
available administrative remedies, because respondent failed to
make an Appeals Office conference available to them before
issuing the statutory notice.
Petitioners presented a letter dated May 12, 2005, from
respondent’s Appeals Office, in which the Appeals officer
informed petitioners that “you did not have the opportunity to
present documents, books, records, receipts, affidavits, etc to
support the deductions, credits, filing status, etc. claimed on
your return.” Petitioners urge the Court to accept that as
evidence that they were not given an opportunity to participate
in an Appeals Office conference until shortly after their
petition was filed.
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Respondent, in turn, contends that petitioners failed to
respond to TCO Harris’s requests for information in connection
with the examination of their 2002 return. As a result, the IRS
sent to petitioners a 30-day letter dated September 14, 2004,
notifying petitioners that they should request a conference with
an Appeals officer if they did not agree with the proposed
adjustments to their return.
Petitioners also rely on Minahan v. Commissioner, 88 T.C.
492, 502-503 (1987), to argue that they fall within the purview
of the exception under section 301.7430-1(f)(2), Proced. & Admin.
Regs. In Minahan, however, the taxpayers did not receive a 30-
day letter. Minahan v. Commissioner, supra at 502. Petitioners
do not argue that they did not receive a 30-day letter from
respondent. Regardless of the letter from the Appeals Office
dated May 12, 2005, the 30-day letter clearly gave petitioners an
opportunity to seek an Appeals Office conference prior to the
issuance of the notice of deficiency. Therefore, the exception
under section 301.7430-1(f)(2), Proced. & Admin. Regs., does not
apply.
Petitioners’ meetings with an Appeals officer, upon
receiving the statutory notice and after filing a petition with
the Court, does not satisfy the exhaustion of administrative
remedies requirement. See Polyco, Inc. v. Commissioner, 91 T.C.
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963, 966 (1988); sec. 301.7430-1(g), Example (11), Proced. &
Admin. Regs.
Qualified Offer
Because the Court has found that petitioners failed to
exhaust their available administrative remedies, the Court need
not decide whether the qualified offer provision under section
7430(c)(4)(E) applies. The Court nevertheless notes that the
application of the qualified offer provision would have been
precluded by the settlement limitation under section
7430(c)(4)(E)(ii)(I).1
Section 7430(c)(4)(E)(ii)(I) provides that the qualified
offer provision does not apply where the parties settle a tax
adjustment rather than litigate and obtain a court determination
of the adjustment. In this case, the entire tax liability was
settled by the parties before this matter was brought before the
Court. Therefore, any judgment in this case will be issued
pursuant to a settlement rather than a judicial determination.
1
The statutory language in sec. 7430(c)(4)(E) reflecting the
settlement limitation to the qualified offer provision, in
relevant part, provides:
(ii) Exceptions.--This subparagraph shall not apply to–-
(I) any judgment issued pursuant to a settlement * * *
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The Court need not and does not reach the issue of whether
respondent’s position in the proceeding was substantially
justified.
Conclusion
Petitioners are not entitled to litigation costs because
they have not exhausted their available administrative remedies
within the IRS, as required by section 7430(b)(1). Accordingly,
petitioners’ motion for litigation costs is denied.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
An appropriate order and
decision will be entered.