The opinion
T.C. Memo. 2007-135
UNITED STATES TAX COURT
MORTON AND ANNE KWESTEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8888-05. Filed May 30, 2007.
Morton and Anne Kwestel, pro sese.
Joseph J. Boylan, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Petitioners seek administrative costs under
Rule 271 and section 7430(f)(2).
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at all relevant times, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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The issue for decision is whether petitioners are entitled
to recover from respondent $7,253 in administrative costs
relating to petitioners’ claim for refund of $13,769 in overpaid
2001 Federal income taxes. Hereinafter, all references to
petitioner in the singular are to petitioner Morton Kwestel.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioners resided in
Rockaway, New Jersey.
In 2001 petitioner converted a traditional IRA into a Roth
IRA under section 408A(d)(3).
For 2001, petitioners timely filed their joint Federal
income tax return and paid the tax shown due thereon. On their
return as filed, petitioners included in income the $55,065 in
accumulated untaxed IRA earnings.1
On October 14, 2002, petitioner timely reversed the
conversion of his Roth IRA back into a traditional IRA under
section 408A(d)(6).2
1
Under sec. 408A(d)(3)(A) and (C), upon conversion of a
traditional IRA into a Roth IRA, the amount of untaxed earnings
in the IRA is includable in the taxpayer’s taxable income in the
year of the conversion.
2
Under sec. 408A(d)(6), a conversion of a traditional IRA
into a Roth IRA may be reversed so long as the transfer of funds
reversing the conversion is completed by the tax return filing
(continued...)
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On October 29, 2002, because of the reversal of the
conversion of his IRA account back into a traditional IRA and
because petitioner no longer had an obligation to report in his
2001 income the earnings from his IRA, petitioners filed with
respondent an amended 2001 joint Federal income tax return
reflecting gross income less the $55,065 in 2001 IRA earnings.
This reduction in income created a $13,769 tax overpayment that
petitioners claimed as a refund (refund claim).
On July 24, 2003, in response to questions about
petitioners’ refund claim, petitioner met with respondent’s
Compliance Division officer and her supervisor. Both of
respondent’s employees erroneously informed petitioner that
petitioner’s reversal of his IRA account back into a traditional
IRA was untimely and therefore that petitioners’ refund claim
would be disallowed.
Also on July 24, 2003, respondent’s Compliance Division
mailed to petitioners a claim disallowance letter disallowing
petitioners’ refund claim and stating that petitioners could
appeal the disallowance to respondent’s Appeals Office.
On September 4, 2003, petitioners’ accountant requested from
respondent’s National Office of Chief Counsel a determination as
to whether petitioners, on their amended 2001 tax return, timely
2
(...continued)
due date (including extensions) for the year in which the
conversion took place.
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and properly treated under section 408A(d)(6) petitioner’s IRA
earnings as not includable in petitioner’s 2001 income.
On September 17, 2003, respondent’s Compliance Division
mailed to petitioners a certified formal disallowance letter
disallowing petitioners’ $13,769 refund claim for 2001.
On December 16, 2003, in response to petitioners’
accountant’s September 4, 2003, letter, the Employee Plans
Technical Branch of respondent’s National Office faxed to
petitioners’ accountant a letter indicating that petitioner was
to be treated as timely reversing the conversion of his
traditional IRA into a Roth IRA.
On December 18, 2003, petitioners filed with respondent a
duplicate 2001 amended Federal income tax return, attaching to
this return a copy of the Employee Plans Technical Branch
December 16, 2003, favorable letter.
On April 2, 2004, respondent’s Compliance Division mailed to
petitioners a letter reversing its earlier position and allowing
in full petitioners’ $13,769 refund claim. On May 24, 2004,
respondent mailed to petitioners a check in the amount of $14,921
consisting of petitioners’ claimed tax refund plus interest.
On or about August 1, 2004, petitioners mailed to respondent
their claim under section 7430 for $7,253 in administrative costs
relating to their attempt to resolve the question as to the
taxability of their IRA conversion and the reversal thereof.
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On April 13, 2005, respondent’s Appeals Office notified
petitioners of respondent’s disallowance of petitioners’ $7,253
claim for administrative costs.
In the notice, respondent explained that, among other
reasons, because respondent had not issued an Appeals Office
notice of decision or a notice of deficiency for 2001 relating to
petitioners’ $13,769 tax refund claim, petitioners could not be
treated as a prevailing party under section 7430 and therefore
that petitioners were not entitled to administrative costs.
OPINION
Generally, under section 7430 Congress has provided that
taxpayers may recover from respondent costs relating to
administrative proceedings in which the taxpayers substantially
prevail. Section 7430(a) provides as follows:
SEC. 7430(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--
(1) reasonable administrative costs incurred
in connection with such administrative proceeding
within the Internal Revenue Service
* * *
In section 7430(c)(2), administrative costs are defined to
include costs incurred on or after the earliest of the following:
(1) The date on which the taxpayer receives from respondent’s
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Appeals Office a notice of decision, (2) the date of respondent’s
notice of deficiency, or (3) the date respondent mails a first
letter of proposed deficiency giving the taxpayer a right to
protest to respondent’s Appeals Office (commonly referred to as a
30-day letter). The flush language of section 7430(c)(2)
provides as follows:
Such term [administrative costs] shall only include
costs incurred on or after whichever of the following
is the earliest: (i) the date of the receipt by the
taxpayer of the notice of the decision of * * *
[respondent’s Appeals Office]; (ii) the date of the
notice of deficiency; or (iii) the date on which the
1st letter of proposed deficiency which allows the
taxpayer an opportunity for administrative review in
* * * [respondent’s Appeals Office] is sent.
Because respondent’s first letter of proposed deficiency
(i.e., a so-called 30-day letter) typically is mailed to a
taxpayer by respondent’s Examination Division prior to any
contact between the taxpayer and respondent’s Appeals Office,
Congress clearly contemplated that under section 7430(c)(2)
taxpayers would be able to recover administrative costs
independently of any actual subsequent court litigation and
independently of any claim for recovery of litigation costs.
Also applicable, however, to a claim for reimbursement of
administrative costs under section 7430, is the requirement that
a taxpayer must qualify as a “prevailing party”. Sec. 7430(a).
For a taxpayer to qualify as a prevailing party, respondent’s
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“position” must not have been substantially justified. Sec.
7430(c)(4)(A) and (B).
Under section 7430(c)(7)(B), respondent’s position that is
to be evaluated as to the justification therefor is identified as
the position respondent takes in the administrative proceeding as
of the earlier of either the date of receipt by the taxpayer of
respondent’s Appeals Office’s notice of decision or the date of
mailing to the taxpayer of respondent’s notice of deficiency
(i.e., no mention is made in section 7430(c)(7)(B) of the date of
respondent’s 30-day letter).
Because of the more restrictive language of section
7430(c)(7)(B), we have held that a taxpayer cannot be treated as
a prevailing party under section 7430 where respondent is treated
as never having adopted a “position” in an Appeals Office notice
of decision or in respondent’s notice of deficiency. See Rathbun
v. Commissioner, 125 T.C. 7, 14 (2005); Fla. Country Clubs, Inc.
v. Commissioner, 122 T.C. 73, 87 (2004), affd. 404 F.3d 1291
(11th Cir. 2005).
Because respondent herein issued to petitioners neither an
Appeals Office notice of decision nor a notice of deficiency, we
cannot consider respondent to have adopted any position for
purposes of section 7430. Petitioners therefore cannot be
treated as a prevailing party, and petitioners may not recover
their $7,253 in administrative costs.
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Petitioners contend that respondent adopted a position in
respondent’s Compliance Division’s September 17, 2003, certified
claim disallowance letter.3 However, under the plain language of
the statute, only respondent’s Appeals Office’s notice of
decision or respondent’s notice of deficiency establishes
respondent’s position for purposes of section 7430. See Fla.
Country Clubs, Inc. v. Commissioner, supra at 86; Wade v. United
States, 865 F. Supp. 216, 219 (D.N.J. 1994). Respondent’s
September 17, 2003, letter from respondent’s Compliance Division
is neither and does not establish respondent’s position for
purposes of section 7430.
Congress considered and decided against changing the
definition of the “position” of the government” in section
7430(c)(7) to include positions taken by respondent in a 30-day
letter first proposing a tax deficiency.4
Under the narrow statutory language of section 7430(c)(7) as
written, under respondent’s interpretative regulation under
3
Petitioners cite sec. 301.7430-3(c)(2), Proced. & Admin.
Regs., to support petitioners’ contention that a Certified Claim
Disallowance Letter may be treated as a document wherein
respondent states his “position” for purposes of sec. 7430 as
applied to refund claims. However, because the cited regulation
specifically requires that the notice of claim disallowance be
issued by respondent’s Appeals Office, the cited regulation does
not help petitioners.
4
See Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73,
78-86 (2004) (discussing the legislative history of sec. 7430)
affd. 404 F.3d 1291 (11th Cir. 2005).
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section 7430 (sec. 301.7430-3(c), Proced. & Admin. Regs.) and
under the interpretation placed thereon by the referenced court
cases, taxpayers (such as petitioners herein) who do a good job
at the administrative level of resolving issues and getting
respondent to realize the error of his ways are precluded from
recovering administrative costs incurred in achieving those
favorable results. To the contrary, taxpayers who do not do as
good a job at the administrative level and who receive adverse
Appeals Office notices of decision or notices of deficiency, but
who later convince respondent to concede issues or who
substantially prevail in litigation on the issues, are able to
seek a recovery of administrative costs. In effect, taxpayers
who do a better job at the administrative level of resolving
issues raised by respondent on audit are prejudiced in their
ability to recover administrative costs under section 7430.
Although we sympathize with petitioners’ situation, the
statute, as enacted, is controlling, and our authority is
limited. As we stated in Metzger Trust v. Commissioner,
76 T.C. 42, 59 (1981), affd. 693 F.2d 459 (5th Cir. 1982):
Courts do not have the power to repeal or amend the
enactments of the legislature even though they may
disagree with the result * * *
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Because the issue we address herein disposes of this case in
favor of respondent, we need not address either party’s further
arguments.
To reflect the foregoing,
Decision will be entered for
respondent.