UNITED STATES TAX COURT

T.C. Memo. 1997-183

UNITED STATES TAX COURT

ROGER L. AND PATRICIA A. LAVALLEE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1604-95.

Filed April 21, 1997.

Roger L. and Patricia A. Lavallee, pro sese.

James F. Kearney, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge:

Petitioners are seeking an award of reasonable

administrative costs pursuant to section 7430(f)(2)1 and Rules

270-274.2

1

Sec. 7430(f)(2) provides that "A decision granting or

denying (in whole or in part) an award for reasonable

administrative costs under subsection (a) by the Internal Revenue

Service shall be subject to appeal to the Tax Court under rules

similar to the rules under section 7463 (without regard to the

amount in dispute)."

2

The petition for administrative costs in this case was

(continued...)

- 2 FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioners resided in Jacksonville, Florida, when they filed

their petition for administrative costs.

During the years 1985,

1986, and 1987, Mr. Lavallee was employed as a cross-country

truck driver for Paul Arpin Van Lines, Inc. (Paul Arpin), in East

Greenwich, Rhode Island.

Petitioners filed untimely Federal income tax returns for

1985 and 1986 on July 23, 1987, and for 1987 on November 23,

1988.

Mr. and Mrs. Lavallee listed their occupations as "truck

driver" and "homemaker" on their returns for these years.

On

Schedule C of their returns, petitioners reported the following

amounts of gross receipts and deductions:

Year

Gross receipts

Deductions

1985

1986

1987

$100,232

102,288

98,582

$80,883

87,797

90,188

On October 13, 1988, respondent's Office Auditor Linda

Barrow was assigned to examine petitioners' 1986 Federal income

tax return.

2

On October 20, 1988, Office Auditor Barrow sent

(...continued)

filed on Jan. 26, 1995, and, therefore, has been considered under

sec. 7430 as amended by sec. 6239(a) of the Technical and

Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.

3342, 3743-3744, effective for all civil tax proceedings

commenced after Nov. 10, 1988. All Rule references are to the

Tax Court Rules of Practice and Procedure.

- 3 petitioners an initial appointment letter, which proposed a

conference date of November 15, 1988.

Petitioners failed to

contact respondent and did not appear at the scheduled

conference.

On December 8, 1988, a second appointment letter was

sent to petitioners requesting that they call for a convenient

appointment.

Petitioners met with Office Auditor Barrow on December 22,

1988.

At that time, petitioners provided information regarding

Mr. Lavallee's employment at Paul Arpin and his compensation and

expenses in connection therewith.

On December 23, 1988,

respondent sent a Letter 1995(DO) to Paul Arpin, requesting

employment-related information with respect to Mr. Lavallee.

Office Auditor Barrow also sent petitioners three Information

Document Requests (Form 4564), which were dated December 22,

1988, December 23, 1988, and January 9, 1989.

The documents

provided on December 22, 1988, were the only documents that

petitioners provided to respondent prior to respondent's issuance

of the notice of deficiency.

On January 17, 1989, Office Auditor Barrow was assigned

petitioners' 1987 Federal income tax return, which had also been

selected for audit.3

3

Office Auditor Barrow had requested information with

respect to petitioners' 1987 year in the initial appointment

letter she sent petitioners on Oct. 20, 1988, and in the Forms

4564 that she issued to petitioners on Dec. 23, 1988, and Jan. 9,

1989.

- 4 On February 24, 1989, petitioners' 1985 return was assigned

to Office Auditor Barrow.

On that date, Office Auditor Barrow

sent petitioners a Form 4564 with respect to their 1985 return.

A second Form 4564 was sent to petitioners on April 4, 1989.

Respondent sent Reports of Individual Income Tax Examination

Changes (Form 4549) to petitioners, which reflected proposed

adjustments.4

The proposed adjustments to petitioners' Schedule

C deductions for 1985, 1986, and 1987 were in the amounts of

$2,930, $10,379, and $15,363, respectively.5

In a letter dated May 19, 1989, respondent requested that

petitioners respond to the Forms 4549 that had been sent to them

and informed petitioners that they could have their case

transferred to respondent's Appeals Office.

The letter also

stated that respondent would issue a notice of deficiency if

petitioners failed to respond within 15 days.

Petitioners, through their daughter-in-law, requested that

their case be sent to Appeals.

On July 21, 1989, petitioners'

case was transferred to respondent's Appeals Office in

Jacksonville, Florida.

On July 25, 1989, Appeals Officer Sandra

G. Holder sent petitioners a letter advising them that the case

had been referred to her and that she would call or write to

4

Respondent's Forms 4549 for petitioners' 1986 and 1987

years are both dated Jan. 18, 1989; her report for petitioners'

1985 year is dated May 1, 1989.

5

A listing of each of Office Auditor Barrow's adjustments

for 1985, 1986, and 1987 is contained in the appendix.

- 5 arrange a mutually satisfactory conference date.

In a letter

dated September 19, 1989, Appeals Officer Holder wrote

petitioners to inform them that she had scheduled a conference

for October 11, 1989, with respect to their 1985, 1986, and 1987

tax years.

After petitioners failed to respond to this letter,

Appeals Officer Holder wrote to petitioners on October 12, 1989,

scheduling another conference date for October 24, 1989.

On

October 20, 1989, Mrs. Lavallee contacted the office of Appeals

Officer Holder to advise her that petitioners would be out of

town for 3 to 4 weeks.

On March 20, 1990, after petitioners had

failed to contact respondent requesting another conference date,

respondent issued a notice of deficiency.

In the notice,

respondent determined the following deficiencies and additions to

tax:

Year

Deficiency

1985

$868

Additions to Tax

Sec. 6651(a)(1) Sec. 6653(a)(1)

$317

$244

Sec. 6653(a)(2)

50 percent of

the interest

due on $868

Additions To Tax

Year Deficiency Sec. 6651(a)(1) Sec. 6653(a)(1)(A) Sec.

6653(a)(1)(B)

1986

$3,038

$665

$296

50 percent of the

interest due on

$3,038

1987

4,104

843

261

50 percent of the

interest due on

$4,104

- 6 Petitioners failed to file a petition with this Court with

respect to the notice of deficiency.

After respondent instituted collection procedures with

respect to these deficiencies, petitioners retained Steven W.

Conner, a certified public accountant in Orange Park, Florida.

In January 1991, Mr. Conner filed amended Federal income tax

returns for petitioners for 1985, 1986, and 1987.6

In Part II

(Explanation of Changes to Income, Deductions, and Credits) of

each amended return, Mr. Conner included the following statement:

Taxpayers' originally filed return was audited and

changes requiring payment of additional tax were made.

The taxpayer [sic] was not able to contact the revenue

officer before the case was closed to contest the

changes. The taxpayers are long haul truckers. The

changes on this amended return convert the audited

numbers back to the return as filed. The taxpayer

believes the return was correct as filed. * * *

In a letter dated March 25, 1991, respondent indicated that the

claims in petitioners' amended returns would not be considered

unless petitioners first paid the tax and then filed a claim for

refund.

On October 31, 1991, respondent received an Offer in

Compromise (Form 656), prepared by Mr. Conner, with reference to

petitioners' 1985, 1986, and 1987 Federal income tax liabilities.

In an October 21, 1991, letter accompanying the Form 656, Mr.

Conner explained that petitioners made the offer "because of

6

The amended returns for 1986 and 1987 were filed on Jan. 3,

1991, and the amended return for 1985 was filed on Jan. 14, 1991.

- 7 doubt as to any liability".

The Form 656 proposed a reduction in

petitioners' Federal income tax deficiencies for 1985, 1986, and

1987 in the amounts of $870, $2,987, and $4,104, respectively.7

Revenue Agent Kim Lovell was assigned to review petitioners'

Form 656.

In a telephone conference on May 7, 1992, Revenue

Agent Lovell informed Mr. Conner that petitioners needed to

present additional information if their case was to be closed.

On May 11, 1992, Revenue Agent Lovell and Mr. Conner met to

review additional documentation and to determine the extent of

any adjustments to petitioners' Federal income tax liabilities

for 1985, 1986, or 1987.

In a Form 4549, which was proposed by

Revenue Agent Lovell and dated July 29, 1992, she determined that

petitioners were entitled to additional Schedule C deductions for

1985 and 1987 in the amounts of $430 and $621, respectively.8

This resulted in a reduction of petitioners' Federal income taxes

for 1985, 1986, and 1987 in the amounts of $123, $2,9 and $166,

respectively.

Revenue Agent Lovell prepared a rejection

7

These amounts were the same as the reductions in Federal

income tax liability listed by petitioners on their amended

returns.

8

Revenue Agent Lovell increased petitioners' Schedule C

deduction in 1985 by $430 to reflect petitioners' payment of a

highway use tax. For 1987, Revenue Agent Lovell increased

petitioners' Schedule C deductions for car/truck expenses, travel

and entertainment expenses, and uniforms in the amounts of $127,

$56, and $438, respectively.

9

This $2 reduction in petitioners' Federal income tax

liability for 1986 resulted from respondent's determination that

petitioners were entitled to use income averaging in computing

their tax liability for that year.

- 8 memorandum on July 29, 1992, with respect to petitioners' Form

656.

In a letter dated November 23, 1992, Mr. Conner informed

respondent of petitioners' disagreement with the rejection of

their Form 656 and the limited extent of Revenue Agent Lovell's

proposed adjustments.

Mr. Conner's letter included eight

attachments which provided substantiation for several of the

deductions discussed therein.

With the exception of three

documents, petitioners had not previously provided this

information to respondent during her examination of their

returns.

In his letter, Mr. Conner proposed the following adjustments

to petitioners' Schedule C deductions:

1985

Per

Office Auditor Barrow

Per

Appeal

$11,831

10,275

4,676

697

0

50,474

$11,957

10,275

8,218

697

5,473

50,474

($126)

0

(3,542)

0

(5,473)

0

$77,953

$87,094

($9,141)

Adjustment

Depreciation

Repairs

Travel & entertainment

Claims/chargebacks

Interest on truck loans

All other expenses

Total

- 9 1986

Per

Office Auditor Barrow

Per

Appeal

Adjustment

$12,499

9,753

8,891

413

0

45,862

$12,625

14,206

8,891

413

5,473

45,862

($126)

(4,453)

0

0

(5,473)

0

$77,418

$87,470

($10,052)

Per

Office Auditor Barrow

Per

Appeal

Adjustment

$25,904

5,399

2,519

737

0

40,266

$37,864

8,579

7,100

767

4,685

40,266

($11,960)

(3,180)

(4,581)

(30)

(4,685)

0

$74,825

$99,261

($24,436)

Depreciation

Repairs

Travel & entertainment

Claims/chargebacks

Interest on truck loans

All other expenses

Total

1987

Depreciation

Repairs

Travel & entertainment

Claims/chargebacks

Interest on truck loans

All other expenses

Total

Thus, petitioners were now claiming Schedule C deductions for

1985 and 1987 in excess of the amounts reported on their returns

for those years, as well as a smaller deduction for 1986:

Year

Amount per return

Amount per appeal

1985

1986

1987

$80,883

87,797

90,188

$87,094

87,470

99,261

On or about May 24, 1993, petitioners' case was reassigned

to Revenue Agent Michael L. Roberts who determined that Mr.

- 10 Conner's November 23, 1992, letter raised additional issues and

provided additional information.

In his examination workpapers,

Revenue Agent Roberts stated that petitioners had adequately

substantiated the amounts of their Schedule C deductions as

listed in Mr. Conner's letter.

However, Revenue Agent Roberts

also concluded that he lacked the authority to allow petitioners

to claim Schedule C deductions in excess of the greater of the

amounts originally reported on the returns for those years or the

amounts allowed by Office Auditor Barrow during her examination

of petitioners' returns.10

Revenue Agent Roberts then

transferred petitioners' case to respondent's Appeals Office for

a determination as to the total amount of Schedule C deductions

which petitioners were entitled to claim.

In a letter dated May 17, 1994, Appeals Officer Robert W.

Whittle advised Mr. Conner that he had scheduled a conference for

June 29, 1994, in Jacksonville, Florida.

However, after

reviewing the workpapers of Revenue Agent Roberts, Appeals

Officer Whittle contacted Mr. Conner to advise him that a meeting

was unnecessary, as Appeals Officer Whittle was prepared to allow

the amounts of Schedule C deductions originally reported on

petitioners' Federal income tax returns for 1985, 1986, and 1987.

Mr. Conner indicated that he still preferred to meet on the

10

In several instances, Office Auditor Barrow allowed

petitioners a deduction that was in excess of the amount claimed

on their return. See appendix.

- 11 scheduled date, and during his meeting with Appeals Officer

Whittle on June 29, 1994, Mr. Conner explained that petitioners

were claiming additional amounts of Schedule C deductions.

Appeals Officer Whittle originally believed that the period of

limitations was no longer open for 1985 and 1987.11

Nevertheless, despite finding that petitioners had a "weak case",

Appeals Officer Whittle ultimately agreed with Mr. Conner that

petitioners should be considered to have made an informal claim

for refund for which the period of limitations had not run and

that petitioners' claimed Schedule C deductions should be

allowed.

Petitioners then filed a claim with respondent to recover

the administrative costs incurred in connection with their case.

In a letter dated December 14, 1994, respondent denied

petitioners' claim for such costs.

On January 26, 1995,

petitioners filed with the Court a petition for administrative

costs pursuant to section 7430(f)(2).

The petition stated that

respondent had denied petitioners' claim for $9,311.12 of

administrative costs.

The petition also stated that petitioners

were now claiming $13,586.12 of administrative costs.

11

Since petitioners' 1986 year involved only a negligible

deficiency under the terms of the settlement agreement, the

parties did not discuss whether the period of limitations

remained open with respect to that year.

- 12 OPINION

Section 7430(a)(1) provides that a party that has prevailed

in any administrative proceeding against the United States may

recover reasonable administrative costs.

Section 7430(c)(2)

limits the term "reasonable administrative costs" to include only

costs incurred on or after the earlier of (i) the date of the

receipt by the taxpayer of the notice of the decision of the

Internal Revenue Service Office of Appeals, or (ii) the date of

the notice of deficiency.

Estate of Gillespie v. Commissioner,

103 T.C. 395, 396 (1994).

To obtain an award of administrative costs, taxpayers must

establish that:

(1) They have "substantially prevailed" in the

controversy; (2) they satisfy certain net worth requirements; (3)

the position of the United States in the proceeding was not

substantially justified; (4) they have not unreasonably

protracted the proceedings; and (5) the amount of the costs

sought is reasonable.

Sec. 7430(b) and (c).

Petitioners must

prove that they satisfy each of these requirements.

Rule 232(e);

Gantner v. Commissioner, 92 T.C. 192, 197 (1989), affd. 905 F.2d

241 (8th Cir. 1990).12

12

The parties have stipulated that

In the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec.

701(b), 110 Stat. 1452, 1463 (1996), sec. 7430(c)(4) was amended

to require the Government to establish that its position was

substantially justified. This amendment is effective for

(continued...)

- 13 petitioners satisfy the net worth requirements.

Respondent also

concedes that petitioners substantially prevailed with respect to

the amounts in controversy.

Whether the Position of the United States was Substantially

Justified

Petitioners must prove that the position of the United

States in this administrative proceeding was not substantially

justified.

Sec. 7430(c)(4)(A)(i); Rule 232(e).

We apply the

"not substantially justified" standard as of the date that

respondent takes her position in the case.

For purposes of an

administrative proceeding, respondent generally takes her

position on the date she issues the notice of deficiency.

Sec.

7430(c)(7)(B); Han v. Commissioner, T.C. Memo. 1993-386.

Whether respondent's position was "not substantially

justified" turns on an analysis of all the facts and

circumstances, as well as any relevant legal precedents.

Coastal

Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 688

(1990); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861

F.2d 131 (5th Cir. 1988); see also H. Rept. 97-404, at 12 (1981).

We must consider the basis for respondent's position and the

manner in which that position was maintained.

Commissioner, 86 T.C. 962, 968-969 (1986).

Wasie v.

A position is

substantially justified if the position is "justified to a degree

12

(...continued)

proceedings commenced after July 30, 1996.

- 14 that could satisfy a reasonable person."

Pierce v. Underwood,

487 U.S. 552, 565 (1988); Powers v. Commissioner, 100 T.C. 457,

470-471 (1993).

The fact that respondent loses or concedes a

case, without more, does not establish an unreasonable position.

Sokol v. Commissioner, 92 T.C. 760, 767 (1989).

Rather, the

reasonableness of respondent's position is determined by

considering the information available to her at the time the

notice of deficiency was issued.

Sharer v. Commissioner, T.C.

Memo. 1996-90; see also Rutana v. Commissioner, 88 T.C. 1329,

1334 (1987).

The adjustments made by Office Auditor Barrow during her

exmaination of petitioners' Federal income tax returns for 1985,

1986, and 1987 formed the basis of respondent's notice of

deficiency in this case.

However, neither petitioners' testimony

at trial nor their post-trial brief clearly identified the

particular adjustments that petitioners contend were not

substantially justified.

For instance, the only adjustments

which Mr. Lavallee made specific reference to in his testimony

were Officer Auditor Barrow's purported adjustments for trip

sheets and oil.

However, Office Auditor Barrow's examination

workpapers do not discuss an adjustment for trip sheets.

While

the adjustments for oil may have been contained within the

nominal adjustments of petitioners' Schedule C deductions for

car/truck expenses, the amounts allowed by Office Auditor Barrow

were determined on the basis of the substantiation provided by

- 15 Mr. Lavallee himself.

In addition, Mr. Conner never disputed

these adjustments during his discussions with respondent.

Deductions from gross income are a matter of legislative

grace, and taxpayers bear the burden of proving that they are

entitled to the deductions they claim.

Rule 142(a); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

the burden of substantiation.

This includes

Hradesky v. Commissioner, 65 T.C.

87, 89-90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

Taxpayers are required to maintain records sufficient to

establish the amounts of their deductions.

Sec. 6001.

Following our review of the record, we conclude that

petitioners have not proven that respondent's position was not

substantially justified.

Rule 232(e).

We have reviewed Office

Auditor Barrow's workpapers and find her adjustments to be

justified given the information available.

In addition, we note

that respondent provided petitioners with Forms 4549 for 1985,

1986, and 1987, which contained the proposed adjustments made by

Office Auditor Barrow.

Respondent requested that petitioners

respond to the proposed adjustments, and she informed petitioners

that they could have their case reviewed by respondent's Appeals

Office.

Moreover, after petitioners' daughter-in-law advised

respondent that petitioners wanted their case sent to Appeals,

Appeals Officer Holder attempted to schedule two Appeals

conferences with them.

Petitioners did not attend either

conference, nor did they ever attempt to arrange another meeting

- 16 date.

Thus, petitioners had several opportunities to meet with

respondent in order to discuss respondent's proposed adjustments,

as well as to present any additional documentation that they had.

They simply failed to take advantage of the opportunities

respondent afforded them.13

For the foregoing reasons, we hold that petitioners are not

entitled to an award of reasonable administrative costs.

As a

result of our disposition, we express no opinion as to whether

any of the remaining requirements of section 7430 have been

satisfied.14

Decision will be entered

that petitioners are not

entitled to administrative

costs.

13

Mr. Conner's letter and most of the documents provided

therein were not submitted until Nov. 23, 1992, more than 2-1/2

years after the notice of deficiency had been issued. Mr.

Conner's letter also proposed Schedule C deductions for 1985 and

1987 that were in excess of the amounts petitioners had reported

on their returns for those years.

14

Respondent also argues that petitioners are seeking costs

incurred in connection with a "collection action", which

respondent maintains does not constitute an "administrative

proceeding" under sec. 7430(c)(5) and sec. 301.7430-3(a)(4),

Proced. & Admin. Regs. Since we have found that petitioners have

failed to prove that the position of the United States was not

substantially justified, we leave the resolution of this question

for another day. See Ball v. Commissioner, T.C. Memo. 1995-520

(also declining to reach this issue).

- 17 Appendix

1985

Per

Return

As

Corrected

Adjustment

1. Bank charges

2. Car/truck expenses

3. Depreciation

4. Dues and publications

5. Insurance

6. Office expense

7. Mortgage interest

8. Other interest

9. Laundry & cleaning

10. Rent on business property

11. Repairs

12. Supplies

13. Taxes

14. Travel & entertainment

15. Utility/telephone

16. Tolls

17. Pick up charges

18. Claims/chargebacks

19. Wire charges

20. Miscellaneous

21. Service charges

22. Permits

23. Weights

24. Handling costs

25. Tools

26. Line haul adjustment

27. Uniforms

28. Postage & Federal Express

29. Casual labor

-$16,751

17,119

-3,634

321

-5,473

-280

7,882

412

1,530

1,148

533

462

1,570

863

648

587

2,108

1,999

802

16,257

337

167

----

-$16,281

11,831

-3,634

506

-5,473

-324

10,275

377

1,100

4,676

110

479

1,495

697

648

100

2,108

1,509

47

15,962

154

167

----

-$470

5,288

-0

(185)

-0

-(44)

(2,393)

35

430

(3,528)

423

(17)

75

166

0

487

0

490

755

295

183

0

----

TOTAL

$80,883

$77,953

$2,930

Per

Return

As

Corrected

Adjustment

-$13,655

15,730

-3,641

571

-5,499

400

420

13,833

-$13,360

12,499

3,641

255

-5,499

400

324

9,753

-$295

3,231

-0

316

-0

0

96

4,080

1986

1. Bank charges

2. Car/truck expenses

3. Depreciation

4. Dues and publication

5. Insurance

6. Office expense

7. Mortgage interest

8. Other interest

9. Laundry & cleaning

10. Rent on business property

11. Repairs

- 18 12. Supplies

13. Taxes

14. Travel & entertainment

15. Utility/telephone

16. Tolls

17. Pick up charges

18. Claims/chargebacks

19. Wire charges

20. Miscellaneous

21. Service charges

22. Permits

23. Weights

24. Handling costs

25. Tools

26. Line haul adjustment

27. Uniforms

28. Postage & Federal Express

29. Casual labor

463

871

10,541

533

620

963

647

579

330

1,590

2,165

820

13,926

------

753

871

8,891

465

499

1,106

413

673

137

1,851

3,069

774

12,185

------

(290)

0

1,650

68

121

(143)

234

(94)

193

(261)

(904)

46

1,741

------

TOTAL

$87,797

$77,418

$10,379

Per

Return

As

Corrected

Adjustment

1. Bank charges

2. Car/truck expenses

3. Depreciation

4. Dues and publications

5. Insurance

6. Office expense

7. Mortgage interest

8. Other interest

9. Laundry & cleaning

10. Rent on business property

11. Repairs

12. Supplies

13. Taxes

14. Travel & entertainment

15. Utility/telephone

16. Tolls

17. Pick up charges

18. Claims/chargebacks

19. Wire charges

20. Miscellaneous

21. Service charges

22. Permits

23. Weights

24. Handling costs

25. Tools

26. Line haul adjustment

27. Uniforms

28. Postage & Federal Express

29. Casual labor

$884

14,596

25,904

48

6,401

-1,026

5,593

922

-8,572

-465

1,089

369

653

2,211

1,896

609

--2,815

990

---779

816

13,550

$36

14,469

25,904

0

4,249

-324

985

200

-5,399

-771

2,519

157

668

2,155

737

609

--2,234

25

---193

564

12,627

$848

127

0

48

2,152

-702

4,608

722

-3,173

-(306)

(1,430)

212

(15)

56

1,159

0

--581

965

---586

252

923

TOTAL

$90,188

$74,825

$15,363

1987