UNITED STATES TAX COURT

T.C. Memo. 2012-74

UNITED STATES TAX COURT

MARITZA FUIUATTI NEWMAN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

ROBERT MECK!COMFORT AND OSCARLINA CAMPOS COMFORT,

Petitioners v COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 25028-09, 1124-10.

Filed March 19, 2012.

Ps were foreign citizens who worked in the United States at foreign

embassies whose countries had not been certified by the U.S. State

Department under I.R.C. sec. 893(b). Claiming tax exemption for those

wages pursuant to I.R.C. sec. 893(a), Ps did not report their embassy wages

as income. R issued notices of deficiency including the embassy wages as

income, and Ps filed petitions. Before trial of these cases, this Court issued

its Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), holding

against the IRS's interpretation of I:R;C.' sec. 893(b). As to Ps, the IRS later

conceded the I.R.C. sec. 893(b) issue and eventually conceded their cases

altogether. Ps moved for administrative and litigation costs under LR.C.

sec. 7430. .

SliíMD MAR 1 9 2012

Held: Notwithstanding our Opinion in Abdel-Fattah, R's position in

these cases, though incorrect, was "substantially justified" under I.R.C.

sec. 7430(c)(4)(B)(i), so that Ps may not recover costs.

A. Duane Webber and Kathleen A. Agbayani, for petitioners.

Karen Lynne Baker and William J. Gregg, for respondent.

MEMORANDUM OPINION

GUSTAFSON, Judge: These cases are now before the Court on motions for

costs filed pursuant to ule 231 and section 7430.' The procedural pi.edicate for

those motions is as fol ows On the dates given'in the table below, respondent, the

Internal Revenue Service ("IRS"), issued a notice of deficiency ("NOD") to

Maritza Furiatti Newman and an NOD to Robert Meck Comfort and Oscarlina

Campos Comfort; petitioners filed petitions in this Court; the IRS filed its

answers; after the case¼ were calendared foi. trial, but before trial, the parties filed

'Unless otherwise indicated, all Rule references are to the Tax Court Rules

of Practice and Procedure,'and all section references are to sections of the Internal

Revenue Code of 1986 (codified in 26 U.S.C., and referred to herein as "I.R.C."

or "the Code"), as amended, in effect for the years at issue.

-3stipulations of settled issues; and petitioners filed their motions for costs. The

dates of these actions were as follows:

Newman

No. 25028-09

Comfort

No. 1124-10

NOD

Aug. 6, 2009

Oct. 20, 2009

Petition

Oct. 20, 2009

Jan. 13, 2010

Answer

Dec. 16, 2009

Mar. 1, 2010

settled issues

Dec. 14, 2010

Nov. 23, 2010

Motion for costs

Jan. 28, 2011

Jan. 31, 2011

Action

Stipulation of

The issue for decision is whether the IRS's position in these cases was

"substantially justified" for purposes of section 7430(c)(4)(B)(i). We hold in favor

of the IRS.

Backaround

Petitioners' employment and tax reporting

Throughout the years at issue (i.e., 2002 through 2007 for Ms. Newman and

2003 through 2007 for the Comforts), Mrs. Comfort and Ms. Newman were

Brazilian citizens and were employed at the Brazilian Aeronautical Commission

(the "Commission"), which was a part of the Brazilian Embassy. Both Mrs.

Comfort and Ms. Newman lived in the United States pursuant to diplomatic A-2

-4immigrant visas that were renewed every two years on the básis of their continued

employment at the Cohnnission. They both worked ás bilingual technical

assistants at the Comnhission under annual renewable employment contracts.

For the years at issue petitioners did not report the wages paid by the

Commission ("Comm ssion wages") on their Federal income tax returns, instead

taking the position that the Commission wages were exempt from tax under

section 893(a) and, therefore, that petitioners had no income tax liabilities

associated with those tvages.

The IRS's initiative e neerning employees of foreign embassies

In 2006 the IRS conducted an initiative in connection with the employees of

foreign embassies, including the Embassy of Brazil. (Also included were

employees of the Embassy of the United Arab Emirates. See Abdel-Fattah v.

Commissioner, 134 T.C. 190 (2010).) The IRS investigated several issues,

including the exclusio of embassy wages pursuant to section 893(a).

Section 893(b) requireb the U.S. Secretary of State to certify to the Secretary of the

Treasury the names ofthe foreign countries that grant to employees of the U.S.

Government an exemption that is equivalent to the exemption under

section 893(a), and the IRS took the position that this certification was a

prerequisite for exemption under section 893(a).

-5Engagement of counsel

In July 2008 petitioners' counsel agreed to represent the Commission's A-2

visa holders with respect to the section 893 income tax exemption issues that had

begun to arise for the Commission's employees. Since the Commission and

petitioners could not afford to pay counsel's customary fee for this work, counsel

agreed to represent petitioners and other A-2 visa holders during the

administrative phase for a limited fee (to be paid by the Commission) and

thereafter on a pro bono basis.

Administrative proceedings

The IRS issued to Ms. Newman (on June 30, 2008) and to the Comforts (on

December 2, 2008) notices of proposed adjustment for their taxable years at issue.

The proposed adjustments included petitioners' Commission wages as taxable

income because the-IRS's position at the time was that the Commission wages did

not qualify. for.exemption under section 893(a).

In response to the notices of proposed adjustment, petitioners' counsel

submitted to the IRS Office of Appeals protests to the notices of proposed '

adjustment. The protests argued that petitioners' Commission wages were exempt

under section 893(a) because, they contended, section 893(a) stands alone, and

petitioners' situations satisfied all of the conditions in section 893(a).

On February 2J, 2009, in accordance with section 893(b), the U.S.

. Department of State certified to the Secretary of Treasury that Brazil does not tax

the wages, fees, or salaries of non-Brazilian employees of the U.S. Mission to

Brazil and that such employees performtservices of a character similar to those

performed by employees of the Embassy and Consulates of Brazil in the United

States. The IRS maintained, however, that the Secretary of State's certification

applied only prospectively, i.e., from the date of the certification, and therefore the

certification was not effective for petitioners' tax years at issue.

The IRS, in August 2009 (for Ms. Newman) and October 2009 (for the

Comforts), brought an end to petitioners' administrative proceedings by issuing

notices of deficiency to petitioners for the taxable years at issue. In the notices of

deficiency the IRS determined that since Ms. Newman and Mrs. Comfort were

residents of the United States, their personal service wages from the Brazilian

Embassy (i.e., the Cornrnission wages) were taxable by the United Staies.

Accordingly, the IRS determined.that their Commission wages were taxable by the

United States and thatipetitioners had resulting deficiencies.1

2The IRS detern7ined in the notices of deficiency that Ms. Newman owed.a

balance of $40,039 in tax, $9,009 in sec. 6651(a)(1) additions to tax, and at least

$4,978 in sec. 6651(a)(2) additions to tax, and that the Comforts owed a balance of

$81,060 in tax and $16,212 in sec. 6662(a)(2) penalties.

-7Commencement of litigation

Petitioners filed timely petitions for redetermination--Ms. Newman on

October 20, 2009, and the Comforts on January 13, 2010--asserting that their

Commission wages were exempt from tax. Petitioners resided in Maryland when

they filed their petitions. Petitioners were self-represented when they filed their

petitions, because counsel had evidently withdrawn from the representation by that

time.

.

The IRS answered Ms. Newnian's petition on December 16, 2009, and the

Comforts' petition où March 1, 2010. In its answers the IRS continued to deny

that the Commission wages were exempt from tax. The Court set Ms. Newman's

case for trial to begin in Washington, D.C., during the week of June 21, 2010, but

on June 9, 2010, the Court granted the IRS's motion to continue generally Ms.

Newman's case. The Court set the Comforts' case for trial during the Court's trial

session beginning on November 29, 2010, in Washington, D.C. No trial ever

occurred in either of the cases.

- :8Proceedings in Abdel÷Fattah

As we have notöd, the IRS hadiraised the section 893 exemption issüe with

employees of multiplé embassies. The issue»was before this Court in a òase

brought by an employþe of an embassy of the United Arab Emirates--AbdebFattah

v. Commissioner, 134f T.C. 190 (2010)--in which the parties'cross-moved'foi

summary judgment. (The taxpayer's còunsel in Abdel-Fattah was not the same

counsel who represents petitioners in these cases.) We held oral argument on the

cross-motions in Abdel-Fattah on.Márch 18, 2010; and in that argument the Court

did not suggest to the IRS that its positión regarding section 893 was unreasonable. On the contrary, we said to the taxpayer's counsel:

[T]he support fqr saying that [section 893(b) is] a condition * * *cis that it

follows on immediately, which is not nothing, and addresses the same

subject matter as the first part3 the conditions, two of the conditions anyway,

and says that thóse things shall be certified by the Secretary * * *. [I]f we

want to do a plain meaning analysis we have to make sure that we give .

meaning to all of the words and all the sentences and all the subsections, but

one criticism'of [petitioner's] positiòn.would be that it reads [subsection (b)]

almost out of th statute. [Tr. at 16-17.]

Nonetheless, the IRS's position did not prevail. On April 27, 2010, this

Court issued an Opinión in Abdel-Fattah v. Commissioner, 134 T.C. 190, holding

that income of an employee working for a foreign embassy in the IJnited States is

exempt from U.S. tax if the requirements of section 893(a) are satisfied, and that

.

-9certification from the Secretary of State under section 893(b) is not a prerequisite

for exemption under section 893(a).

-

The decision in Abdel-Fattah became final on October 11, 2010, when the

IRS did not file a notice of appeal.3

.

Re-entry of counsel

On December:1, 2009, Ms. Newman re-engaged as counsel the same

lawyers who had assisted her in her administrative proceedings but had not filed

her petition in this litigation. On April 30, 2010, three days after the issuance of

the Abdel-Fattah Opinion, petitioners' counsel filed their entry of appearance in

Newman. On August 26, 2010, the IRS informed petitioners' counsel that it

intended to concede in Newman.

Less than a month later, on September 20, 2010, Mr. and Mrs. Comfort reengaged as counsel those same lawyers. Counsel filed their entry of appearance in

Comfort three days later on September 23, 2010.

o

.

The record does not show the reason for petitioners' counsel's exit fròm and

re-entry into these pro bono cases.

3Although the Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190

(2010), was issued on April 27, 2010, it was necessary for the parties to make

computations under Rule 155. The Court did not enter its decision until July 12,

2010.

- 10 IRS concessions .

Consistent with a later-announced action on decision ("AOD") discussed

below, IRS counsel in the present cases began investigating whether petitioners

met the requirements òf section 893(a). The IRS requested documents in both

Newman (in March 2010) and Comfort (in September 2010).

e

On July 9, 201Ó, counsel for the parties met to discuss a stipulation of facts

in Newman, at which time petitioners' counsel gave to the IRS information that

was relevant to the disputed issues in Newman. As is noted above, on August 26,

2010, the IRS's counsel advised petitioners' counsel that the IRS was conceding

the Newman case.

Similarly, petitioners' counsel gave to the IRS information that was relevant

to the disputed issues in Comfort on October 28, 2010. Four days later, on

November 1, the IRS s counsel informed the Comforts that the IRS intended to

concede its case in Còmfort.

On.November 22, 2010, the Chief Counsel of the IRS published an AOD

with respect to Abdel+Fattah, advising that "the Service will no longer take the

position that the certification required by the Secretary of State in I.R.C. § 893(b)

- 11 is a prerequisite for the tax exemption provided for in I.R.C. § 893(a)."4 Action on

Decision 2010-04 (Nov. 22, 2010).

The next day--November 23, 2010--the parties in Comfort filed a stipulation

of settled issues, and the parties in Newman filed such a stipulation on

December 14, 2010.

Motions for costs

In late January 2011, petitioners filed motions for awards of reasonable

litigation and administrative costs. The motions request costs for the services their

counsel performed during the administrative and litigation proceedings in their

respective cases.

Petitioners argue that they are entitled to awards of costs under section 7430

because they were prevailing parties and the IRS lacked substantial justification to

4The AOD also stated:

However, the employee has the burden of proof to establish the

enumerated conditions of I.R.C. § 893(a) are met. In disposing of

cases where the State Department has issued an I.R.C. § 893(b)

certification, the Service will apply the certification to all taxable*

years for which the facts and law are the same as those upon which

the certification was based. In cases where the State Department has

not issued an I.R.C. § 893(b) certification, the Service will continue

to challenge a non-U.S.-citizen embassy employee's claim of

exemption if the employee fails to establish to the Service that the

conditions of I.R.C. § 893(a)(2) and (3) are met as to that employee.

[Action on Decision 2010-04 (Nov. 22, 2010).]

- 12 deviate from the plaini language of section 893. Petitioners rely on our Opinion in

Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), to support their contention.

In addition petitioners cite the fact that the IRS did not appeal the decision in

Abdel-Fattah and that the IRS eventually conceded its position in petitioners'

cases as well as several other similar cases.

The IRS responds by arguing first that petitioners did not incur any costs

associated with their proceedings and, therefore, are not entitled to an award under

section 7430. Alternatively, the IRS argues that petitioners were not prevailing

parties as required by section 7430 because the IRS's position that section 893(b)

was a prerequisite for exemption under section 893(a)--although ultimately held

incorrect--was substantially justified.

. Discussion

I.

Operative legal principles

A.

Section 7430 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, the "prevailing party" may be awarded reasonable administrative and

litigation costs incurr d in connection with the proceeding. Sec. 7430(a). Costs

incurred include fees paid or incurred for the services of an attorney in connection

with the proceeding. See sec. 7430(c)(1)(B)(iii); 26 C.F.R. sec. 301.74304(b)(1)(iV), Proced. & Admin. Regs. The Court may award reasonable attorney'so

fees for pro bono legal services, even though a taxpayer.does not "incur" thóse

fees. Sec. 7430(c)(3)(B)

To recover-incurred costs, the taxpayer: (1) must be the "prevailing party",

sec. 7430(a); (2) must have exhausted administrative remedies, sec. 7430(b)(1)

and (3) must not havë prótracted the proceedings unreasonably, sec. 7430(b)(3).

To qualify as a "prevailihg party",bthe»taxpayer: (1) must substantially prevail

with respect to the arùount in controversy ór the most significant issue or set of

issues presented, sec. 7430(c)(4)(A)(i); and (2) múst meet the timing and net worth

requirements of the first sentence of 28 U.S.C. section 2412(d)(1)(B), incorporated

by reference in section 7430(c)(4)(A)(ii).

Most notably however, a taxpayer will nevertheless fail to qualify as;the

"prevailing.party" if the IRS can establish that its position in the proceedings,

though unsuccessful,(was ''substantially justified". Sec. 7430(c)(4)(B)(i). By

denying costs where the IRS's unsuccessful position was "substantially justified",.

section 7430 resembles 28 U.S.C. secti n 2412(d)(1)(A) and distinguishes itself

5The Equal Access to Justice Act ("EAJA") provides for awards of fees and

costs against thé United States, in cases other than tax cases covered by

(continued...)

-.14 from some other fee-shifting statutes, in comparison with which section 7430 is

not at all generous. By contrast, Rule 54(d)(1) of the Federal Rules of Civil

Procedure as a general rule allows costs other than attorney's fees to the prevailing

party as a matter of course.' As to awards of attorney's fees, section 7430 does

not, like the Fair-Labor Standards Act, provide that "[t]he court in such action

shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow a

reasonable attorney's fee to be paid by the defendant, and costs of the action", 29

U.S.C. sec. 216(b) (eriiphasis added); nor does'section 7430, like the Employee

Retirement Income Security Act ("ERISA"), provide that "the court in its

discretion may allow a reasonable attorney's fee and costs of action to either

5(...continued)

section 7430. See 28 J.S.C. sec. 2412(e)(2006) ("The provisions of this section

shall not apply to any costs, fees, and óther expenses in cónnection with any

proceeding to which section 7430 of the Internal Revenue Code of 1986 applies").

Like section 7430, thë EAJA denies attorney's fees if "the court finds that the

position of the United States was substantially justified". 28 U.S.C.

sec. 2412(d)(1)(A).

6See United States ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161,

1172 (10th Cir. 2009); This general rule of Fed. R. Civ. P. 54(d)(1)--that "costs

* * * should be allowed to the prevailing party" (emphasis added)--applies "[u]nless a federal statute * * * provides otherwise", so that the limits of +

section 7430 apply not only in the Tax Court but also in Federal tax litigation in

the district courts.

- 15-party"), 29 U.S.C. sec. 1132(g)(1) (emphasis added).7 Rather, Congress has

directed that no costs (including attorney's fees), however reasonably and

necessarily incurred,fill be awarded to a winning taxpayer if the IRS's position

was "substantially justified". Sec. 7430(c)(4)(B)(i).

The IRS agrees that petitioners (1) have substantially prèvailed:with respect

to the amount in controversy and-with respect to the most significant issue in the

action, (2) meet the net worth requirements of 28 U.S.C. section 2412(d)(2)(B),

(3) exhausted the administrative remedies that were available to them, and (4) did 2

not uñreasonably protract the administrative orjudibial proceedings. Accordingly;

the only issue remaining with regard to petitioners' eligibility for reasonable fee

awards is whether the IRS's position in the proceeding was substantially justified.

B.

Substantial justification in particular

The IRS's position is,substantially justified if, based on all the fabts and

circumstances of the!case, it acted feasonably, that is, if the IRS's position had a

reasonable basis in both law and fact. Pierce v. Underwood, 487 U.S. 552, 563

(1988); Sher v. Commissioner, 89 T.C: 79, 84 (1987), aff'd, 861 F.2d 13 1 (5th Cir.

1988). The relevantiinquiry is whether the IRS knew or should have known that

7See also 42 U.S.C. sec. 2000e-5(k) (Title VII; "In any action or proceeding

under this subchapter the court, in its discretion, may allow the prevailing party

* * * a reasonable attorney's fee (including expert fees) as part of the costs").

- 16 its position was invalid when adopted, given the facts available and any legal

precedent related to the case. Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.

1995), aff'g T.C. Men o. 1994-182; Maggie Mgmt. Co. v: Commissioner, 108 T.C.

430, 443 (1987); Prouty v. Commissioner, T.C. Memo. 2002-175. The Supreme

Court has warned that courts must "resist the understandable temptation to engage

in p_o__st hoc reasoning by concluding that, because a pláintiff did not ultimately

prevail, his action must have been unreasonable or without foundation."

Christiansburg Garment Co. v. ÉEOC, 434 U.S. 412, 421-422 (1978). Or, as the

Court of Appeals for the D.C. Circuit put it, "courts need to guard against being

'subtly_influenced by the familiar shortcomings of hindsight judgment.'" Táucher

v. Brown-Hruska, 396 F.3d 1168, 1173 (D.C. Cir. 2005) (quoting Beck v. Ohio,

379 U.S. 89, 96 (1964)).

The IRS's posit on may be incorrect but nevertheless substantially justified

"'if a reasonable persdn could think it correct'." Maaaie Mamt. Co. v.

Commissioner, 108 T.C. at 443 (quoting Pierce, 487 U.S. at 566 n.2). The IRS's

eventually conceding ör even losing a case does not establish that its position was

unreasonable, but its concession does remain a factor to be considered. Sokol v.

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

As to matters ðf fact, in order fo'r a position to be substantially justified,

"substantial evidènce" must exist to siipport it. Pierce, 487 U.S."at 564.

"'[Substantial eviden'ce] does not mean a large or considerable amount of

evidence, but rather sucli relevant evidence as a seáàohable mind niight accept as

adequate to support a donclusion.'" Id. at 564-565 (quoting Consol. Edison Co. v.

NLRB, 305 U.S. 197 229 (1938)). The IRS is nbt oblige'd to cönceÒe adju 541tments

whose resolution reqüires factual"determinations until it has rèceived and had a

reasonable period of time to verify adequate substantiation for the matters in issue.

See Nguyen v. Commissioner, T.C. Memo: 2003-313; Huynh v. Commissioner,

T.C. Memo. 2002-1110.

As to matfers òf law, "[g]enei.all 570?thë

Commissionef's position is '

considered substantiálly justified ähen an issde is oùe of fifst inipression.'' Vines

v. Commissioner, T.Ô. Memo. 2006-258 (citing TKB Int'l Ínc. v. United States,"

995 F.2d 1460, 1468 (9th Cir. 19Ós)). in pakticular a position is substantially

justified when it is "É case of first impression," it is "not côhtrary to any publisliéd

decision", an'd a "reasonable person [could not] say that it'lacked colorable

justification." Estate of Wall v: CommÍssioner, 102 T.C $91, 394 (1994).

The mere fact that a case is one öf first impres 541ioh

v}ill nót establish

substantial justification when the Il 254S's

positiori is in conflict with the "clear and

- 18 unequivocal" language of the statute such that the IRS's interpretation of that

statute is clearly unreasonable. Nalle v. Commissioner, 55 F.3d at .193. For

instance, if the IRS's interpretation of a statute "'lacked any ligaments of fact' and

was 'clearly erroneous' as a matter of law", Portillo v. Commissioner, 988 F.2d

27, 29 (5th Cir. 1993) (quoting Portillo v. Commissioner, 932 F.2d 1128, 1133

(5th Cir. 1991)), rev's T.C. Memo. 1992-99, or if "[n]one of the arguments offered

by the IRS during the yarious stages of the litigation had even a chance of

succeeding", Beaty v. United States, 937 F.2d 288,.292-293 (6th Cir. 1991), such

an interpretation would violate the "clear and unequivocal" language of the statute

and would not be substantially justified.

However, the courts have not held that a Government position that is later

determined to be contrary to the plain meaning of a statute necessarily fails, for

that reason, to,be substantially justified. Rather, if on a question of first

impression the Government takes a position that fails to give effect to the plain

meaning of the statute but that is still colorable, its position, though unavailing,

may be substantially jùstified and may not warrant an award of fees to its

opponent. In Nalle v. Commissioner, 55 F.3d at 190-191, for example, the Court

of Appeals for the Fifth Circuit had held that the regulation whose validity the IRS

defended and on which the IRS relied "contradicted the plain meaning of [I.R.C.]

- 19 § 48"; but the court also held, id. at 194, that, for purposes of section 7430, the ;

IRS's position was nonetheless substantially justified.8 Similarly, after the

Supreme Court held that a "literal reading of the" statutory language supported the

conclusion adverse to the Government and that "[t]he text of [18 U.S.C.] § 209(a)

thus indicates that employment status is an element of the offense", Crandon v.

United States, 494 U.S. 152, 159 (1990), the Court of Appeals for the Fourth

Circuit (to which an appeal would lie in either Newman or Comfort) nonetheless

held, for purposes of the Equal Access to Justice Act, see supra note 5, that before

the Supreme Court had so announced, the Government's contrary position was

nonetheless "substantially justified", see United States.v. Paisley; 957 F.2d 1161,

1170 (4th Cir. 1992) A "plain meaning" analysis may be a very important

8The Court of Appeals in Nalle addressed the question "whether the

Commissioner * * * knew or should have known that her position was invalid at

the onset of the litigation", 55 F.3d at 191 (emphasis added), i.e., at a time when

the circumstances were equivalent to those in these cases now before us: At "the

onset of the litigation" in Nalle, when the petition-was filed in the Tax Court, there

was no opinion of any court addressing the issue, and the IRS's regulation and its

litigating position contradicted the plain meaning of the statute. The Tax Court

later issued an Opinión upholding the regulation and the IRS's position, which the

Court of Appeals rev,ersed, see Nalle v. Commissioner, 99 T.C. 187 (1992), rev'd,

997 F.2d 1134 (5th Cir. 1993); but:that pro-IRS Tax Court Opinion did not exist

as of "the onset of the litigation" and therefore could not be cited as an authority

giving rise to substantial justification.

- 20 consideration in determining whether the Government's position-is substantially

justified, but it is not'always thé only consideration.

The foregoing principles must be applied to the IRS's position on

section 893(a).

C.

Section 893

..

The primary substantive issue in petitioners' administrative and judicial

proceedings was whether petitioners' Commission wages were exempt from

taxation under section 893. Section 893(a) and (b) provides:

SEC. 893(a). Rule for Exclusion.--Wages, fees, or salary of

any employee of a foreign government or of an international

organization (iijcluding a consular or othèr officer, or a nondiplomatic

representative), received as compensation for official services to such

government or international organization shall not be included in gross income and shall be exempt from taxation under this subtitle

if--

(1) such employee is not a citizen of the United States, or

is a citizen of the Republic of the Philippines (whether or not a

citizen of the United States); and

(2) in the case of an employee of a foreign government,

the services are of a character similar to those performed by

employeès of the Government of the United States in foreign countries; and

(3) in the.case of an employee of a foreign government,

the foreign government grants an equivalent exemption to

employees of the Government of the United States performing

similar services in such foreign country.

-'21 (b) Certificate by Secretary of State.--The Secretary of State

shall certify to the Secretary of the Treasury the names of the foreign

countries which grant an equivalent exemption to the employees of

the Government of the United States performing services in such

foreign countries, and the character of the services performed by L

employees of the Government of the United States in foreign

countries.

That is, section 893(a) provides an exclusion on three conditions, and

section 893(b) provides that the Secretary of State shall certify two of the

conditions.

Before this Court's Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190

(2010), there had been no published opinions precluding the IRS's position that

section 893(b) certification was a prerequisite to an exemption under section

893(a). However, in Abdel-Fattah we concluded "that under the plain language of

the statute, certification [by the Secretary of State] is not a condition or

prerequisite of the e:¿emption". Id. at 204.

.

Under section(893 as we.interpret it (and as petitioners have always

contended it should be interpreted), deciding whether a taxpayer is entitled to

exemption from income tax under section 893 still requires a factual inquiry--i.e.,

to determine whethe the conditions in section 893(a) have been met.

-22II.

Analysis

A.

The two phases of these cases

To determine " ubstantial justification", we must identify the point at which

the IRS first took the position that petitioners' Commission wages were not

exempt from income tax under section 893, and we must then decide whether this

position from that point forward was substantially justified. Maggie Mgmt. Co. v.

Commissioner, 108 T.C. at 442. When determining whether the IRS's position

was substantially justified as of a given date, a significant factor is whether the

taxpayer had presented all relevant information and legal arguments supporting

the taxpayer's positioik. 26 C.F.R. sec. 301.7430-5(c), Proced. & Admin. Regs.

In these cases the IRS maintained from the start that petitioners'

Commission wages were not exempt under section 893, and the IRS did not

deviate from this position until the parties settled. As proceedings in petitioners'

I

cases were taking place, this Court issued an Opinion and decided Abdel-Fattah,

which clarified the Tax Court's interpretation of section 893 and provided

.

-

petitioners with new legal authority to support their position. Before the issuance

of Abdel-Fattah, there! was.no legal authority interpreting section 893. Given

petitioners' reliance on Abdel-Fattah as new legal authority, it is appropriate to

- 23 analyze the reasonableness of the IRS's position in two phases--i.e., before the

Abdel-Fattah Opinion and after.

B.

Substantial justification for the IRS's pre-Abdel-Fattah position

Since the legal issues in Abdel-Fattah and petitioners' cases were the same

(i.e., whether section!893(b) is a prerequisite for exemption under section 893(a)),

the position that the IRS took in Abdel-Fattah is indicative of its position in

petitioners' cases. Accordingly, if the IRS's arguments in Abdel-Fattah were

reasonable, then its position in petitioners' cases was also reasonable, at least until

the time that we issued our Opinion in Abdel-Fattah. That case raised an issue of

first impression. Although we did not ultimately agree with the IRS's position,

that position had a colorable justification, based on its arguments as to (i) policy

objectives and (ii) thé proximity of subsections (a) and (b) of section 893.

1.

Policy objectives

The IRS considered section 893 as a whole and argued that the purpose of

including subsectionr(b) in section 893 was to require the U.S. State Department's

certification as a prerequisite for the income tax exemption under subsection (a).

We noted that the Cdde includes other provisions that do make a Government

official's certification a prerequisite to a tax benefit; and we observed that tliese

provisions reflect a legislative choice not to "assign[] to the tax collector the task

- 24 of making, in the first instance, difficult determinations that may be well outside

his knowledge or expertise" but instead to "commit[] the determination to the

agency with the relevant subject-matter expertise." Abdel-Fattah v.

Commissioner, 134 T.C. at 202-203. In that connection, we noted the IRS's

contention that grantiùg the section 893(a) tax benefit without the section 893(b)

certification "requiresisection 893 to be administered without the benefit of

'State's expertise in the arena of international affairs'", id. at 209; and we

acknowledged that "[t]hese issues of diplomacy and tax administration might be

reasons to prefer a rulè that required State Department certification as a

prerequisite to the incbme tax exemption", ich at 210.' We ultimately determined

that there is no basis to impute such reasoning to the Congress that enacted

section 893, but we cannot say that the argument was unreasonable.

2.

The proximity of subsections (a) and (b)

As we noted at oral argument, the criteria for exemption under section 893

are stated in subsection (a), and the requirement that the Secretary of State certify

9In De Allende v. Baker, 891 F.2d 7, 12 (1st Cir. 1989), the Court of

Appeals for the First Circuit similarly noted the Government's proffered policy

considerations in holding that the Government's position, which was contrary to

the plain meaning of 8 U.S.C. section 1182(a)(27) and that therefore failed on the

merits, see De Allende v. Shultz, 845 F.2d 1111 (1st Cir. 1988), was nonetheless

substantially justified for purposes of the EAJA.

25 two of those criteria ollows immediately in subsection (b)--which originally nas

in the same subsectiön Thus, the IRS's position did not invent a limitatiõn out of

whole öloth but rath r urged that the certification÷which certainly is provided for

I

in section 893(b)--is a prerequisite to the benefit in sectiorr893(a)--to which the

certification certainl relates. The IRS's pósition exaggerated thè-sighificance of

this arrangement iii intèrpreting thé statute[ but if'was not wrong to urge thabthis

arrangement be taker into account. 'Fhe plain meaning o'f statutory lang'uage is not

detèrmined without egard to its context; rather "[t]he plain meaniiig bf the

statute's words, enli htened by their context"; Edwards v. Aaùillard, 482 U.S.

578, 594 (1987) (ém hasis addëd), governs our interpretation. We'ultimately

determined that the 1 roximity of subsections (a) and.(b)-did not vitiate the benefit

conferred in sectiorì 93(a) in the absence of:the certificatioii'called'for in

section 893(b),rso thát the arrangement of the statutory langùáge does not

overcòme wliat is otl erwise its plain ü1eaning; but the proximity of these

provisions did help t justify the IRS's contrary argumente

Since the IRS s josition in Abdel-Fåttah was colorablè, it véasialso

substantially jûstified. See Estate'of Wall v. Commissioner, 10 576

T.C. at 394; sèe

also Nalle v. Commi sioner, 55 F.3d at 193-194. Sin'ce therIRS's position in

- 26.Abdel-Fattah and its position in petitioners' cases were the.same, the IRS's

pre-Abdel-Fattah position in petitioners' cases was substantially justified.

C.

Substantial justification for the IRS's post-Abdel-Fattah position

When Abdel-Fàttah was issued, the situation changed. The issue was no

longer one of first impression, and the IRS's position was now contrary to a

published Opinion, thus making the IRS's position newly susceptible to the

criticism that it lacked substantial justification. It took several months (four ;

months in Ms. Newman's case and six months in the Comforts') after the decision

in Abdel-Fattah for th;e IRS to concede these cases, and petitjoners argue that the

IRS's position was not substantially justified during these periods.: However, we

find the IRS's post-Abdel-Fattah handling of these cases reasonable--and we,

therefore find its position substantially justified--for two reasons:

1.

Sufficient time to concede the section 893(b) issue

Just as the IRS must-be given a reasonable amount of time to change its

position when it becomes aware of new pertinent facts in a,case, see Nauven v.

Commissioner, T.C. Memo; 2003-313; Huynh v. Commissioner, T.C.. Memo.

2002-110, so the IRS must be given time to reassess its position in light of new legal precedent: We xpect the IRS to administer the tax laws not ad hoc butuniformly. If it is to do so, then decisions about the positions it will take on legal

27 issues must be resolved centrally and not by various Chief Counsel attorneys

handling various casés. These cases were among a group of cases arising from the

IRS's initiative in connection with the employees of multiple foreign embassies.

Coordinated decision-making necessarily requires time to present the issues to

authorized officials and to let them make decisions.

Moreover, the decision whether to treat section 893(b) certification as a

prerequisite to séction 893(a) exemption was necessarily bound up with the

decision whether to appeal Abdel-Fattah, but that appeal decision was not

committed solely to the IRS. Rather, under 28.U.S.C. section 519, that decision

required the involvement of the Department of Justice. We cannot criticize the

IRS for allowing thistprocess to take its course in Abdel-Fattah before conceding

Newman and Comfort.

We issued our Opinion in Abdel-Fattah on April 27, 2010; and on

August 26 and November 1, 2010--i.e., four and six months later--the IRS's

counsel informed Ms. Newman and the Comforts that the IRS would concede the

section 893(b) issue. l That was a reasonable amount of time for the Government to

decide to revise its pòsition and concede this issué.

- 28 2.

Sufficient time to address the section 893(a) issue

Petitioners further criticize the IRS for taking several months after we

issued our Opinion in Abdel-Fattah to confirm that petitioners satisfied the

requirements of section 893(a). However, the IRS is not obliged to concede

adjustments whose resolution requires factual determinations until it has received

and had a reasonable period of time to verify adequate substantiation for the

matters in issue. See Nguyen v. Commissioner, T.C. Memo. 2003-313; Huynh v.

Commissioner, T.C. Memo. 2002-110.

Even though section 893(b) certification is not a prerequisite to

section 893(a) exemption, petitioners still had the burden to prove that they

satisfied the three conditions for an exemption set forth in section 893(a). See

Rule 142; see also New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Ms. Newman did not substantiate her citizenship or employment information until

July 9, 2010. Similarly, the Comforts did not substantiate Mrs. Comfort's

citizenship or employment information until-October 28, 2010.

Petitioners poir t out, however, that before the decision in Abdel-Fattah, the

IRS asserted to petitiòners and their counsel that the requirements of

section 893(a) were nbt at issue. Consequently, the IRS did not seek confirmation

that petitioners met those requirements. Petitioners urge that the IRS could and

- 29 should have asked for that information before it issued notices of deficiency or

defended them in liti ,ation.

For us to hold that the IRS's position was substantially justified is to hold

that the IRS. was entitled to assume that position in conducting investigations and

determining deficienbies. Since we.höld that the:IRS was substantially justified in

taking the position that section 893(b) certification is a prerequisite to exemption,

the IRS was therefore not required to develop alternative positions before issuing

notices of deficiencylor answering petitions.

It is evidently true that the IRS did not challenge Mrs. Comfort's or

Ms. Newman's citizenship or employment status before Abdel-Fattah, but this was

natural because the IllS's position up to that point was that the Commission wages

did not qualify for ex 570mption

under section 893(a) because section 893(b) had not

been satisfied. Acco¾dingly, under the IRS's pre-Abdel-Fattah position, whether

petitioners satisfied the citizenship and employment requirements of section

893(a) was immaterial. Although the IRS could have investigated Mrs. Comfort's

and Ms. Newman's citizenship or employment situation as additional or alternate

grounds to support its position before Adbel-Fattah, the IRS was not unreasonable

in declining to do so.

-30Conclusion

Since we have determined that the IRS was substantially justified in both its

pre:-Abdel-Fattah and post-Abdel-Fattah positions, petitioners were not prevailing

parties for purposes of section 7430(c)(4). Accordingly, petitioners are not

entitled to an award of costs under section 7430.

.

Appropriate orders and

decisions will be entered.