Opinion
35472-21S
03-28-2023
DANIEL T. LYNCH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Diana L. Leyden Special Trial Judge
Pending before the Court is petitioner's First Amended Motion for Reasonable Litigation or Administrative Costs (motion) seeking reimbursement for $67.80 for costs and $2,387.50 for legal fees, filed on January 11, 2023. By order served January 12, 2023, the motion was assigned to the undersigned for disposition. Respondent filed a Response to Motion for Reasonable Litigation or Administrative Costs on January 26, 2023 (response), and petitioner filed a Reply to Response to Motion for Reasonable Litigation or Administrative Costs on March 6, 2023 (reply).
Background
Petitioner timely filed a Petition in this case on November 22, 2021, seeking review of a notice of deficiency dated September 13, 2021, which determined that petitioner owed a deficiency in tax in the amount of $5,160.00 and a substantial tax understatement penalty under section 6662(a) in the amount of $1,032.00, for tax year 2018. The deficiency and penalty stemmed from unreported taxable dividends, unreported gains from securities, and unreported social security income reported to the Internal Revenue Service (IRS) on several Forms 1099 by third parties.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The Court uses the term "IRS" to refer to administrative actions taken outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case.
On February 25, 2022, respondent filed an Answer in this case, and the case was forwarded to the IRS Independent Office of Appeals (Appeals Office). On September 30, 2022, nearly a year after the notice of deficiency was issued, petitioner's counsel provided a 2018 Form 1099-DIV and a redemption statement which showed the value of shares redeemed and dividends earned on a Prudential (a.k.a. PGIM Investments) asset under petitioner's name, in the amounts listed on the notice of deficiency. Subsequently on October 20, 2022, petitioner's counsel provided respondent with a copy of the Pennsylvania Inheritance Tax Return for the Estate of David L. Lynch which showed the date of death value of the PGIM Investments asset that petitioner inherited from his father along with another copy of the redemption statement from his PGIM Investments account, which was the asset petitioner inherited from his father. Then on November 1, 2022, petitioner's counsel provided respondent with a statement from petitioner's PGIM Investments account which showed the account's balance when petitioner's father passed away and when the proceeds were transferred out of the account in 2018. Also on November 1, 2022, petitioner's counsel provided respondent with Form 1099-B and Form 1099-DIV issued for the same PGIM Investments account showing the cost basis, gross proceeds, and ordinary dividends of the inherited asset petitioner sold in 2018.
On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 983 (2019). We will use the name in effect at the times relevant to this case, i.e., the Office of Appeals or Appeals Office.
After receiving and reviewing the documentation provided by petitioner's counsel, respondent conceded the case and, on November 9, 2022, sent petitioner a proposed stipulated decision stating that for tax year 2018 petitioner did not owe any additional tax nor did petitioner owe a section 6662(a) penalty. On November 10, 2022, the parties filed a proposed stipulated decision that petitioner did not have any deficiency for tax year 2018, nor did petitioner owe a section 6662(a) penalty for tax year 2018. The Court entered that stipulated decision on November 14, 2022.
On December 13, 2022, petitioner filed a Motion for Reasonable Litigation or Administrative Costs seeking reimbursement for $67.80 for costs and $2,387.50 for legal fees. On December 22, 2022, the Court held a conference call with the parties. Pursuant to that discussion, the Court vacated its November 14, 2022, stipulated decision, held that petitioner's Motion for Reasonable Litigation or Administrative Costs be stricken from the Court's record, and directed petitioner to file a Motion or Reasonable Litigation or Administrative Costs in accordance with Rule 231 and for respondent to file a response to that motion.
On January 6, 2023, the parties filed a Stipulation of Settled Issues agreeing that respondent conceded all adjustments at issue in the notice of deficiency, which resulted in there being no deficiency in income tax due from, nor overpayment due to petitioner for tax year 2018 and that there was not any section 6662(a) penalty due from petitioner for tax year 2018. Petitioner subsequently filed a Motion for Reasonable Litigation or Administrative Costs on January 10, 2023, and a First
Amended Motion for Reasonable Litigation or Administrative Costs on January 11, 2023, which is now before the Court for decision.
For the reasons discussed below, the Court will deny petitioner's motion.
Discussion
I. General Principles
Section 7430(a) authorizes the award of reasonable litigation or administrative costs to the prevailing party in court proceedings brought by or against the United States in connection with the determination of income tax. See Corson v. Commissioner, 123 T.C. 202, 205 (2004). To recover costs, the taxpayer must establish that (1) he is the prevailing party, (2) he did not unreasonably protract the proceedings, (3) the amount of the costs requested is reasonable, and (4) he exhausted the administrative remedies available. See I.R.C. § 7430(b) and (c); Friends of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. 107, 111-12 (2018). The failure to satisfy any of these requirements will preclude an award of costs. See Minahan v. Commissioner, 88 T.C. 492, 497 (1987).
Respondent concedes that petitioner substantially prevailed with respect to the amount in controversy, petitioner did not unreasonably protract the proceedings, and petitioner exhausted the administrative remedies available to him.
Section 7430(c)(4)(A) provides that a taxpayer qualifies as a prevailing party if (1) the taxpayer substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues, and (2) the taxpayer meets an applicable net worth requirement. See Corson v. Commissioner, 123 T.C. at 206. A taxpayer who meets the requirements of section 7430(c)(4)(A), however, will not be treated as a prevailing party if respondent's position in the court proceeding was "substantially justified." See I.R.C. § 7430(c)(4)(B)(i); Corson v. Commissioner, 123 T.C. at 206. Although the taxpayer has the burden of proving that he satisfies section 7430(c)(4)(A), the IRS must show that its position was substantially justified. See I.R.C. § 7430(c)(4)(B)(i); Rule 232(e); Corson v. Commissioner, 123 T.C. at 206.
Respondent concedes that petitioner meets the net worth requirement.
The IRS' position is substantially justified if it has a reasonable basis in both fact and law and is justified to a degree that could satisfy a reasonable person. Huffman v. Commissioner, 978 F.2d 1139, 1147 n.8 (9th Cir. 1992) (citing Pierce v. Underwood, 487 U.S. 552, 565 (1988)); Rosario v. Commissioner, T.C. Memo. 2002-247 at *4; Treas. Reg. § 301.7430-5(d)(1). In deciding whether the IRS' position was substantially justified, a significant factor is whether, on or before the date the IRS assumed the position, the taxpayer provided "all relevant information under the taxpayer's control and relevant legal arguments supporting the taxpayer's position to the appropriate Internal Revenue Service personnel." Treas. Reg. § 301.7430-5(d)(1).
II. The IRS' position was substantially justified.
The IRS' position is substantially justified if, on the basis of all the facts and circumstances and the legal precedents relating to the case, the IRS acted reasonably. Pierce v. Underwood, 487 U.S. 552, 565 (1988); Swanson v. Commissioner, 106 T.C. 76, 86 (1996). In other words, to be substantially justified, the IRS' position must have a reasonable basis in both law and fact. Pierce v. Underwood, 487 U.S. at 563- 65. Thus, the IRS' position may be incorrect but nevertheless be substantially justified "if a reasonable person could think it correct." Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997) (quoting Pierce v. Underwood, 487 U.S. at 566 n.2). Courts have generally found that the IRS' position was substantially justified in cases that mainly involve factual issues. See, e.g., Bale Chevrolet v. United States, 620 F.3d 868, 873 (8th Cir. 2010).
The Court evaluates the position of the IRS in the administrative proceeding as the decision from the Appeals Office or the notice of deficiency. I.R.C. § 7430(c)(7)(B). As the Appeals Office did not make a decision in this case, the IRS' position in the administrative proceeding is its position taken in the notice of deficiency upon which this case is based.
The Court evaluates respondent's litigating position on the basis of its actions after the filing of the petition. See Friends of Benedictines in Holy Land v. Commissioner, 150 T.C. at 117-18; St. Claire v. Commissioner, T.C. Memo. 2016-192 at *12. Respondent's litigating position is generally established at the time the government files its answer in the judicial proceeding. See I.R.C. § 7430(c)(7)(A); Huffman v. Commissioner, 978 F.2d at 1148; Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 442; St. Claire v. Commissioner, T.C. Memo. 2016-192 at *12.
Conceding a case, even in full, does not necessarily mean that the position of the United States was not substantially justified. Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443. Nor is a delay in concession until after a taxpayer provides documentation substantiating their position and giving the government time to review the documentation unreasonable. See Harrison v. Commissioner, 854 F.2d 263 (7th Cir. 1988) (concession some 6 months after the answer was filed, after the government had an opportunity to verify information, held reasonable), aff'g T.C. Memo.1987-52; Sliwa v. Commissioner, 839 F.2d 602, 609 (9th Cir. 1988) (reasonable for concession not to have been made until the IRS had opportunity to review records obtained some 6 months prior), aff'g an unreported opinion of this Court; Ashburn v. United States, 740 F.2d 843 (11th Cir. 1984) (11-month delay in conceding case not unreasonable); White v. United States, 740 F.2d 836, 842 (11th Cir. 1984) (government's concession of issue 3 months after issue raised was reasonable).
Respondent concedes that petitioner has substantially prevailed with respect to the amount in issue but contends that petitioner is not the prevailing party because respondent's position was substantially justified.
Petitioner did not supply evidence substantiating his claims as to the alleged dividends, securities sold, and social security retirement income for tax year 2018, until ten months after filing the Petition and seven months after respondent filed its Answer. After receiving the last of the relevant documentation substantiating petitioner's position on November 1, 2022, respondent conceded the case in full and sent petitioner a proposed stipulated decision reflecting that there was not any deficiency and not any penalty owed for tax year 2018, on November 9, 2022.
Petitioner's counsel did not provide documentation regarding petitioner's dividends, securities sold, and social security retirement income until well after the IRS issued the notice of deficiency, establishing its administrative position, and many months after respondent filed its Answer, first establishing respondent's litigating position. After receiving and reviewing such documentation, respondent conceded its case in full, just over a week after receiving the last of the documentation from petitioner's counsel. Based on the facts available to respondent at the time the notice of deficiency was issued and the Answer was filed, the Court is satisfied that both the IRS' administrative position and respondent's litigating position regarding petitioner purportedly not reporting dividends, securities sold, and social security retirement income for tax year 2018 had a reasonable basis in both law and fact at the times the positions were established, and therefore were substantially justified. See Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443. When respondent issued the notice of deficiency and filed its Answer, respondent had not yet received documentation substantiating petitioner's position.
Having held that petitioner is not entitled to claimed litigation and administrative costs, the Court will not address the reasonableness of the claimed costs.
Conclusion
Petitioner cannot be treated as the prevailing party in this litigation because respondent's position was substantially justified. Thus, petitioner is not entitled to reasonable litigation or administrative costs. Upon due consideration and for cause, it is
ORDERED that petitioner's January 11, 2023, First Amended Motion for Reasonable Litigation or Administrative Costs is denied.