Opinion
20981-18 15264-19
11-02-2022
TRACE T. WATKINS & LAUREE L. WATKINS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
David Gustafson Judge
These consolidated cases concern deficiencies in federal income tax for petitioners' 2015, 2016, and 2017 tax years, which the parties resolved by a joint stipulation of settled issues. Now before the Court is petitioners' motion for an award of reasonable administrative and litigation costs ("motion for costs") filed pursuant to section 7430 and Tax Court Rule 231, to which the Commissioner has filed a response and petitioners have filed a reply. (Doc. 306 at 3-4; Doc. 312). We will order additional filings, in order to determine whether a hearing is necessary or whether instead the motion can be decided on the parties' written submissions.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., as in effect at the relevant times; regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), as in effect at the relevant times; and Rule references are to the Tax Court Rules of Practice and Procedure. Parenthetical references to "Doc." are to documents as they are numbered in the docket record of this case, and the page numbers cited in those references are according to the numbering in the portable document format ("PDF") of the digital file.
The primary issues to be addressed in resolving a motion for costs are (1) whether petitioners have "exhaust[ed] the administrative remedies available", for purposes of section 7430(b)(1); (2) whether the position of the United States in the administrative or court proceeding "was substantially justified" under section 7430(c)(4)(B); (3) whether petitioners had "unreasonably protracted" the administrative or court proceeding under section 7430(b)(3); and (4) in the event that petitioners are determined to be entitled to recover their administrative and/or litigation costs, whether those costs are "reasonable" under section 7430(c)(1) and (2).
Background
The following facts are based on the entire records of these consolidated cases, including the exhibits submitted with the parties' briefs on petitioners' motion for costs, as well as their stipulated settlement and various other motions and supporting documents.
Examination of petitioners' 2015 and 2016 returns and notice of deficiency
By letter dated September 21, 2017, IRS Tax Compliance Officer ("TCO") T. Roberson notified petitioners that their 2015 and 2016 federal income tax returns had been selected for examination. (Doc. 312 at 42-44). At the same time, the TCO sent to petitioners Form 4564, "Information Document Request" ("IDR"), to request documentation substantiating certain expense deductions that petitioners claimed on their Schedule C, "Profit or Loss From Business", in both years. (Doc. 312 at 46). Petitioners did not submit documents in response to the IDR. (Doc. 312 at 42).
On December 6, 2017, the IRS mailed to petitioners a 30-day letter that included copies of a proposed examination report. (Doc. 312 at 54-55). The 30-day letter stated that if petitioners disagreed with the findings set forth in the examination report, then within 30 days they could either: (1) mail additional evidence or information, (2) request a discussion of the findings with the examiner, (3) discuss their position with the examiner's supervisor, or (4) "[r]equest a conference with an Appeals Officer, as explained in the enclosed Publication 3498, The Examination Process.". (Doc. 312 at 54-55). (The first page of the letter included a statement "Last date to respond to this letter: January 5, 2018").
On July 1, 2019, the IRS Office of Appeals was renamed the "Internal Revenue Service Independent Office of Appeals". See Taxpayer First Act, Pub. L. No. 116-25, sec. 1001(a), 133 Stat. at 983 (2019). Some of the events in this case predate that renaming. We use the term "IRS Appeals" without distinction to refer to the office both before and after the name change.
We take notice of the fact that Publication 3498 (Rev. 11-2004), available online at irs.gov/pub/irs-pdf/p3498.pdf, includes at pages 6-7 a discussion entitled "How Do You Appeal a Decision?".
On December 19 and 20, 2017, petitioner-wife allegedly contacted the TCO and submitted some documentation. This was the first time that petitioners submitted documents for 2015 and 2016. (Doc. 312 at 5, 25; Doc. 316 at 6). The TCO indicated, however, that the provided documents were illegible, and that the IRS still needed additional information before allowing petitioners' Schedule C business expenses. (Doc. 312 at 42, 25).
On December 21, 2017, the TCO mailed petitioners a follow-up letter ("Letter 1912"). (Doc. 312 at 56-58). The Letter 1912 stated that petitioners should contact the IRS representative designated on the letter within 15 days or else the IRS would issue a notice of deficiency ("NOD") to petitioners for 2015 and 2016. (Doc. 312 at 57). The Letter 1912 also repeated that petitioners "can request a conference with an appeals officer". (Doc 312 at 56-58). (The first page of the letter again included a statement "Last date to respond to this letter: January 5, 2018"). (Doc. 312 at 56).
Petitioners sent additional documentation in January 2021, but the TCO determined that many of the expenses appeared personal and were not business expenses. (Doc. 312 at 43). The TCO accordingly closed the case in June 2018 and recommended that a notice of deficiency be issued to petitioners for 2015 and 2016. (Doc 312 at 43). On August 27, 2018, the IRS issued a notice of deficiency disallowing the Schedule C business expenses petitioners claimed for 2015 and 2016. (Doc. 23 at 111). On October 23, 2018, petitioners filed their Tax Court Petition seeking review of their notice of deficiency for 2015 and 2016. (Doc. 312 at 6).
Examination of petitioners' 2017 return and notice of deficiency
In July 2018, the TCO began investigation of petitioners' 2017 federal income tax return and sent to petitioners another Form 4564 requesting documentation substantiating some of the 2017 Schedule C business that petitioners claimed. (Doc. 312 at 60). Shortly thereafter, petitioners retained Abram Jack Fishman to represent them in the above deficiency matters. (Doc. 312 at 61).
During the course of her investigation for 2017, the TCO reviewed several documents submitted by petitioners but ultimately determined that petitioners' documents were insufficient to substantiate several of their claimed Schedule C business expenses. (Doc. 23 at 166). Consequently, on March 13, 2019, the IRS issued to petitioners a 30-day letter for 2017, proposing to disallow those expenses and providing them opportunity to "[r]equest a conference with an Appeals Officer" (again explained in an enclosed Form 3498) in order to potentially resolve the matter before an NOD was issued for 2017. (Doc. 312 at 198-99). (The first page of the letter included a statement "Last date to respond to this letter: April 12, 2019"). (Doc. 312 at 198). Subsequently, on March 28, 2019, the TCO sent to petitioners and their counsel, Mr. Fishman, a Letter 1912 requesting a response within 15 days and once again informing petitioners that they "can request a conference with an appeals officer" and bearing the statement "Last date to respond to this letter: April 12, 2019". (Doc. 312 at 208). On August 7, 2019, the IRS issued to petitioners an NOD for 2017 determining a deficiency in federal income tax due to a disallowed portion of petitioner's claimed Schedule C expenses. (Doc. 23 at 4; Doc. 312 at 208-09). On August 19, 2019, petitioners filed another Tax Court Petition challenging respondent's determinations in the NOD that was issued to them for 2017. (Doc. 312 at 8).
Tax Court proceedings
After petitioners filed their Petitions and respondent prepared his answers, respondent's counsel forwarded the administrative file for petitioners' 2015 and 2016 years to the IRS Appeals office in Atlanta, Georgia, so that petitioners and Appeals could attempt to settle the case. (Doc. 312 at 212). The parties did not reach a basis for settlement, however, and the matters were referred to Area Counsel to prepare for trial-originally scheduled for January 13, 2020. (Doc. 312 at 215). Petitioners then moved for continuance, requesting that trial of their case for 2015 and 2016 be continued so that it could be consolidated with their 2017 deficiency case. (Doc. 7 at 1-2). The Court granted petitioners' motion for continuance. (Doc. 9 at 1).
On July 30, 2020, petitioners moved to consolidate these cases for trial, and the Court granted the motion and set the cases for trial in Atlanta, Georgia, on November 16, 2020. (Doc. 14 at 1-2; Doc. 15 at 1-2; Doc. 16: at 1-2). On October 26, 2020, petitioners moved for another continuance, and the Court granted petitioner's motion and set the cases for trial on the Court's May 17, 2021, trial calendar in Atlanta. (Doc. 26 at 1-2; Doc. 28 at 1-2). On May 11, 2021, petitioners' counsel requested another continuance because of medical issues, which the Court granted. (Doc. 32 at 1-2). The Court subsequently set the cases for trial on July 14, 2021. (Doc. 32 at 1-2).
In anticipation of trial, petitioners filed proposed exhibits, which were subsequently stricken from the record because they did not comply with the Court's procedures. (Doc. 293 at 1-2). Petitioners were accordingly ordered to file their proposed trial exhibits in compliance with the Court's procedures no later than July 12, 2021. (Doc. 293 at 1-2). Petitioners complied and filed their proposed exhibits on July 9 and 10, 2021. (Doc. 312 at 16). Thereafter, respondent apparently found within petitioners' proposed exhibits a "few new documents" that justified a revised settlement offer that proposed lower deficiencies, and the parties were then able to settle the cases. (Doc. 312 at 16).
On July 13, 2021, the parties initiated a telephone conference with the Court reporting that they had reached a basis for settlement and that they expected to file a stipulation of settled issues no later than July 14, 2021. (Doc. 302 at 1). During the conference, petitioners' counsel stated that petitioners intended to move for an award of costs. (Doc. 302 at 1).
On September 13, 2021, after the filing of the parties' stipulation of settled issues, petitioners filed their instant motion for costs under section 7430. (Doc. 303 at 1-3; Doc. 306 at 1-4). Respondent subsequently filed his response to the motion for costs in which he concedes that petitioners have substantially prevailed with respect to the issues and amounts in controversy for the 2015, 2016, and 2017 years. See § 7430(c)(4)(A)(i). (Doc. 312 at 2). Nevertheless, respondent opposes petitioners' motion on grounds that (1) petitioners did not exhaust their administrative remedies; (2) respondent's position in this proceeding was substantially justified; (3) petitioners unreasonably protracted the litigation; and (4) in the alternative, that at least "some" of the costs claimed are unreasonable in amount. (Doc. 312 at 17). Except as set forth in section 7430(c)(4)(B) (regarding whether respondent's position was substantially justified), petitioners have the burden of proof on all issues relating to their claim. See Rule 232(e).
Discussion
A threshold requirement for recovery of litigation costs is that the requesting taxpayer must have exhausted all available administrative remedies before filing a petition. § 7430; Haas & Associates Accountancy Corp. v. Commissioner, 117 T.C. 48, 57 (2001), aff'd, 55 Fed.Appx. 476 (9th Cir. 2003). A taxpayer exhausts his or her administrative remedies if (1) before filing a petition, he or she participates in an IRS Appeals conference, or (2) if no IRS Appeals conference is granted, the taxpayer, before issuance of a notice of deficiency in the case of a Tax Court petition, (a) requests an IRS Appeals conference and (b) files a written protest if a written protest is required to obtain an IRS Appeals conference. Treas. Reg. § 301.7430-1(a) and (b)(1).
Here, we understand petitioners to argue that they met this requirement, claiming on brief that they "asked for a meeting with appeals which was not granted." (Doc. 316 at 26, 27). But petitioners do not cite any record evidence that they requested an IRS Appeals conference either orally or in writing prior to receiving an NOD. (Doc. 316 at 26). Furthermore, little information is presented about the timing of petitioners' purported request for an IRS Appeals conference or about which tax year or years an IRS Appeals conference was requested. Petitioners' argument is unclear and apparently fails to show that they exhausted all available administrative remedies prior to filing their Petitions. Moreover, the circumstantial evidence regarding IRS Appeals' activity on petitioners' 2015, 2016, and 2017 tax years seems to suggest that IRS Appeals did not review these years prior to the filing of the Petitions in Tax Court-presumably because either no IRS Appeals conference was granted (a hypothesis difficult to square with the explicit invitation in the 30-day letters), or none was requested. We will therefore require petitioners to file a supplement to their motion for costs, wherein they should provide any available evidentiary support for their allegations that (1) they requested an IRS Appeals conference for any or all the tax years at issue, and (2) they did so prior to filing their Petitions in Tax Court. A failure to make a showing of these crucial facts may result in denial of their motion for costs. See § 7430(b)(1); see also Treas. Reg. § 301.7430-1(a) and (b)(1). The facts about the nature and timing of any requests petitioners made for an Appeals conference should be established by affidavit (or an unsworn declaration made under penalty of perjury in lieu of affidavit pursuant to 28 U.S.C. § 1746). No hearing would be warranted in this case without a showing that admissible evidence supporting exhaustion of remedies is available to be offered at a hearing.
Next, we note that respondent maintains that "[p]etitioners unreasonably protracted litigation by failing to produce all relevant documents until the eve of the third trial date" (Doc. 312 at 32-33) and that respondent was finally provided on such date a "few new documents that could give some justification to lowering his settlement offer[.]" (Doc. 312 at 16). However, respondent neither identifies the supporting documents nor explains their contents, and it would be helpful to the Court to understand precisely what documents petitioners provided pre-trial (but had not provided previously) that prompted settlement of the case, so that we may adequately evaluate whether petitioners could or should have provided them sooner and whether respondent's position throughout the examination and litigation was substantially justified. See § 7430(b)(3), (c)(4)(B). It is therefore
ORDERED that petitioners no later than November 30, 2022, shall file a supplement to their motion for costs supporting their allegations that they requested Appeals Office conference(s) and clarifying for which taxable years they requested such conference(s) and the timing of their purported request(s). It is further
ORDERED that no later than December 30, 2022, respondent shall file a supplement to his response, responding to petitioners' supplement and specifying which of petitioners' proposed exhibits was the basis for respondent's concessions and proposal of settlement.