KRAWCZYK v. COMMISSIONER

PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority. All references to section 7430 are to that section as in effect at the time the petition was filed. Unless otherwise indicated, all other section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

This case is before the Court on petitioner's motion for award of litigation costs pursuant to section 7430. After concessions,¹ the issue for decision is whether petitioner is a "prevailing party" that may be awarded a judgment for reasonable litigation costs incurred in connection with this court proceeding. As explained in further detail below, *53 we hold that respondent's position was substantially justified, and, therefore, we shall deny petitioner's motion for award of litigation costs.

Background

Petitioner filed a Federal income tax return for the 1999 taxable year (1999 tax return). He claimed head-of-household filing status, the earned income credit, and two dependency exemption deductions.

In April 2000, respondent began an examination of petitioner's 1999 tax return by requesting documentation from petitioner to verify the claimed filing status, dependency exemption deductions, and earned income credit. Respondent then sent petitioner a so-called 30-day letter dated September 13, 2000, proposing adjustments to petitioner's 1999 tax return.

In a letter dated September 27, 2000, petitioner sent respondent copies of several utility bills, *54 Social Security cards for himself and his two children, and two letters from a school stating that the children resided with petitioner.

Respondent responded by issuing a notice of deficiency dated December 11, 2000, stating in part:

     We have received your correspondence on October 11, 2002,

   in regard to the examination of your 1999 tax return.

     After reviewing the correspondence you submitted, we have

   determined that additional information is necessary to resolve

   the issues. Please see the enclosed explanations listing the

   adjusted items. In order for us to reconsider the proposed

   adjustment, you must submit the documentation explained on the

   attachments.

Petitioner did not submit any of the requested documentation. Without the benefit of additional information from petitioner, respondent determined a deficiency in petitioner's Federal income tax of $ 4,354 for the 1999 taxable year.

Petitioner filed a petition on March 5, 2001, and an amended petition on May 4, 2001. At the time of filing the petition, petitioner resided in Johnstown, Pennsylvania.

From June 2001 to February 2002, respondent's*55 Pittsburgh Appeals Office sent petitioner six letters seeking information regarding his case. Respondent's counsel also sent petitioner two letters, one dated February 12, 2002, and another dated April 5, 2002. Petitioner did not respond to any of these letters. Beginning in November 2001, petitioner suffered from anxiety and depression.

By notice dated August 23, 2002, this case was set for trial at a Pittsburgh, Pennsylvania, trial session scheduled to commence November 18, 2002.² Petitioner brought with him information regarding his 1999 tax return. On November 18, 2002, the parties filed a stipulation and stipulation of settled issues, which resolved all issues in petitioner's favor.³

*56 On November 18, 2002, petitioner filed a motion for award of litigation costs. Petitioner seeks an award of $ 448,010.78. Respondent contends that petitioner is not the prevailing party within the meaning of section 7430(c)(4) because, while the stipulation and stipulation of settled issues resolved all issues in petitioner's favor, respondent's position was substantially justified. In addition, respondent contends that petitioner did not exhaust administrative remedies and that petitioner unreasonably protracted the proceedings.

Neither party has requested a hearing, and we conclude that a hearing is not necessary. Rule 232(a)(2). Accordingly, we decide petitioner's motion on the basis of the motion, respondent's notice of objection, petitioner's response, and exhibits submitted by both parties.

Discussion

Subject to certain limitations, the prevailing party in any court proceeding may be awarded a judgment for reasonable litigation costs incurred in connection with such court proceeding. Sec. 7430(a)(2). The prevailing party must exhaust the administrative remedies available to it within the Internal Revenue Service, and the prevailing party must not have unreasonably protracted*57 any portion of the administrative or court proceeding. See sec. 7430(b)(1), (3).

The term "prevailing party" means "any party * * * which (I) has substantially prevailed with respect to the amount in controversy, or (II) has substantially prevailed with respect to the most significant issue or set of issues presented". Sec. 7430(c)(4)(A)(i). And in the case of an individual taxpayer, the term also means any party which had a net worth that did not exceed $ 2,000,000 at the time the civil tax case proceeding was commenced. Sec. 7430(c)(4)(A)(ii) (referring to 28 U.S.C. sec. 2412(d)(1)(B) and (2)(B)(2000)). However, a party shall not be treated as the prevailing party if the Commissioner can establish that his position was substantially justified. Sec. 7430(c)(4)(B).

Respondent contends that petitioner is not the prevailing party within the meaning of section 7430(c)(4) because, while the stipulation and stipulation of settled issues resolved all issues in petitioner's favor, respondent's position was substantially justified.⁴The Commissioner's position is substantially justified if, based on all of the facts and circumstances and the legal precedents relating*58 to the case, the Commissioner acted reasonably. Pierce v. Underwood, 487 U.S. 552 (1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988). In other words, to be substantially justified, the Commissioner's position must have a reasonable basis in both law and fact. Pierce v. Underwood, supra; Rickel v. Commissioner, 900 F.2d 655, 665 (3d Cir. 1990), affg. in part and revg. in part on other grounds 92 T.C. 510 (1989). A position is substantially justified if the position is "justified to a degree that could satisfy a reasonable person". Pierce v. Underwood, supra at 565 (construing similar language in the Equal Access to Justice Act). Thus, the Commissioner's 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, supra at 566 n. 2).

*59 The relevant inquiry is "whether * * * [the Commissioner] knew or should have known that * * * [his] position was invalid at the onset". Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir. 1995), affg. T.C. Memo. 1994-182. We look to whether the Commissioner's position was reasonable, in light of and subject to the available facts and circumstances at the time that the Commissioner took his position. Maggie Mgmt. Co. v. Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

The fact that the Commissioner eventually concedes, or even loses, a case does not establish that his position was unreasonable. Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991); Sokol v. Commissioner, 92 T.C. 760, 767 (1989). However, the Commissioner's concession does remain a factor to be considered. Powers v. Commissioner, 100 T.C. 457, 471 (1993), affd. in part, revd. in part and remanded on another issue 43 F.3d 172 (5th Cir. 1995).

As relevant herein, the position of the United States that must be examined against the substantial justification standard with*60 respect to the recovery of litigation costs is the position taken by the Commissioner in the answer to the petition. Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988); see sec. 7430(c)(7)(A). In the present case, respondent did not file an answer to the petition,⁵ but we note that respondent's position was essentially the same in the administrative and litigation proceedings. ⁶ More specifically, respondent's position was that petitioner was not entitled to the head-of-household filing status, the earned income credit, and two dependency exemption deductions.

*61 Considering all the facts and circumstances, respondent did not know and could not have known that his position was invalid after the petition was filed. Petitioner's marital status and the amount of support he provided to his children for the 1999 taxable year were unknown to respondent. See secs. 2(b), 32, 151, 152. On at least eight separate occasions, respondent requested that petitioner provide documents to substantiate such information. Petitioner declined to respond. The documents provided by petitioner in a letter dated September 27, 2000, while helpful, did not invalidate respondent's position. More documentation was necessary for petitioner to establish that he was entitled to the claimed filing status, deductions, and credit. We note that, when petitioner did bring the necessary documents on November 18, 2002, the case was quickly resolved.

We hold that petitioner is not entitled to an award for litigation costs because respondent's position was substantially justified. In so holding, we have carefully considered the remaining arguments made by the parties, and to the extent not discussed above, we consider those arguments to be without merit.

Reviewed and adopted as*62 the report of the Small Tax Case Division.

In order to reflect the foregoing,

An appropriate order and decision will be entered.