Dalton v. Comm'r

(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, and

(ii) which meets the requirements of the 1st sentence of section 2412(d)(1)(B) of title 28, United States Code (as in effect on October 22, 1986) except to the extent differing procedures are established by rule of court and meets the requirements of section 2412(d)(2)(B) of such title 28 (as so in effect).Nothing in section 7430 requires that the moving party satisfy the other requirements of 28 U.S.C. sec. 2412(d)(1)(B), including the requirement that the moving party allege that the Government's position was not substantially justified. Rather, section 7430(c)(4)(B)(i) makes it clear that the Commissioner bears the burden of proving that his position was substantially justified. ^2*144 Corson v. Commissioner, 123 T.C. at 206.

The *145 Tax Court has set forth in Rule 231(b) the required contents of a motion for litigation and administrative costs. Petitioners' motion meticulously complied with those requirements. On the basis of the foregoing, we hold that petitioners' motion is not deficient on its face because petitioners failed to allege that respondent's position was not substantially justified.

We next consider whether respondent has shown that his position was substantially justified. For purposes of deciding a motion for reasonable administrative costs, an administrative proceeding is a procedure or action before the IRS, sec. 7430(c)(5), and the "position of the United States" in an administrative proceeding refers to the position taken by the IRS as of the earlier of (i) the date the taxpayer receives the notice of decision of the IRS Appeals Office, or (ii) the date of the notice of deficiency, sec. 7430(c)(7)(B); Rathbun v. Commissioner, 125 T.C. 7, 12-13 (2005); see also sec. 301.7430-3(a), (c), Proced. & Admin. Regs. In the instant case, the Government first took a position in the administrative proceeding when Appeals Office *146 issued the notice of determination dated October 24, 2006, which petitioners received on or about October 31, 2006. See sec. 7430(c)(7)(B)(i); Owen v. Commissioner, T.C. Memo. 2005-115.

A court proceeding, for purposes of section 7430, means any civil action brought in a court of the United States, including this Court, sec. 7430(c)(6), and the "position of the United States" in a court proceeding is the position taken by the IRS in a judicial proceeding to which section 7430(a) applies, sec. 7430(c)(7)(A). In the instant case, respondent's initial litigation position is that taken in his answer to petitioner's petition. Sec. 7430(c)(7)(A); see Huffman v. Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part, revg. in part and remanding T.C. Memo. 1991-144.

We may consider the Commissioner's administrative and litigation positions together if the Commissioner maintains the same position throughout the administrative and litigation process. Huffman v. Commissioner, supra at 1144-1147; Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 442. In the instant case, respondent concedes that he has maintained the same position since issuing the initial notice of determination on October *147 24, 2006. Respondent's position in that notice of determination was that petitioners held a nominee interest in the trust property. Accordingly, our inquiry will be limited to the question of whether respondent has shown that that position was substantially justified.

The Commissioner's 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. Corson v. Commissioner, supra at 206; Maggie Mgmt. Co. v. Commissioner, supra at 443. The reasonableness of the Commissioner's position is determined on the basis of the available facts that formed the basis for the position, as well as the controlling law. Maggie Mgmt. Co. v. Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C. 927, 930 (1985). A position that was reasonable when established may become unreasonable in the light of changed circumstances. See sec. 301.7430-5(c)(2), Proced. & Admin. Regs. A significant factor in determining whether the Commissioner acted reasonably as of a given date is whether, on or before that date, the taxpayer presented all relevant information under the taxpayer's control. Corson v. Commissioner, supra at 206-207; *148 sec. 301.7430-5(c)(1), Proced. & Admin. Regs. Respondent does not contend, and the record does not suggest, that petitioners failed to present all relevant evidence before the Appeals Office issued the initial notice of determination. The record shows that no new relevant facts emerged during the proceedings in this Court or during the Appeals Office hearing on remand.

Respondent contends that his position was substantially justified because it had a reasonable basis in the facts and the law. In Dalton II, we held that the Appeals Office had abused its discretion when it refused to consider petitioners' offer-in-compromise on the basis of its conclusion that petitioners had a nominee interest in the trust property. The question of whether an abuse of discretion has occurred requires an inquiry into whether the discretion was exercised "without sound basis in fact or law." See Murphy v. Commissioner, 125 T.C. 301, 308 (2005), affd. 469 F.3d 27 (1st Cir. 2006); Freije v. Commissioner, 125 T.C. 14, 23 (2005).

The standard we apply for purposes of deciding whether the Commissioner's position is substantially justified uses similar language: "The Commissioner's position is substantially justified *149 if it has a reasonable basis in both fact and law and is justified to a degree that could satisfy a reasonable person." Corson v. Commissioner, supra at 206; see also Maggie Mgmt. Co. v. Commissioner, supra at 443. However, we are not required to hold that the Commissioner's position lacked substantial justification in all cases where the Commissioner abused his discretion. See Rowe v. Commissioner, T.C. Memo 2002-136; Mid-Del Therapeutic Ctr., Inc. v. Commissioner, T.C. Memo. 2000-383, affd. 30 Fed. Appx. 889 (10th Cir. 2002); Mauerman v. Commissioner, T.C. Memo. 1995-237. For example, we have held that the Commissioner generally is not subject to an award of litigation costs under section 7430 if the case is one of first impression, even where we hold that the Commissioner abused his discretion in the underlying case. See Rowe v. Commissioner, supra; Mid-Del Therapeutic Ctr., Inc. v. Commissioner, supra.We must consider the facts and circumstances of the particular case. See Rowe v. Commissioner, supra; Mid-Del Therapeutic Ctr., Inc. v. Commissioner, supra.

Although Dalton I was decided on the administrative record, the parties' constructions of the documents in that record were *150 different. As we noted in our opinion in Dalton I, in their motions "the parties [appeared] to advance conflicting views with respect to the contours of the proper record for review and which party is attempting to exceed the bounds of the record." In our opinion in Dalton I we adopted a construction of the administrative record that was closer to the construction advanced by petitioners. After setting forth our construction of the administrative record, we examined the Appeals Office's application of law, and we concluded that the Appeals Office had failed to apply the correct law because it did not apply State law. Accordingly, we remanded the case to the Appeals Office, directing it to apply Maine law to determine whether petitioners had a nominee interest in the trust property.

However, on remand, when the Appeals Office requested an advisory opinion from the Office of Chief Counsel, the opinion from the Office of Chief Counsel gave only cursory treatment to Maine law, summarily concluding that Maine law is silent with regard to the nominee doctrine. In our Opinion in Dalton II, we rejected respondent's legal position, concluding that Maine law is not undeveloped on the issue of *151 nominee interest and that under Maine law petitioners did not have a nominee interest in the trust property. Dalton II, 135 T.C. at 407-415. We also concluded that, even using the Federal factors analysis, petitioners did not have an interest in the trust property. Id. at 415-423. We therefore held that respondent's Appeals Office had abused its discretion when it concluded that petitioners did have a nominee interest in the trust property. Id. at 423.

When we decide that the Commissioner's Appeals Office has abused its discretion, we are holding that its conclusion is "without sound basis in fact or law." See Murphy v. Commissioner, supra at 308; Freije v. Commissioner, supra at 23. However, in his objection to the instant motion, respondent contends that his position was substantially justified because it had a reasonable basis in the facts and the law.

Respondent appears to misunderstand the standard for "substantially justified" and our holding in Dalton II. Respondent contends that his position was substantially justified because it was reasonable for him to conclude that Maine law was undeveloped. However, our holding in Dalton II went further than simply holding that petitioners *152 had no interest in the trust property under Maine law; we also held that petitioners would have no interest in the trust property even if Federal law applied. See Dalton II, 135 T.C. at 416-423.

Moreover, in our opinions in both Dalton I and Dalton II we disagreed with respondent's construction of documents in the administrative record. See id. at 394-400. In some particulars, the Appeals Office's findings appeared to exceed the facts that were established by those documents. It appears that respondent still has not accepted our construction of the administrative record. During the hearing on remand, in his motion for summary judgment in Dalton II, and in his opposition to petitioners' motion now before the Court, respondent advanced proposed findings of fact in conflict with our opinion in Dalton I. For example, respondent continued to contend that during 1983 petitioners exchanged lots 3 and 4 with Mr. Dalton Jr.'s father (Mr. Dalton Sr.) for no consideration despite the fact that we had found, in Dalton I, that Mr. Dalton Sr. assumed the mortgage on lot 3. Respondent continued to insist that when Mrs. Dalton Jr. cosigned a mortgage on lots 3 and 4 with Mr. Dalton Sr. during 1993, *153 she was treating those lots as her property, despite the fact that we had found that she did so only at the request of the bank because of the bank's concern about Mr. Dalton Sr.'s advanced age. Respondent continued to assert that because there was no written lease evidencing a rental agreement between petitioners and Mr. Dalton Sr., they were living on the Poland property and treating it as their own, despite the fact that we had found petitioners paid rent on the Poland property pursuant to an oral agreement.

In some cases, the Appeals Office's findings were simply unsupported by the documents in the record. Because we were reviewing the Appeals Office's determination for abuse of discretion, by disagreeing with its construction of documents in the administrative record we were concluding that respondent's construction of those documents, i.e., his basis in fact, was not reasonable.

Accordingly, we reject respondent's contention that his position was substantially justified because it had a reasonable basis in the facts and the law. However, as noted above, our inquiry does not end here. Respondent's position may still be substantially justified if, examining all the facts and circumstances, *154 we find other facts that make his position substantially justified. See Rowe v. Commissioner, T.C. Memo 2002-136; Mid-Del Therapeutic Ctr., Inc. v. Commissioner, T.C. Memo. 2000-383. However, the instant case did not involve an issue of first impression, and we do not find any other facts or circumstances that would make respondent's position substantially justified.

Accordingly, on the basis of the foregoing, we conclude that respondent's position was not substantially justified and that, therefore, petitioners were the prevailing party.

In an affidavit attached to their motion for award of litigation and administrative costs, petitioners claim that they are entitled to costs dating back to 1999. Respondent contends that petitioners are not entitled to costs incurred before October 31, 2006, the date on which petitioners received the initial notice of determination and began to prepare their petition for filing in this Court. We agree with respondent.

Section 7430(a) permits a taxpayer to recover reasonable administrative costs incurred in connection with an administrative proceeding. *155 Pursuant to section 301.7430-3(a)(4), Proced. & Admin. Regs., an "administrative proceeding" does not include proceedings in connection with collection actions; i.e., any action taken by the IRS to collect a tax. Sec. 301.7430-3(b), Proced. & Admin. Regs. Because the instant case involves a collection action, petitioners are not permitted to recover costs incurred in connection with the collection due process hearing. See id.; sec. 301.7430-3(d), Example (5), Proced. & Admin. Regs. Moreover, before petitioners received the Appeals Office's initial notice of determination on October 31, 2006, the IRS had not taken a position. See sec. 7430(c)(7); Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73 (2004), affd. 404 F.3d 1291 (11th Cir. 2005). Accordingly, we deny petitioners' claim for costs incurred in connection with their collection due process hearing before the Appeals Office issued its initial notice of determination.

Respondent contends that the fees petitioners' attorney charged them for reviewing the initial notice of determination also constitute administrative costs, not litigation costs, and that therefore those fees are subject to the limitation described in section 301.7430-4(b)(3), *156 Proced. & Admin. Regs. Fees incurred before filing a petition in the Tax Court are considered litigation costs if those fees are "incurred in connection with the preparation and filing of a petition". Sec. 301.7430-4(c)(3)(i), Proced. & Admin. Regs. The regulations provide two examples to illustrate the distinction between administrative and litigation costs when the taxpayer is filing a petition with this Court:

Example (1). Taxpayer A receives a notice of proposed deficiency (30-day letter). A files a request for and is granted an Appeals office conference. At the conference no agreement is reached on the tax matters at issue. The Internal Revenue Service then issues a notice of deficiency. Upon receiving the notice of deficiency, A discontinues A's administrative efforts and files a petition with the Tax Court. A's costs incurred in connection with the preparation and filing of a petition with the Tax Court are litigation costs and not reasonable administrative costs. Furthermore, A's costs incurred before the administrative proceeding date (date of the notice of deficiency as set forth in § 301.7430-3(c)(3)), are not reasonable administrative costs.

Example (2). Assume the same facts *157 as in Example 1 except that after A receives the notice of deficiency, A recontacts Appeals. Again, A's costs incurred before the administrative proceeding date, the date of the notice of deficiency as set forth in § 301.7430-3(c)(3), are not reasonable administrative costs. A's costs incurred in recontacting and working with Appeals after the issuance of the notice of deficiency, and up to and including the time of filing of the petition, are reasonable administrative costs. A's costs incurred in connection with the filing of a petition with the Tax Court are not reasonable administrative costs because those costs are litigation costs. Similarly, A's costs incurred after the filing of the petition are not reasonable administrative costs, as those are litigation costs.Sec. 301.7430-4(c)(4), Proced. & Admin. Regs. As those examples make clear, a taxpayer begins incurring litigation costs as soon as the taxpayer "discontinues" the taxpayer's administrative efforts. We must therefore decide at what time petitioners discontinued their administrative efforts.

Petitioners never recontacted the Appeals Office after they received the initial notice of determination. On October 31 and November *158 1, 2006, petitioners' attorney reviewed the notice of determination from the IRS, wrote a "file memo" for his clients, and had a telephone conference with his clients. After that telephone conference petitioners' attorney began researching and drafting the petition. Although it is unclear from the record at exactly what time petitioners decided to discontinue their administrative efforts and file a petition in the Tax Court, the record shows that they had made that decision by November 1, 2006, when they had their first conversation about the issue with their attorney. The regulations make it clear that a taxpayer can decide to discontinue administrative efforts "Upon receiving the notice of deficiency"; i.e., without incurring any further administrative costs. See sec. 301.7430-4(c)(4), Example (1), Proced. & *159 Admin. Regs. Because petitioners never recontacted the Appeals Office and almost immediately directed their attorney to begin preparing a petition to file in this Court, we conclude that petitioners began incurring litigation costs as soon as they received the initial notice of determination. We therefore reject respondent's argument that some of those costs were administrative.

Respondent concedes that if the Court decides that petitioners are the prevailing party, the litigation costs they claim beginning on November 2, 2006, are reasonable at the claimed rate of $150 per hour. As explained above, we also hold that petitioners are entitled to litigation costs for fees incurred on October 31 and November 1, 2006. However, we note that petitioners' attorney made several typographical or mathematical errors when computing the proper amount of attorney's fees. After correcting for those errors, we hold that petitioners are entitled to an award for litigation costs of $45,248.11, which includes $45,015 in attorney's fees and $233.11 in filing, printing, and mailing costs.

In reaching these *160 holdings, we have considered all the parties' arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.

To reflect the foregoing,

An appropriate order and decision will be entered.