Florida Country Clubs, Inc. v. Comm'r of Internal Revenue

• Citation: 122 T.C. 73,122 T.C. No. 3
• Decision Date: 03 February 2004
• Docket Number: No. 9160–02.,9160–02.
• Parties: FLORIDA COUNTRY CLUBS, INC., A Florida Corporation, Suncoast Country Clubs, Inc., A Florida Corporation, Deborah A. Hamilton, and James R. Mikes, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

122 T.C. 73

122 T.C. No. 3

FLORIDA COUNTRY CLUBS, INC., A Florida Corporation, Suncoast Country Clubs, Inc., A Florida Corporation, Deborah A. Hamilton, and James R. Mikes, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 9160–02.

United States Tax Court.

Feb. 3, 2004.

James R. Mikes, for petitioners.

Michael D. Zima, for respondent.

OPINION

KROUPA, J.

Petitioners (Ps), two S corporations and two shareholders of those corporations, received letters of proposed deficiency with respect to their 1993 and 1994 Federal income tax returns, which allowed Ps an opportunity for administrative review in Respondent's (R) Appeals Office. After Ps protested the proposed deficiencies with the Appeals Office, the parties settled without R's issuing either an Appeals Office notice of decision or a notice of deficiency.

Ps filed a petition with this Court under sec. 7430(f), I.R.C., and Rule 271, Tax Court Rules of Practice and Procedure, for reasonable administrative costs. R moved for a summary judgment that Ps are not entitled to an award of administrative costs as a matter of law.

1. Held: R never took a position in the administrative proceeding as provided by sec. 7430(c)(7)(B), I.R.C., because Ps never received a notice of decision from the Appeals Office and R never sent Ps a notice of deficiency. Consequently, Ps do not qualify as prevailing parties under sec. 7430(c)(4), I.R.C.

2. Held, further, the meaning of term “notice of deficiency” under sec. 7430(c)(7), I.R.C., is the same as its meaning under sec. 6212(a), I.R.C.

3. Held, further, the proposed notice of deficiency that was never approved and never sent to Ps is not a notice of deficiency for purposes of sec. 7430(c)(7), I.R.C.

This matter is before the Court on respondent's motion for summary judgment under Rule 121.¹ The sole issue for decision is whether petitioners are entitled to reasonable administrative costs under section 7430 for expenses incurred in proceedings within the Internal Revenue Service (IRS) regarding their 1993 and 1994 Federal income taxes. For the reasons explained below, we find that petitioners are not entitled to administrative costs.

Background

Petitioners are James R. Mikes (Mikes), Deborah A. Hamilton (Hamilton), Florida Country Clubs, Inc. (FCC), and Suncoast Country Clubs, Inc. (SCC). FCC and SCC are corporations that elected to be taxed under subchapter S for 1993, 1994, and 1995. Mikes and Hamilton were married and filed joint returns for those years, and they were shareholders of the corporations.²

Respondent commenced an audit of FCC for the years 1993 and 1994 in December 1995, to examine, inter alia, certain claimed depreciation expenses and a possible understatement of gross receipts. In 1996 respondent expanded the audit for those years to include Mikes, Hamilton, and SCC. The audit encompassed, in addition to the depreciation deductions, the deductibility of net operating losses as well as interest income and expenses claimed by petitioners on account of certain loans. In May 1999, the audit was further widened to include the year 1995 for all petitioners.

On September 23, 1997, respondent sent petitioner FCC a 30–day letter proposing to increase the income reported on its 1993 and 1994 returns in the amounts of $1,168,554 and $44,219, respectively. On October 3, 1997, 30–day letters were sent to SCC, Mikes, and Hamilton. The letters proposed to increase Mikes's and Hamilton's income for 1993 and 1994 by the amounts of $2,680,313 and $2,253,256 respectively and to increase the income of SCC by $272,840 for 1993 and $74,426 for 1994. Those proposed changes would have resulted in deficiencies for Mikes and Hamilton of $398,101 for 1993 and $130,892 for 1994.

On March 27, 1998, a reviewer in respondent's Quality Measurement Staff submitted a proposed notice of deficiency (the reviewer's proposal) with respect to the 1993 and 1994 Federal income tax returns of Mikes and Hamilton. The reviewer's proposal was to be reviewed by the Office of District Counsel (District Counsel) in Jacksonville, Florida. The reviewer's proposal recommended an increase in the income reported on the 1993 and 1994 returns of FCC and SCC and also proposed increases to the income reported on the 1993 and 1994 returns of Mikes and Hamilton in the amounts of $2,698,549 and $2,300,647, respectively.

On May 29, 1998, District Counsel rejected the reviewer's proposal and advised her to obtain petitioners' agreement to extend the statutory period of limitations for assessment, which would allow the staff time to further explore the facts of the case. Petitioners consented to extend the statutory period of limitations until June 30, 1999. Consequently, respondent did not send petitioners any notice of deficiency, nor did respondent issue the reviewer's proposal to petitioners.

During 1998 and 1999, respondent issued to each petitioner at least three revised 30–day letters proposing adjustments to their 1993 and 1994 reported income. Upon receipt of the final 30–day letters, petitioners protested the proposed adjustments to respondent's Appeals Office.

The parties settled the case sometime in April 2000, without respondent issuing either a notice of deficiency or an Appeals Office notice of decision. Pursuant to the settlement, the parties agreed that petitioners owed no additional taxes for either 1993 or 1994 and in fact were entitled to a refund for 1995.

Petitioners filed a request for administrative costs under section 7430 with respondent, and respondent denied their request on February 28, 2002. Consequently, petitioners timely filed their petition with this Court on May 29, 2002, under section 7430(f) and Rule 271, for administrative costs they incurred after January 18, 1999.³

On May 27, 2003, respondent filed a motion for summary judgment claiming that petitioners were not entitled, as a matter of law, to recover administrative costs because respondent never took a “position” in the proceedings.

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681, 1988 WL 31439 (1988). Summary judgment may be granted where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(a) and (b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520, 1992 WL 88529 (1992), affd. 17 F.3d 965 (7th Cir.1994); Zaentz v. Commissioner, 90 T.C. 753, 754, 1988 WL 34876 (1988). The moving party bears the burden of proving that there is no genuine issue of material fact, and factual inferences will be read in a manner most favorable to the party opposing summary judgment. Dahlstrom v. Commissioner, 85 T.C. 812, 821, 1985 WL 15413 (1985); Jacklin v. Commissioner, 79 T.C. 340, 344, 1982 WL 11139 (1982). When a motion for summary judgment is made and properly supported, the adverse party may not rest upon mere allegations or denials of the pleadings but must set forth specific facts showing that there is a genuine issue for trial. Rule 121(d). We conclude that there is no genuine issue of material fact precluding us from resolving the question raised in respondent's motion. ⁴

Discussion

Section 7430 has been amended several times since it was enacted in 1982.⁵ Which provisions (and therefore which amendments) apply in a given case depends on when the proceeding was commenced and the period within which the claimed costs were incurred. Because this proceeding was commenced on May 29, 2002, and the costs were incurred after January 18, 1999, the amendments to section 7430(c)(2) made by the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub.L. 105–206, sec. 3101(b), 112 Stat. 727 apply. In addition, we are asked to interpret the amendment in 1996 to section 7430(c)(4) made by the Taxpayer Bill of Rights 2 (TBOR 2), Pub.L. 104–168, secs. 701–704, 110 Stat. 1463–1464.

We begin by discussing the general, operative provisions of section 7430, then discuss the amendments made in TBOR 2 and RRA 1998. We then analyze the arguments each party made, and we conclude that petitioners cannot recover administrative costs.

I. Section 7430

Recovery of administrative costs is governed by section 7430(a), which permits a taxpayer who is a “prevailing party” in any administrative proceedings brought by or against the United States to recover reasonable administrative costs incurred by him or her in connection with such proceedings. See sec. 7430(a)(1). To be a “prevailing party”, the taxpayer must, inter alia, substantially prevail with respect to the amount in controversy or the most significant issue or set of issues presented. Sec. 7430(c)(4)(A).⁶ A taxpayer will not qualify as a prevailing party, however, if the Government establishes that “the position of the United States” was substantially justified. See sec. 7430(c)(4)(B). The “position of the United States” is, in turn, defined in section 7430(c)(7) as the position taken by the Government in an administrative proceeding as of the earlier of: (1) The date of receipt by the taxpayer of the notice of decision of the Appeals Office, or (2) the date of the notice of deficiency. Thus, prior to the issuance of a notice of deficiency or an Appeals Office decision, the Government is not considered as having taken any position. See, e.g., Richardson v. Commissioner, T.C. Memo.1991–427 (“we cannot consider the conduct of the revenue agent prior to * * * [date of notice of deficiency].”); Nathaniel v. United States, 69 AFTR 2d 456, 92–1 USTC par. 50,023 (E.D.Cal.1991) (“The plain language of section 7430(c)(7) precludes the court from considering the position taken by the United States in the administrative proceedings * * * [prior to] the date of a notice of deficiency or the date of the receipt by the taxpayer of a notice of a decision of the Office of Appeals”).

Respondent argues that because no notice of deficiency or Appeals Office decision was...