Baker v. Comm'r of Internal Revenue
| Decision Date | 28 November 1984 |
| Docket Number | Docket No. 7599-83. |
| Citation | 83 T.C. 822,83 T.C. No. 45 |
| Parties | ROBERT RANDALL BAKER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Respondent conceded all the issues that gave rise to the deficiencies in petitioner's Federal income tax and additions to tax for 1979 and 1980. Petitioner subsequently filed a motion for litigation costs pursuant to Rule 231, Tax Court Rules of Practice and Procedure, and sec. 7430, I.R.C. 1954, HELD, that in order for petitioner to be a ‘prevailing party‘ under sec. 7430(c)(2)(A)(i), I.R.C. 1954, he must establish that respondent's position after the petition was filed was unreasonable. HELD FURTHER, that respondent's concession of the case does not automatically mean that his position in the civil proceeding was unreasonable. HELD FURTHER, that petitioner's motion for litigation costs will be denied because respondent's position in the civil proceeding was not unreasonable. STEVEN M. WALK, for the respondent.
DAVID E. RODNEY, for the petitioner.
This case is before the Court on petitioner's Motion for Litigation Costs filed on April 26, 1984, 1 pursuant to Rule 231 2 and section 7430. 3 The issues for decision are (1) whether respondent's position in the civil proceeding was unreasonable, and, if so, (2) whether petitioner has exhausted the administrative remedies available to him within the Internal Revenue Service. If both issues are resolved in favor of petitioner, the Court must also decide whether petitioner's litigation costs were reasonable.
In August 1982 respondent notified petitioner that his 1979 and 1980 returns had been selected for examination and that he should meet with respondent's tax auditor in Riyadh, Saudi Arabia on September 19, 1982. At the meeting with the tax auditor, petitioner received a copy of a report that computed proposed tax deficiencies and additions to tax for 1979 and 1980 and a copy of respondent's Publication No. 5, which contains an explanation of the administrative appeals process. The proposed deficiencies resulted, in part, from a disallowance of the foreign earned income exclusion claimed by petitioner under section 911.
Petitioner mailed a letter dated October 15, 1982, to the tax auditor in Jidda, Saudi Arabia, protesting the decision to disallow the section 911 exclusion and stating that petitioner ‘wished to make a written appeal.‘ The letter was apparently not received by the tax auditor because on October 26, 1982, the auditor closed the administrative case file as an ‘unagreed‘ case and, pursuant to standardized procedures, returned the case file to the Foreign Operations District in Washington, D.C., for issuance of a notice of deficiency.
In a notice of deficiency dated December 10, 1982, respondent determined the following deficiencies and additions to tax:
+-------------------------------------+
¦ ¦ ¦Addition to tax ¦
+------+------------+-----------------¦
¦Year ¦Deficiency ¦sec. 6651(a)(1) ¦
+------+------------+-----------------¦
¦ ¦ ¦ ¦
+------+------------+-----------------¦
¦1979 ¦$655 ¦$82.72 ¦
+------+------------+-----------------¦
¦1980 ¦2,534 ¦506.80 ¦
+-------------------------------------+
For both taxable years, the adjustments that gave rise to the deficiencies were as follows: (1) a full disallowance of the foreign earned income exclusion; (2) an increase in a rental loss; (3) an allowance of a deduction for excess foreign living costs under section 913; and (4) additional income in the form of fair rental value of housing provided to petitioner by his employer.
In January 1983 petitioner mailed a letter to respondent reaffirming his desire to protest the deficiency determination. Respondent treated this letter as a submission of new information and as a request for an explanation of the determination of deficiencies and additions to tax for 1979 and 1980. Accordingly, respondent mailed to petitioner in February 1983 a written explanation of the adjustments that gave rise to the deficiencies and a copy of the section 911 temporary regulations in force at that time.
The petition in this case was filed on April 6, 1983. At the time the petition was filed, petitioner resided in Riyadh, Saudi Arabia. Petitioner requested that trial of the case be held in Cleveland, Ohio. His request was granted. Respondent filed an answer on May 16, 1983, and trial responsibility for the case was then transferred from the Washington to the Cleveland District Counsel Office.
On June 3, 1983, the Cleveland Appeals Office was given jurisdiction over the case to explore all settlement alternatives. The appeals officer mailed to petitioner a letter dated June 15, 1983, explaining the issues in the case and requesting that petitioner submit information in support of his position for the purpose of exploring the possibility of settlement. Petitioner met with the appeals officer in Cleveland in September, 1983. No settlement having been reached, on November 14, 1983, the case was closed by the Appeals Office and returned to the Cleveland District Counsel Office for trial preparation.
In December 1983 petitioner retained counsel to represent him in this case. On December 12, 1983, the Court notified the parties that the case was set for trial in Cleveland at the Trial Session beginning March 5, 1984. Petitioner's counsel entered his appearance in this case on January 5, 1984. On January 12, 1984, petitioner filed a motion for continuance and a motion for leave to supplement the petition.
On January 12, 1984, counsel for both parties met to discuss a stipulation of facts. The parties reviewed the documents that had been previously submitted by petitioner. Not being satisfied with that information, counsel for respondent requested that petitioner supply additional information to support petitioner's entitlement to the foreign earned income exclusion. Petitioner provided certain information to respondent on February 14, 1984. Deeming the information to be inadequate, respondent renewed his request for information by letter dated February 15, 1984.
On February 21, 1984, petitioner filed certain items, including a motion for leave to further amend the petition and a motion for summary judgment. All of petitioner's motions were disposed of by the Court on March 15, 1984.
On February 23, 1984, counsel for both parties met again. During this conference the parties discussed respondent's request for information and petitioner's claim for litigation costs. Counsel for respondent indicated to petitioner's counsel that respondent might concede the foreign earned income exclusion issue if the information that had been previously requested were submitted.
On March 23, 1984, petitioner submitted more information. Respondent agreed to concede the foreign earned income exclusion and by letter dated April 17, 1984, respondent transmitted to counsel for petitioner an executed Stipulation as to Settled Issues pursuant to Rule 231(c). This stipulation was filed by both parties on April 26, 1984. One adjustment to petitioner's returns remained. This adjustment increased petitioner's rental loss, resulting in an over-assessment and refund to petitioner.
Petitioner is requesting an award of $4,236.40 for litigation costs incurred as of April 23, 1984.
Petitioner contends, in part, that respondent was unreasonable in determining the deficiencies and additions to tax and ‘in promulgating‘ section 1.911-1(c)(1)(iv), Income Tax Regs. Respondent contends that his conduct prior to the filing of the petition should not be considered by the Court. Assuming that the Court does inquire into the pre-petition actions of respondent, respondent further contends that his actions were reasonable.
Section 7430 provides, in part, as follows:
(a) IN GENERAL.—In the case of any civil proceeding which is,
(1) brought by or against the United States in connection with the determination, collection, or refund of an tax, interest, or penalty under this title, and
(2) brought in a court of the United States (including the Tax Court), the prevailing party may be awarded a judgment for reasonable litigation costs incurred in such proceeding.
(b) LIMITATIONS.
(2) PREVAILING PARTY.
(A) In general.—The term ‘prevailing party‘ means any party to any proceeding described in subsection (a) () which,
(i) establishes that the POSITION OF the United States IN THE CIVIL PROCEEDING was unreasonable, and
(ii)(I) has substantially prevailed with respect to the amount in controversy, * * *
(3) CIVIL ACTIONS.—The term ‘civil proceeding‘ includes a civil action. (Emphasis added.)
In order for petitioner to be a ‘prevailing party,‘ as defined in section 7430(c)(2), he must establish that respondent's ‘position * * * IN THE CIVIL PROCEEDING‘ was unreasonable. We think that the clear meaning of this specific language and of the statute as a whole requires us to examine the reasonableness of respondent's position during the litigation. Congress clearly distinguished a civil proceeding from an administrative proceeding by including the requirement of exhaustion of administrative remedies in section 7430(b)(2) before an award may be made of costs incurred in the SUBSEQUENT civil proceeding. Support for our interpretation of section 7430(c)(2) is found in the legislative history of that section. H. Rept. 97-404, p.14 (1981), states as follows:
Recoverable litigation costs include only the reasonable amount of costs which are incurred in the...
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