Blasius v. Commissioner

Decision Date14 September 2005
Docket NumberDocket No. 4368-01.,Docket No. 4367-01.,Docket No. 4366-01.
Citation90 T.C.M. 274
PartiesJames E. Blasius and Mary Jo Blasius, et al. v. Commissioner.
CourtU.S. Tax Court

Erwin A. Rubenstein and Nicole R. Tennenhouse, for petitioners.

Eric R. Skinner and Phoebe L. Nearing, for respondent.

MEMORANDUM OPINION

HALPERN, Judge:

These cases (the consolidated cases, or, when referred to prior to consolidation, the cases) are before the Court on petitioners' motions for litigation and administrative fees and costs (the motions) filed October 9, 2002.2 2 The motions are made pursuant to section 7430 and Rules 230 through 233.3 Petitioners seek to recover (1) attorney's fees of $7,131 and costs of $182 in connection with respondent's determinations of deficiencies in tax with respect to petitioners' taxable (calendar) years 1996, 1997, and 1998 (the audit years),4 (2) attorney's fees of $1,357.50 incurred through August 31, 2002, in connection with filing the motions, plus (3) "other fees and expenses since August 31, 2002." Petitioners also request that we increase the statutory fee limit based on the expertise of petitioners' counsel. Respondent objects to the motions in all respects.

On March 7, 2005, the parties jointly moved pursuant to Rule 141(b) to bifurcate consideration of the issues presented in the motions. They requested that the Court first decide the "primary legal issue", whether respondent has met his burden of proving that his position in the consolidated cases was "substantially justified" within the meaning of section 7430(c)(4)(B)(i). If, and only if, the Court were to decide that issue in petitioners' favor, then the Court would decide the remaining issues, which involve the amount of the attorney's fees and other expenses properly recoverable by petitioners.5 During a March 14, 2005, teleconference, counsel for the parties agreed that the Court may decide the substantial justification issue without a trial or hearing. On March 17, 2005, the Court issued an order granting the parties' joint motion to bifurcate. No trial or hearing has been held.

Because the parties appear to agree on the underlying facts necessary for us to reach a decision on the substantial justification issue, there are no factual issues in that respect to resolve.6 Therefore, we shall proceed on the basis of the parties' submissions. For the reasons discussed below, we shall deny the motions.

Factual and Procedural Background

The parties filed a "Stipulation of Agreed Facts", which, with accompanying exhibits, is incorporated herein by this reference.

Petitioners

Petitioners James E. Blasius (Blasius) and Mary Jo Blasius are husband and wife who, at the time their petition was filed, resided in Northville, Michigan. Petitioners Steven G. Balan (Balan) and Rachel Margules are husband and wife who, at the time their petitions were filed, resided in West Bloomfield, Michigan. During the audit years, Blasius and Balan were the sole shareholders (Blasius, 80 percent, Balan, 20 percent) of Automotive Credit Corporation (ACC), an S corporation.7

History of the Consolidated Cases

By notices of deficiency dated December 29 and 31, 2000 (the notices of deficiency), respondent determined deficiencies in the Federal income taxes of petitioners for the audit years. Explanations included with the notices of deficiency show adjustments to petitioners' incomes resulting from changes in the treatment of items of ACC passed through to Blasius and Balan on account of their status as shareholders of ACC. Respondent required the capitalization of certain costs incurred (and deducted) by ACC in connection with (1) "Loan Origination/Acquisition", (2) "Offering Expenses", and (3) "Professional Fees".

On March 30, 2001, petitions were filed in the cases (the petitions), and, on May 21, 2001, respondent answered the petitions denying all assignments of error.

On January 9, 2002, the Court notified the parties that the cases were set for trial at the trial session of the Court commencing June 10, 2002, in Detroit, Michigan.

On March 14, 2002, attorney Oksana O. Xenos, on behalf of all petitioners, wrote a letter to Eric R. Skinner, one of respondent's counsel in this case. In that letter, Ms. Xenos requested that, in light of respondent's position regarding the deductibility of the types of costs at issue in the consolidated cases, as stated in Announcement 2002-9, 2002-1 C.B. 536, issued on February 15, 2002 (discussed infra), respondent "should without inordinate delay, confess error and concede the instant cases in their entirety."

On April 19, 2002, Mr. Skinner informed Ms. Xenos that, in light of the March 15, 2002, issuance of Chief Counsel Notice 2002-21 (discussed infra), respondent would concede the deductibility of the loan origination/acquisition costs at issue in each of the cases (the loan origination/acquisition costs).8 Sometime previously, Mr. Skinner had been instructed by his superior, Division Counsel, Large and Mid-Size Business Division (LMSB), to contact Victoria Balacek, Senior Legal Counsel (LMSB), to confirm the office's position with respect to the loan origination/acquisition costs. On April 19, 2002, Mr. Skinner learned from Ms. Balacek that a concession of the issue was appropriate in light of Chief Counsel Notice 2002-21. He then contacted Ms. Xenos.

On May 29, 2002, Ms. Xenos again wrote Mr. Skinner, alleging that he was reneging in part on his promise to concede the costs at issue in the consolidated cases. Ms. Xenos requested that "any stipulated decision you propose for our consideration provide for an award of reasonable administrative and litigation fees and costs incurred in these civil proceedings."9

On May 31, 2002, we filed respondent's trial memorandum in each of the cases. In those memoranda, respondent concedes the deductibility of both the loan origination/acquisition costs and the professional fees at issue.

On June 10, 2002, the cases were called for trial. No trial was held, however, since the Court received from the parties stipulations of settled issues that resolved all of the then outstanding issues in the cases.10 A section of each stipulation is entitled "Adjustments to Automotive Credit Corporation, Inc. (1120S)". In those sections, petitioner(s) in each case concede(s) that ACC's "expenditures for commissions and offering expenses should be capitalized rather than deducted in the year incurred", and respondent in each case concedes the deductibility of ACC's (1) loan origination/acquisition costs and (2) professional fees.

Nature of the Expenses Conceded by Respondent To Be Deductible in the Year Incurred
Loan Origination/Acquisition Costs

ACC is the same S corporation that was the focus of our report in Lychuk v. Commissioner [Dec. 54,353], 116 T.C. 374 (2001), which dealt with the 1993 and 1994 tax years of its then shareholders (including petitioners James E. and Mary Jo Blasius). In Lychuk v. Commissioner, supra at 376, we reported certain basic facts with respect to ACC:

It was formed to provide alternate financing for purchasers of used automobiles or light trucks (collectively, automobiles) who have marginal credit. Its sole business operation is (1) the acquisition of installment contracts from automobile dealers (dealers) who have sold automobiles to high credit risk individuals and (2) the servicing of those contracts. Its primary business activities are credit investigation, credit evaluation, documentation, and the monitoring of collections on installment contracts. * * *

We have no reason to believe that those reported facts have changed.

Moreover, the parties appear to agree that the loan origination/acquisition costs are essentially identical in nature to costs described in Lychuk v. Commissioner, supra at 377-381, as incurred by ACC in investigating and acquiring automobile dealer installment contracts with purchasers of automobiles. Briefly, the costs at issue were incurred by ACC employees in analyzing credit applications submitted by the dealers' customers, analyzing credit reports, verifying information provided by credit applicants (the credit analysis activities), and purchasing the approved installment contracts from the dealers. Those costs consisted of employee salaries and benefits deemed attributable to the foregoing activities.

Professional Fees

The professional fees at issue in the consolidated cases (professional fees) were payments, apparently to third parties, relating to the creation of a bank line of credit for ACC, which extended over 2 calendar years.

Chronology of Administrative and Judicial Developments Regarding the Capitalization Versus Expense Issues Conceded by Respondent in the Consolidated Cases
Cases and Public Pronouncements

On June 8, 1998, this Court issued its report in PNC Bancorp, Inc. v. Commissioner [Dec. 52,729], 110 T.C. 349 (1998), revd. [2000-1 USTC ¶ 50,483] 212 F.3d 822 (3d Cir. 2000), in which we held that a bank's costs associated with making loans extending beyond the years in which the costs were incurred, including salaries and benefits paid to employees, are not currently deductible under section 162(a) and must be capitalized under section 263(a).

On March 8, 1999, this Court issued its report in Norwest Corp. v. Commissioner [Dec. 53,277], 112 T.C. 89 (1999), affd. in part and revd. in part sub nom. Wells Fargo & Co. & Subs. v. Commissioner [2000-2 USTC ¶ 50,697] 224 F.3d 874 (8th Cir. 2000), in which we held that officer salaries and outside legal fees incurred in investigating a potential consolidation that was ultimately consummated are capital expenditures not currently deductible under section 162(a).

On March 21, 2000, the Internal Revenue Service (IRS) released a document entitled "2000 Priority Guidance Plan", in which it listed "loan origination costs" among the expenditures to be addressed in "[g]uidance on deduction and capitalization".

On May 19, 2000, ...

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