Comtec Systems, Inc. v. Commissioner, Docket No. 24015-91.
| Court | United States Tax Court |
| Writing for the Court | Colvin |
| Citation | 70 T.C.M. 52 |
| Parties | Comtec Systems, Inc. v. Commissioner. |
| Docket Number | Docket No. 24015-91. |
| Decision Date | 13 July 1995 |
v.
Commissioner.
Magda Abdo-Gomez, Miami, Fla., for the petitioner. Avarian R. McKendric and Ellen T. Friberg, for the respondent.
COLVIN, Judge:
This matter is before the Court on petitioner's motion for litigation costs under section 7430 and Rule 231.
To prevail, petitioner must show that respondent's position in the underlying litigation was not substantially justified. We conclude that petitioner has not made this showing. Thus, petitioner's motion will be denied.
The parties have submitted affidavits and memoranda supporting their positions. We decide the motion based on petitioner's motion, respondent's objection, and affidavits provided by the parties. There are no significant conflicts of fact presented by the affidavits. Neither party requested a hearing, and we conclude that a hearing is not necessary to properly decide this motion. Rule 232(a)(3).
Section references are to the Internal Revenue Code in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
1. Petitioner and the Underlying Tax Case
Petitioner is a closely held corporation, the principal place of business of which was in Florida when it filed its petition.
The primary issue in the underlying case, Comtec Systems, Inc. v. Commissioner, T.C. Memo. 1995-4, filed January 9, 1995, was whether petitioner could deduct as reasonable compensation amounts it paid to Vernon and Reda Beard and petitioner's directors in fiscal year 1988. Petitioner deducted as compensation for that year $683,368 for Vernon Beard, $56,881 for Reda Beard, and $7,500 for the directors. Respondent determined that the amounts of compensation petitioner paid to Vernon and Reda Beard and the directors were not reasonable. Both parties called expert witnesses to testify. In the notice of deficiency, respondent determined that petitioner could deduct $243,368 for Vernon Beard, $26,881 for Reda Beard, and $3,500 for the directors. We held for petitioner with respect to compensation paid to Vernon and Reda Beard, and for respondent with respect to compensation paid to the directors.
1. Motion for Litigation Costs: Introduction
Generally, a taxpayer who has substantially prevailed in a Tax Court proceeding may be awarded reasonable litigation costs. Sec. 7430(a). To be entitled to an award, the taxpayer must:
(a) Exhaust administrative remedies. Sec. 7430(b)(1). Respondent concedes that petitioner meets this requirement.
(b) Substantially prevail with respect to the amount in controversy. Sec. 7430(c)(4)(A)(ii)(I). Respondent concedes that petitioner meets this requirement.
(c) Show that the position of the United States in the action was not substantially justified.
Sec. 7430(c)(4)(A)(i). Respondent contends and we hold that petitioner does not meet this requirement.
(d) Be an individual whose net worth did not exceed $2,000,000, or an owner of an unincorporated business, or any partnership, corporation, etc., the net worth of which did not exceed $7,000,000, when the petition was filed. Sec. 7430(c)(4)(A)(iii); 28 U.S.C. sec. 2412(d)(2)(B) (1988). Respondent contends that petitioner does not meet this requirement. We need not decide this issue because of our conclusion that respondent's position was substantially justified.
(e) Establish that the amount of costs and attorney's fees claimed by petitioner is reasonable. Sec. 7430(a), (c)(1). Respondent contends that petitioner does not meet this requirement. We need not decide this issue because of our conclusion that respondent's position was substantially justified.
A taxpayer must meet each requirement before the Court may order an award of litigation costs under section 7430. Minihan v. Commissioner, 88 T.C. 492, 497 (1987). The taxpayer has the burden of proving that it meets each requirement. Rule 232(e); Estate of Johnson v. Commissioner [93-1 USTC ¶ 50,251], 985 F.2d 1315, 1318 (5th Cir. 1993); Gantner v. Commissioner [Dec. 45,452], 92 T.C. 192, 197 (1989), affd. [90-2 USTC ¶ 50,335] 905 F.2d 241 (8th Cir. 1990).
2. Whether Respondent's Position Was Substantially Justified
A taxpayer must establish that the position of the United States in the litigation was not substantially justified to be entitled to an award for litigation costs. Sec. 7430(c)(4)(A)(i). The substantially justified standard is a reasonableness standard. Pierce v. Underwood, 487 U.S. 552, 563-565 (1988). The "position of the United States" for purposes of litigation costs means the position taken by the United States in a judicial proceeding. Sec. 7430(c)(7)(A). Respondent took a position in this proceeding on the date the answer was filed. Han v. Commissioner [Dec. 49,238(M)], T.C. Memo. 1993-386.
The Equal Access to Justice Act's substantially justified standard requires that the Government's position be justified to a degree that would satisfy a reasonable person. Pierce v. Underwood, supra at 565. That interpretation also applies to motions for litigation costs under section 7430. Comer Family Equity Pure Trust v. Commissioner [92-1 USTC ¶ 50,132], 958 F.2d 136,...
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