ESTATE OF MERCHANT III v. Commissioner, Docket No. 34124-85.
| Decision Date | 26 March 1990 |
| Docket Number | Docket No. 34124-85. |
| Citation | 1990 TC Memo 160,59 TCM (CCH) 222 |
| Parties | Estate of William Davidson Merchant III, Deceased, Margaret Norling Merchant, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
John M. Youngquist, 650 California St., San Francisco, Calif., for the petitioner. Stephen R. Asmussen, for the respondent.
Memorandum Findings of Fact and Opinion
This matter is before us at this time on a motion by petitioner1 for litigation costs pursuant to Rule 231 and section 7430.2 Respondent agrees that under section 7430(c)(2)(A)(ii) (now section 7430(c)(4)(A)(ii)) petitioner has substantially prevailed with respect to the issues and the amounts involved in this proceeding. Respondent also agrees that petitioner exhausted all administrative remedies available to him within the Internal Revenue Service. Therefore, the only issues remaining are: (1) whether petitioner has established under section 7430(c)(2)(A)(i)(now section 7430(c)(4)(A)(i)) that the position of respondent in this proceeding was unreasonable; and (2) if so, the amount of litigation costs to which petitioner is entitled.
In a notice of deficiency dated June 6, 1985, respondent determined deficiencies in and additions to petitioner's income tax as follows:
Additions to Tax
-------------------
Section Section
Year Deficiency 6653(b) 6654
1980 .................... $113,491 $56,746 $ 7,107
1981 .................... 151,340 75,670 11,653
On November 14, 1980, petitioner was convicted in a state court on two counts of brandishing firearms in violation of Cal. Penal Code section 417 (West 1988). As found by the Court of Appeals for the Ninth Circuit in a subsequent proceeding, United States v. Merchant, 760 F.2d 963 (9th Cir. 1985), the state court sentenced petitioner to (1) a three-year prison term which was suspended; (2) a three-year term of probation effective immediately; and (3) a six-month jail term, as a condition of probation.3 As further conditions of probation, the trial court required petitioner to not possess any firearms and to consent to the search of "his person, residence or vehicle *** at any time of day or night by a peace officer with or without a warrant." When petitioner and his counsel protested the sentence as being unduly harsh and stated an intention to appeal, the trial court stayed the sentence pending the outcome of the appeal.
On February 11, 1981, the assistant district attorney that prosecuted the case moved for a clarification or modification of the trial court's stay. At a hearing on February 27, 1981, the sentencing judge granted the prosecutor's motion, and ordered that "defendant will be reinstated on the terms of probation." Petitioner was not present at this hearing but his counsel was present and no objection was made to the motion.
Early on March 3, 1981, the assistant district attorney and nine state law enforcement officers appeared at petitioner's home and, without his consent and despite his insistence that he was not on probation, conducted what was purported to be a probation search with the expectation of locating weapons because the assistant district attorney had received reports of gunfire on the property. The officers continued the search even after being informed by telephone by petitioner's counsel that petitioner had not received notice of the order of February 27, 1981.
The search ultimately revealed more than 80 firearms, laboratory equipment and chemical supplies used in the manufacture of phencyclidine ("PCP"), over $300,000 in cash, and financial records indicating an illegal business activity. With at least part of the results of the "probation search," the state officers later in the same day obtained by telephone a search warrant for petitioner's residence. The state officers also notified special agents of respondent's Criminal Investigation Division ("CID") of the results of their search. The CID agents subjected petitioner to a lengthy interview on the evening of March 3 at the Santa Cruz county jail where he had been incarcerated by the state officers. On March 4 and March 5 the CID agents were present at petitioner's home while the state officers continued their search. While there, the CID agents reviewed documents seized by the state officers. The searching of petitioner's home which took place subsequent to the warrantless "probation search" was conducted pursuant to the search warrant obtained with the fruits of the initial search.
With the evidence obtained in the above search, petitioner was subsequently indicted in the United States District Court for the Northern District of California for manufacturing PCP and related charges in violation of 21 U.S.C. section 841(a), (b), and (d)(1982). In the District Court petitioner moved to suppress the evidence seized in the search of his home. After an evidentiary hearing, the District Court denied petitioner's motion finding that petitioner was on probation at the time of the initial search and, in the alternative, that the state officers' reasonable good faith belief that petitioner was on probation precluded application of the exclusionary rule under the good faith exception to the rule as established by the Supreme Court in United States v. Leon, 468 U.S. 897 (1984).
On appeal, the Court of Appeals found that petitioner was not on probation at the time the search was initiated because the stay which was granted by the state court applied to both the jail sentence and the probation, and the reinstatement order of the state court on February 27, 1981, was a nullity because of the absence of notice to petitioner. United States v. Merchant, 760 F.2d 963 (9th Cir. 1985). Therefore, the Court of Appeals concluded that the initial search of petitioner's home was not a probation search and consequently the evidence seized in the search was suppressible. It was also concluded that the state officers could not have had a reasonable good faith objective belief in the validity of the search, and consequently the good faith exception to the exclusionary rule was not applicable. Since the search warrant obtained by the state officers by telephone was premised upon the fruits of the improper probation search, the evidence seized pursuant to the search warrant was also suppressible. A petition by the government for a writ of certiorari with respect to the decision of the Court of Appeals was initially granted by the Supreme Court but the writ was subsequently dismissed on March 24, 1987. United States v. Merchant, 480 U.S. 615 (1987).
The decision of the Court of Appeals was filed on May 14, 1985. On June 6, 1985, respondent's notice of deficiency was mailed to petitioner. On March 12, 1986, respondent made a jeopardy assessment under section 6861 against petitioner of the deficiencies determined in the notice of deficiency and thereafter seized the cash discovered in the search.
The evidence obtained by the state officers in their search of petitioner's residence on March 3-5, 1981, was the basis of respondent's notice of deficiency and jeopardy assessment.
After timely filing a petition in this Court, petitioner filed an action under section 7429 for a review of the jeopardy assessment in the United States District Court for the Northern District of California and moved to suppress the use of the evidence seized by the state officers in the search of petitioner's home. In an unpublished Memorandum Decision and Order dated June 12, 1987, the District Court granted the motion to suppress and on July 24, 1987, ordered respondent to abate the jeopardy assessment and to refund the money collected thereunder.
On August 13, 1987, petitioner died and his mother, Margaret Norling Merchant, was appointed administrator of his estate. By letter dated November 24, 1987, petitioner's counsel was advised by respondent's District Counsel that respondent's position in the case before this Court would be fully defended because in the District Counsel's opinion petitioner's Fourth Amendment rights did not survive petitioner's death and his administrator had no standing to object to the introduction of the disputed evidence in this case. However, after a series of discussions with members of his national office, the District Counsel decided that the case should be conceded and on April 11, 1988, a stipulated decision that there were no deficiencies or additions to tax due from petitioner was entered. On December 19, 1988, the motion for litigation costs was filed.
OpinionIn a proceeding before this Court to determine the amount of a tax or addition to tax, we are authorized to award to any prevailing party other than the United States or a creditor of the taxpayer a judgment for the reasonable litigation costs incurred by such prevailing party. Sec. 7430.4 Since respondent agrees that petitioner exhausted the administrative remedies available to him in the Internal Revenue Service and has prevailed in this proceeding with respect to the amounts in controversy and the issues presented, the principal issue remaining is whether the position of respondent in the proceeding was unreasonable. Petitioner bears the burden of proof on this issue. Rule 232(e); sec. 7430(c)(2)(A).
In determining the reasonableness of respondent's position in cases of this nature which are filed in this Court we have concluded that the words "in the civil proceeding" as used in section 7430(a) limit "the position of the United States" to the government's conduct after the initiation of litigation by the taxpayer. See Baker v. Commissioner Dec. 41,636, 83 T.C. 822 (1984). Although reversing on other grounds, the District of Columbia Circuit approved our interpretation of section 7430. See Baker v. Commissioner 86-1 USTC ¶ 9311, 787 F.2d 637, 641 and n.8 (D.C. Cir. 1986). In addition to the District of...
To continue reading
Request your trial