Gantner v. Comm'r of Internal Revenue

• Decision Date: 30 January 1989
• Docket Number: Docket No. 2222-86.
• Citation: 92 T.C. 192,92 T.C. No. 11
• Parties: DAVID E. AND SANDRA L. GANTNER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

92 T.C. 192

92 T.C. No. 11

DAVID E. AND SANDRA L. GANTNER, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2222-86.

United States Tax Court

Filed January 30, 1989.

In an earlier proceeding in this Court, Ps prevailed on one significant issue. HELD: Ps are not entitled to litigation costs. R's position does not include any administrative action prior to the involvement of District Counsel, and the Eighth Circuit's opinions in Wickert v. Commissioner, 842 F.2d 1005 (8th Cir. 1988), and Berks v. United States, 860 F.2d 841 (8th Cir. 1988), do not mandate a different conclusion. The positions taken by R subsequent to District Counsel's involvement are substantially justified, in that they were supported by a rational construction of the applicable statutory provision. Mark Arth, for the petitioners.

Genelle Forsberg, for the respondent.

OPINION

WELLS, JUDGE:

This matter is before us on petitioners motion for litigation costs pursuant to Rule 231 and section 7430. ¹ On September 29, 1988, we issued our Opinion in Gantner v. Commissioner, 91 T.C. 713, in which we held for petitioners on one issue (the applicability of section 1091 to stock options), and for respondent in substantial or total part on the other issues. The issues before us in that opinion involved various deductions in the total amount of $61,198.74, investment credits in the total amount of $2,164.48, and the appropriateness of increased interest under section 6621 with respect to commodities straddles deductions previously conceded by petitioners. We held for petitioners on the stock option issue, allowing them a deduction in the amount of $38,909.70 for 1980. Of the other approximately $22,000 of disputed deductions, we held that petitioners were entitled to only a small portion of these deductions ($900 - $1,000 by our rough calculation). We disallowed over 90 percent of the amount of investment credits in issue, and we held against petitioners on the question of the increased rate of interest.

Respondent opposes petitioners' motion on the grounds that (1) petitioners have not proved that respondent's position in the litigation was not substantially justified, and (2) petitioners' claimed costs are not reasonable. Section 7430 authorizes us to award reasonable litigation costs to a prevailing party in a proceeding in this Court if certain conditions are met. A taxpayer may be awarded litigation costs for a proceeding commenced after December 31, 1985 (such as the instant case, wherein the petition was filed in January 1986), if (1) the taxpayer ‘has substantially prevailed‘ with respect to either the amount in controversy or the most significant issue(s) presented, and (2) the position of the Commissioner was ‘not substantially justified.‘ Sec. 7430(c)(2)(A)(i) and (ii); Egan v. Commissioner, 91 T.C. 704, 711 (1988). In that we conclude that respondent's position was substantially justified, however, we need not decide whether petitioners are the prevailing parties.

Section 7430(c)(4) defines ‘the position of the United States,‘ i.e., respondent's position in proceedings in this Court, to include ‘(A) the position taken by the United States in the civil proceeding, and (B) any administrative action or inaction BY THE DISTRICT COUNSEL of the Internal Revenue Service (and all subsequent administration action or inaction) upon which such proceeding is based.‘ (Emphasis supplied.) Section 7430(c)(4) was added to the Code in 1986 and applies to any amounts paid after September 30, 1986, in proceedings commenced after December 31, 1985. Pub. L. 99-514, sec. 1551(e), 100 Stat. 2753. It thus applies herein.

In Sher v. Commissioner, 89 T.C. 79, 86 (1987), affd. 861 F.2d 131 (5th Cir. 1988), we interpreted newly enacted section 7430(c)(4) to provide that respondent's position includes only those actions or inactions occurring at or after the point at which District Counsel becomes involved in the proceedings. We came to the same conclusion in Weiss v. Commissioner, 89 T.C. 779 (1987). On appeal, however, the Second Circuit disagreed with our conclusion in Weiss and held that the focus for determining respondent's position should be ‘on the Commissioner's final position as set forth in the statutory notice of deficiency.‘ Weiss v. Commissioner, 850 F.2d 111, 115 (2d Cir. 1988). We subsequently reconsidered our reading of section 7430(c)(4) in Egan v. Commissioner, supra, and held in a Court reviewed opinion that we would continue to follow Sher, and not follow the Second Circuit's conclusion in Weiss, except in cases appealable to the Second Circuit. See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 745 F.2d 985 (10th Cir. 1971).

In spite of Egan, however, petitioners argue that in the Eighth Circuit, to which appeal of the instant case lies, the position of the United States includes not only ‘the post-petition conduct but also * * * the pre-litigation conduct and the administrative action of the agency.‘ Petitioners base their argument on their reading of Wickert v. Commissioner, 842 F.2d 1005, 1008 (8th Cir. 1988), affg. a Memorandum Opinion of this Court. In short, petitioners assert that the Eighth Circuit's opinion in Wickert holds that courts must review the actions of the Internal Revenue Service both before and after the filing of their petition to decide whether respondent took a position that was not substantially justified, and that we are bound to follow Wickert because of the rule in Golsen.

We do not agree with petitioners' reading of Wickert. In that the petition in Wickert was filed before 1986, section 7430(c)(4) did not apply in that proceeding. The Eighth Circuit looked to section 7430(c)(4), but only to buttress its conclusion that for actions commenced before 1986, the position of the United States encompassed only the government's in-court litigating position. 842 F.2d at 1008. Specifically, the Eighth Circuit stated (842 F.2d at 1008),

By providing in the new statute that the ‘position of the United States‘ includes the government's administrative action or inaction as well as its in-court litigating position, Congress has made it clear that the pre-amendment [pre-section 7430(c)(4)] phrase at issue does not include administrative action or inaction. Moreover, these amendments were prospective only. We doubt that Congress would have made the amendments prospective only if it was merely clarifying, rather than modifying, existing law. See McDonald v. Commissioner of Internal Revenue, 764 F.2d 322, 340 (5th Cir. 1985).

In a more recent case also dealing with a petition filed prior to 1986 (i.e., before section 7430(c)(4) was in effect), the Eighth Circuit similarly stated in a footnote that ‘[section 7430(c)(4)] requires the court to consider the reasonableness of the government's position at the administrative stage.‘ Berks v. United States, 860 F.2d 841, 843 n.3 (8th Cir. 1988). Insofar as we can ascertain, however, the Eighth Circuit has not yet decided a case where the interpretation of ‘position‘ under section 7430(c)(4) was squarely before the court, i.e., a case involving a petition filed after 1985.

We do not read the Eighth Circuit's comments in Berks and Wickert to require our review of respondent's activities prior to District Counsel's involvement. We reach that conclusion because we read the comments of the Eighth Circuit to distinguish merely between ‘administrative action or inaction‘ and ‘in-court litigating position.‘ We think our interpretation of section 7430(c)(4) in Sher and Egan harmonizes with the Eighth Circuit's comments in that our interpretation would include within the purview of respondent's ‘position‘ certain administrative action or inaction, specifically, ‘any administrative action or non- action by the District Counsel‘ taken before the part of the proceeding which occurs in court. Under our interpretation of section 7430(c)(4), any proceeding could contain two phases of respondent's ‘administrative action‘ — actions prior to the initial involvement of District Counsel, which are not part of respondent's position (as defined by section 7430(c)(4)) and actions subsequent to District Counsel's initial involvement, which are part of respondent's position. The comments of the Eighth Circuit do not address whether that Court will consider only administrative action after District Counsel's involvement to be a part of respondent's position, or whether the Court might consider respondent's position also to include administrative action prior to District Counsel's involvement. We therefore conclude that the Eighth Circuit's stance on this issue is not contrary to our opinions in Sher and Egan.

As in Wickert, our conclusion is buttressed by subsequent legislative activity. The recently enacted Technical and Miscellaneous Revenue Act of 1988 (‘TAMRA‘), Pub. L. 100-647, 102 Stat. 3342, inter alia, amended section 7430. The provisions of former section 7430(c)(4) were modified and redesignated as section 7430(c)(7), which now provides that in proceedings commenced after November 10, 1988, the ‘position of the United States‘ is to include positions taken as of the earlier of (1) the date of a taxpayer's receipt of the decision from respondent's Appeals Office, or (2) the date of the notice of deficiency. Pub. L. 100-647, sec. 6239, 102 Stat. 3743. In discussing the amendment of section 7430, the TAMRA Conference Report noted the then-existing law (i.e., the law as applicable in the instant case) to be as follows:

POSITION OF THE UNITED STATES. — In determining whether the position of th United States was substantially justified, the position of the United States is determined beginning with the position in the civil proceeding, or, if applicable, the POSITION TAKEN BY THE IRS DISTRICT COUNSEL ADMINISTRATIVELY. THIS GENERALLY DOES NOT INCLUDE POSITIONS TAKEN IN THE AUDIT OR APPEALS PROCESSES. [Emphasis supplied.]

H. Rept. 100-1104 (Conf.) 225 (1988). Thus, while alone...