Pan Pacific Trading Corporation v. Commissioner
| Decision Date | 14 March 1994 |
| Docket Number | Docket No. 23729-91. |
| Citation | 67 T.C.M. 2374 |
| Parties | Pan Pacific Trading Corporation v. Commissioner. |
| Court | U.S. Tax Court |
William P. Shannahan, 7855 Ivanhoe Ave., La Jolla, Calif., and Charles H. Dick Jr., for the petitioner. June Y. Bass, for the respondent.
This case was assigned to Special Trial Judge Robert N. Armen, Jr., pursuant to the provisions of section 7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and Rules 180, 181, and 183.1 The Court agrees with and adopts the Opinion of the Special Trial Judge, which is set forth below.
ARMEN, Special Trial Judge: This case is before the Court on petitioner's Motion for Award of Reasonable Litigation and Administrative Costs filed pursuant to section 7430 and Rule 231.
The substantive issues in this case were conceded by respondent before trial. The only issue remaining for decision is whether petitioner is entitled to an award of administrative and litigation costs. In order to resolve this issue we must decide whether respondent's position was substantially justified. If respondent's position was not substantially justified, then we must also decide: (1) Whether, in view of section 7430(e), petitioner substantially prevailed; (2) whether petitioner unreasonably protracted the proceedings in this case; (3) whether petitioner satisfied the applicable net worth requirements; and (4) whether the amount of costs claimed is reasonable.2
In accordance with Rule 232, the parties have submitted affidavits, declarations, and memoranda supporting their positions. Neither party requested an evidentiary hearing. We decide the matter before us based on petitioner's motion, respondent's objection to petitioner's motion, petitioner's response to respondent's objection, and the affidavits, declarations, and exhibits provided by the parties. See Rule 232(a)(3).
Petitioner is a California corporation whose principal office was located in San Diego, California, at the time its petition was filed with the Court.
During the period of time relevant to this case, petitioner had only two shareholders, namely, Tize-Shun Tan, who owned 97 percent of petitioner's stock, and Richard Tan, his son, who owned the remaining 3 percent.
After conducting an examination (the examination) to determine the tax liabilities of petitioner and the Tans, respondent issued four notices of deficiency. Two notices were sent to petitioner, the third notice was sent to Tize-Shun Tan, and the fourth notice was sent to Richard Tan.3
By notice dated July 18, 1991, respondent determined deficiencies in, and additions to, petitioner's Federal withholding taxes for the taxable years ended December 31, 1986 and December 31, 1987, as follows:
Additions to Tax
------------------------------------------------------------------------
Year Deficiency Sec. 6651(a)(1) Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B) Sec. 6656(a)
1986 $7,797 $ 1,949 $ 390 1 $780
1987 1,268,389 317,097 63,419 2 126,839
1 50 percent of the interest due on $7,797
2 50 percent of the interest due on $1,268,389
Petitioner disputes this determination and petitioned this Court.
By a second notice dated July 18, 1991, respondent determined deficiencies in petitioner's Federal income taxes for its taxable year ended October 31, 1987, and its short year ended December 31, 1987, in the aggregate amount of $1,022,307, exclusive of additions to tax. Petitioner does not dispute the income tax determination to this Court.
Both the withholding tax determination and the income tax determination related to alleged commission payments claimed by petitioner as deductible expenses on its relevant income tax returns. Thus, respondent's determination of the deficiencies in income taxes resulted from respondent's disallowance, for lack of substantiation, of the deductions for commission expense claimed by petitioner under section 162.4 The deficiencies in withholding tax resulted from respondent's alternative determination that the payments claimed as commission expense would, if substantiated, constitute "items of income" subject to the withholding tax provisions set forth in sections 1441, 1442, and 1461. Essentially, those sections require that a specified percentage5 of each payment made to nonresident aliens or to foreign corporations or foreign partnerships be withheld by the payor as tax.
Both before the notice of deficiency in this case was issued and in its petition to this Court, petitioner asserted that the commissions in question were not subject to withholding under sections 1441, 1442, and 1462 because the commissions were paid to nonresident alien individuals, foreign partnerships, or foreign corporations for services rendered outside the United States.6 Petitioner subsequently asserted that the commissions were not subject to withholding because if the commissions were paid to petitioner's majority shareholder, as respondent now maintains, Tize-Shun Tan's U.S. citizenship would insulate petitioner from application of the withholding requirements.7
On October 16, 1992, a notice of deficiency was issued to Tize-Shun Tan (Mr. Tan). The notice determined deficiencies in Mr. Tan's joint income tax for the calendar years 1987 and 1988. The deficiencies reflected respondent's alternative determination that the payments claimed by petitioner as deductible commissions were actually constructive dividends to Mr. Tan, and therefore taxable to him, if he were subject to direct taxation by the United States.8 Mr. Tan was, in fact, a U.S. citizen, having been naturalized sometime in 1983 or 1984.
Despite Mr. Tan's U.S. citizenship, an international tax plan prepared for petitioner by Price Waterhouse in November 1987, was predicated upon Mr. Tan's being a Taiwanese national. Additionally, the international examiner (the examiner) who assisted in the investigation of petitioner's foreign transactions received conflicting reports about Mr. Tan's citizenship status from those individuals whom he interviewed.
Mr. Tan appealed from the October 16, 1992, notice of deficiency and filed a petition with this Court on January 11, 1993. The petition alleged that Mr. Tan was a citizen of the United States. In her answer, filed on March 12, 1993, the respondent denied this allegation for lack of information sufficient to justify a belief.
As previously indicated, petitioner did not petition the Court for a redetermination of its income tax liability, but did petition the Court for a redetermination of its withholding tax liability. Two years after filing its petition, and immediately following a telephone conference with a Judge of this Court on April 23, 1993, petitioner provided respondent with Mr. Tan's immigration number and date of birth. Based on this information, respondent was able to confirm, by contacting the Immigration and Naturalization Service of the Department of Justice (INS), that Mr. Tan was in fact a U.S. citizen during the relevant period of time.9 Immediately thereafter, on April 28, 1993, respondent conceded that no withholding tax or additions to tax were due from petitioner for either of the 2 taxable years in issue.
Section 7430(a) provides that the prevailing party may be awarded a judgment for (1) reasonable administrative costs incurred in connection with an administrative proceeding with the Internal Revenue Service, and (2) reasonable litigation costs incurred in connection with a court proceeding. Congress enacted section 7430 in 1982, Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 292(a), 96 Stat. 572, and amended it most recently by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec. 6239(a), 102 Stat. 3342, 3743-3746, applicable to proceedings commenced after November 10, 1988. Because both the administrative proceeding and the court proceeding in this case commenced after November 10, 1988, we apply section 7430 as amended by TAMRA.
A judgment may only be awarded under section 7430(a) if a taxpayer: (1) Was the "prevailing party"; (2) exhausted the administrative remedies available to the taxpayer within the Internal Revenue Service; and (3) did not unreasonably protract the proceedings. Sec. 7430(a), (b)(1), (4). We understand respondent to concede that petitioner exhausted its administrative remedies.
In order to qualify as the "prevailing party", a taxpayer must establish that: (1) The position of the United States in the proceeding was not substantially justified; (2) the taxpayer has substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues presented; and (3) the taxpayer satisfies the applicable net worth requirements. Sec. 7430(c)(4)(A).
Finally, if a taxpayer qualifies as the prevailing party, only administrative and litigation costs which are reasonable in amount and reasonably incurred may be awarded. Sec. 7430(a), (c)(1) and (2).
We begin with whether respondent's position was substantially justified. Petitioner bears the burden of proving that respondent's position was not substantially justified. Rule 232(e); Dixson Corp. v. Commissioner [Dec. 46,582], 94 T.C. 708, 714-715 (1990); 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).
As originally enacted, section 7430 required that a taxpayer establish that the position of the United States was unreasonable. In 1986, Congress adopted the standard applicable to the Equal Access to Justice Act (EAJA), 28 U.S.C. sec. 2412 (1988), by changing "unreasonable" to "not substantially justified". Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551, 100 Stat. 2752; see H. Conf. Rept. 99-841, at II-801 (1986), 1986...
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