Sokol v. Comm'r of Internal Revenue

• Decision Date: 06 April 1989
• Docket Number: Docket No. 18288-84.
• Citation: 92 T.C. 760,92 T.C. No. 43
• Parties: RONALD M. AND NANCY I. SOKOL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

92 T.C. 760

92 T.C. No. 43

RONALD M. AND NANCY I. SOKOL, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18288-84.

United States Tax Court

Filed April 5, 1989.As Amended April 6, 1989.

Prior to filing his answer to the petition herein, R tried to concede the tax issue raised in the deficiency notice and in the petition. Ps refused to execute a stipulated decision document because R would not concede Ps' entitlement to litigation costs under sec. 7430, I.R.C. 1954. In his answer to the petition, R conceded the only tax issue raised in the deficiency notice and in the petition. No further action was taken by either party until the case was called from a trial calendar for trial, at which time the parties filed a stipulation that there was no deficiency in or overpayment of Ps' tax. Ps then filed their motion for litigation costs.

HELD: The ‘position of the United States in the civil proceeding‘ under sec. 7430(c)(2)(A)(i) [now sec. 7430(c)(4)(A)(i)], I.R.C. 1954, refers to R's position in regard to the underlying substantive tax issue(s) raised in the case rather than to R's refusal to stipulate to litigation costs under Rule 231(a), Tax Court Rules of practice and procedure.

HELD FURTHER: There is no per se rule that a taxpayer is automatically entitled to litigation costs whenever R concedes the case.

HELD FURTHER: On the facts of this case, R's position in this proceeding was not unreasonable. Ronald M. Sokol, pro se.

James E. Cannon, for the respondent.

PARKER, JUDGE:

This case is before the Court on petitioners' motion for litigation costs under section 7430. ¹ Specifically, the issue is whether respondent's position in this civil proceeding was unreasonable within the meaning of section 7430(c)(2)(A)(i) (now section 7430(c)(4)(A)(i)].

FINDINGS OF FACT ²

At the time the petition was filed, petitioners resided in St. Joseph, Missouri. Petitioner Ronald M. Sokol (Mr. Sokol) is an attorney, now employed by his professional corporation, Ronald M. Sokol, P.C. Ronald M. Sokol, p.C. was incorporated on November 5, 1981. In addition to petitioners' personal bank account and the corporate bank account, Mr. Sokol also had a Trust Account for his clients.

Respondent determined a deficiency in petitioners' Federal income tax for the taxable year 1981 in the amount of $419. Petitioners timely filed their petition in this Court. The deficiency in the statutory notice of deficiency arose out of a Form 1099-INT issued by the American Bank of St. Joseph, Missouri for the year 1981. The underlying tax issue in this case is whether that interest income is reportable by petitioners individually, by the Trust Account, or by the professional corporation. In their petition Mr. and Mrs. Sokol alleged that the deficiency was pursuant to an ‘erroneous 1099 report * * * which has been corrected as shown by the corrected 1099 reports attached hereto * * *. ³

Prior to preparing his answer to the petition, respondent's trial counsel contacted Mr. Sokol and offered to concede the case. Mr. Sokol thereupon sought reimbursement of this Court's $60 filing fee and refused to execute a stipulated decision document unless respondent's counsel stipulated under this Court's Rule 231(a) that petitioners were entitled to the $60 as litigation costs under section 7430. Respondent's answer to the petition was thereafter filed. Numbered paragraph 1 of that answer admitted that ‘the deficiency was pursuant to an erroneous 1099 report by the American Bank of St. Joseph, Missouri for the tax year 1981.‘

After respondent filed his answer conceding the deficiency, neither party took any further action until after the Court noticed the case for trial. At the calendar call of the trial session, the parties filed a stipulation that there is no deficiency in income tax due from, nor overpayment due to, petitioners for the taxable year 1981. Petitioners did not appear at the calendar call but mailed their motion for litigation costs under section 7430 to respondent's counsel for presentation to the Court on their behalf.

That motion seeks recovery of the $60 filing fee plus attorney's fees in the amount of $225 ($75 x 3 hours). ⁴ The attorney's fees of $225 do not represent the cost of preparing the petition in this case but, according to Mr. Sokol, represent time spent by him after the petition was filed in this case, specifically after respondent's counsel refused to stipulate under Rule 231(a) that petitioners are entitled to litigation costs under section 7430. ⁵ Apparently this was time spent drafting the present motion.

OPINION

Section 7430(a) authorizes an award of reasonable litigation costs to the prevailing party in a tax case. ⁶ In order to be the ‘prevailing party,‘ the taxpayer must establish, among other things, that ‘the position of the United States in the civil proceeding‘ was unreasonable or was not substantially justified. Sec. 7430(c)(2)(A)(i) [now sec. 7430(c)(4)(A)(i)]. ⁷ Thus, we must decide whether respondent's position ‘in the civil proceeding‘ was unreasonable. In deciding that issue we examine only the events occurring after the filing of the petition, i.e., only the Government's in-court litigating position. Rutana v. Commissioner, 88 T.C. 1329, 1332 (1987); Don Casey Co. v. Commissioner, 87 T.C. 847, 861-862 (1986); Wasie v. Commissioner, 86 T.C. 962, 967-968 (1986); Baker v. Commissioner, 83 T.C. 822, 827 (1984), affd. on this point 787 F.2d 637, 641-642 (D.C. Cir. 1986). The circuit courts are divided on this matter. ⁸ However, petitioners have not challenged the Tax Court's position that we look only at the Government's in- court litigating position. ⁹

Here the substantive tax issue raised in the deficiency notice and in the petition involved interest income for 1981, which a bank had reported on Forms 1099-INT, apparently erroneously showing that interest as income to petitioners. The narrow question was whether that interest income was reportable by petitioners individually, by Mr. Sokol's Trust Account for his clients, or by Mr. Sokol's professional corporation, which was incorporated in November of 1981.

Before preparing the answer to the petition, respondent's counsel tried to concede the case. He prepared a proposed stipulated decision document for petitioners' signature. Petitioners refused to sign the proposed stipulated decision document, because respondent's counsel would not concede that they were entitled to recover litigation costs under section 7430. In the answer, respondent's counsel conceded the only substantive tax issue raised in the deficiency notice and in the petition.

The filing of respondent's answer was the first formal action taken by respondent in this civil tax proceeding and respondent conceded the issue therein. Thus, it is difficult to see how ‘the position of the United States in the civil proceeding‘ could be deemed to be unreasonable. See and compare Harrison v. Commissioner, 854 F.2d 263 (7th Cir. 1988), affg. a Memorandum Opinion of this Court (concession some six months after answer filed, after respondent had an opportunity to verify information, held reasonable); Ashburn v. United States, 740 F.2d 843 (11th Cir. 1984) (eleven-month delay in conceding case not unreasonable); Wickert v. Commissioner, 842 F.2d 1005 (8th Cir. 1988), affg. a Memorandum Opinion of this Court (concession 10 days after filing of answer, although it took several months to draft the stipulation of settlement, held to be reasonable); White v. United States, 740 F.2d 836, 842 (11th Cir. 1984) (Government's concession of issue three months after issue raised was reasonable). ¹⁰

Nonetheless, petitioners argue that respondent's position ‘in the civil proceeding‘ was unreasonable because respondent refused to stipulate under the Court's Rule 231(a) that they are entitled to recover litigation costs under section 7430. We think that argument is an attempt to have the tail wag the dog.

Section 7430(c)(2)(B) [now section 7430(c)(4)(B)] provides that the determination as to whether a taxpayer is the ‘prevailing party‘ is to be made by the Court or by agreement of the parties. Rule 231(a) provides as follows:

(a) Time and Manner of Claim: (1) Agreed Cases: Where the parties have reached a settlement which disposes of all issues in the case including litigation costs, an award of reasonable litigation costs, if any, shall be included in the stipulated decision submitted by the parties for entry by the Court.

(2) Unagreed Cases: Where a party has substantially prevailed and wishes to claim reasonable litigation costs, and there is no agreement as to that party's entitlement to such costs, a claim shall be made by motion filed —

* * *

Nothing in section 7430 or in our Rule 231(a)(1) suggests that a refusal to stipulate to litigation costs serves to transform what would otherwise be a reasonable position in the civil proceeding into an unreasonable one. If anything, section 7430(c)(2)(B)(i) [now section 7430(c)(4)(B)(ii)] and the structure of our rules suggest otherwise. ¹¹ Agreed cases under Rule 231(a)(1) are cases in which the parties agree to everything, including litigation costs. On the other hand, Rule 231(a)(2) goes on to discuss ‘Unagreed Cases‘ where the party has substantially prevailed but ‘there is no agreement as to that party's entitlement to such costs. ‘ Rule 231(b) details the contents of a motion for an award of reasonable litigation costs. Rule 231(c) sets out the requirements for the stipulation of settlement ‘(other than litigation costs).‘ Section 231(d) describes the affidavit in support of claimed costs that is to accompany the motion. Rule 232 then provides various different procedures for the Court's disposition of claims for litigation costs. Accordingly, we hold that respondent's refusal to stipulate to recovery of litigation costs under Rule 231(a)(1), standing alone, does not entitle a taxpayer to such costs. ¹²

Petitioners are essentially arguing for a per...