Tinsley v. Commissioner
| Decision Date | 31 March 1992 |
| Docket Number | Docket No. 28722-88. |
| Parties | Thomas V. Tinsley, Jr. and Katherine S. Tinsley v. Commissioner. |
| Court | U.S. Tax Court |
Thomas W. Ostrander, 1500 One Franklin Plaza, Philadelphia, Pa., for the petitioners. Michael D. Baker, Kenneth J. Rubin, and Ruth M. Spadaro, for the respondent.
This matter is before the Court on Petitioners' Motion for Award of Reasonable Litigation Costs under section 7430 and Rule 231.
The case was settled without trial. The basis of settlement was submitted at the calendar call for the case.
The issues for decision are:
(1) Whether we will consider respondent's position before the petition was filed on November 2, 1988, in deciding if respondent's litigation position was reasonable, or allow litigation expenses before that date. We hold that we will not.
(2) Whether respondent's position relating to substantiation provided by petitioners was substantially justified. We hold that it was not.
(3) Whether petitioners exhausted all administrative remedies. We hold that they did.
(4) Whether petitioners' costs in connection with this motion for litigation costs are covered. We hold that they are.
(5) Whether petitioners have shown the presence of a special factor which justifies raising the $75 limit on the hourly rate. We hold that a special factor has not been shown.
(6) Whether the $75 hourly limit will be increased because of an increase in the cost of living and if so, from which date the $75 hourly rate is indexed. We hold that it is indexed from October 1, 1981. Bayer v. Commissioner [Dec. 48,051], 98 T.C. 19 (1992).
(7) What amount, if any, of petitioners' litigation costs is allowable. We hold that it is $17,271.61.
In accordance with Rule 232, the parties have submitted affidavits and memoranda supporting their positions. We decide the motion based on petitioners' motion, respondent's objection, and affidavits and exhibits thereto provided by both parties.
There are no significant conflicts of fact presented by the affidavits of each party. Neither party requested a hearing, and we conclude that a hearing is not necessary for the proper consideration and disposition of this motion. Rule 232(a)(3).
References to petitioner in the singular are to Thomas V. Tinsley, Jr. All section references are to the Internal Revenue Code as amended and in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioners were husband and wife residing in Mountain Top, Pennsylvania, when they filed their petition in this case. Petitioner Thomas V. Tinsley, Jr., has been a certified public accountant since 1970. The tax years at issue are 1977, 1978, and 1979.
The examining agent was originally Mr. Al Rava. Agent Rava conducted an examination of petitioners' records from approximately December 1983 to January 1986. The examination was conducted in petitioner's office in Wilkes-Barre, Pennsylvania.
Petitioner provided Agent Rava with the hundreds of documents he requested. Petitioners provided Agent Rava with an immense number of business and accounting records and supporting documents, such as (but not limited to) leases, bills, ledgers, trial balances, journal entries, client service data, ledger cards, cash disbursement sheets, tax forms and records, receipts for expenses, bank statements, canceled checks, depreciation records, petty cash records, day books, and other records.
Sometime before January 31, 1986, respondent notified petitioner that Agent Rava had retired and that Internal Revenue Service agent, Mr. Clemence Scott, had taken over the case. Agent Scott issued a report captioned "Income Tax Examination Years 1977, 1978, and 1979", dated January 31, 1986.
Agent Scott had earlier audited petitioners' returns for 1973, 1974, and 1975, and transmitted the case to the Criminal Investigation Division. The IRS referred the case to the Department of Justice, which declined to prosecute petitioner.
On February 10, 1986, petitioner wrote to Agent Scott and told him that the information previously examined by Agent Rava was available at petitioner's office for his review. Petitioner enclosed with his letter 29 pages of documentation concerning adjustments set forth in Agent Scott's report. This information had been previously provided to Agent Rava.
By letter dated November 6, 1986, the Internal Revenue Service sent petitioners a Form 4549-A, Income Tax Examination Changes, dated September 30, 1986. This form covered the years 1977, 1978, and 1979, the same years covered by the audit.
Petitioners filed a protest on March 9, 1987, contesting all adjustments made by the Form 4549-A.
On April 15, 1987, the Internal Revenue Service issued a "Revised Report, Form 4549-A Income Tax Examination Changes". It was provided to petitioner and his counsel at the first Appeals conference held on July 2, 1987.
Ms. Margaret Crouse was the Appeals officer in this case, and Mr. Thomas W. Ostrander represented petitioners. The Appeals conference was held July 2, 1987. Petitioners submitted documents in support of their protest to the Appeals Division, including copies of all documents previously provided during petitioners' audit.
Petitioners provided additional documents to clarify certain expenses and their treatment of income when requested by the Appeals officer.
On June 30, 1988, the Appeals officer sent a letter to petitioners stating a basis on which the case could be settled. Petitioners did not respond to it because they believed it was an "all-or-nothing" offer, and items which they thought they were clearly entitled to deduct were not allowed.
Respondent issued the notice of deficiency on August 9, 1988. It included the following adjustments:
Year Adjustment Amount
1977 Rent deduction ................... $ 11,194
outside services ................. 4,200
1978 Gross receipts ................... 79,061
1979 Gross receipts (Schedule C) ...... (22,477)
Legal and professional services .. 1,156
Tinsley & Co. partnership
(Schedule E) ................... 26,777
3. Petition and Answer
Petitioners filed the petition on November 2, 1988, and respondent filed the answer on December 23, 1988. The answer made general denials of all claims made by petitioners. The answer did not make any concessions in response to substantiation that had been provided by petitioners.
On August 14, 1989, counsel for both parties met for the first time to discuss this case. At that meeting, respondent's counsel conceded the $79,061 gross receipts issue for 1978. Respondent's counsel also asked for additional information about petitioners' Schedule C rental expenses for 1977. Petitioners had previously provided this information to the Appeals officer in July and October 1987.
On August 23, 1989, respondent's counsel wrote petitioners' counsel to ask for further information to substantiate the 1977 rental expenses.
On August 23, 1989, petitioners' counsel sent respondent's counsel documentation concerning the Pressed Steel Co. payment to petitioner and certain interest deductions. He included a copy of the Form 1099-NEC issued by the Pressed Steel Co., a division of the Eastern Pennsylvania Corp., to petitioner for $4,300.
On September 7, 1989, petitioners' counsel wrote respondent's counsel concerning the rent issue. He stated, as he previously did to the Appeals officer, that errors were made in postings to the loan receivables account, and the adjustment of these amounts was made by adjusting journal entry #2 to reflect the amounts paid to TPD Realty.
The case was set for trial in Philadelphia at a trial session of this Court beginning October 30, 1989. On that date the parties agreed to a settlement and the case was not tried.
The basis of settlement differed from the offer made by the Appeals officer on June 30, 1988, as indicated below:
Item Appeals Offer Answer Stipulation
1977 rent deduction disallow $11,194 disallow $11,194 disallow $275
1977 outside services disallow $4,200 disallow $4,200 no change to
tax return
1977 firm relations disallow $8,067 disallow $10,084 disallow $7,591
1977 travel disallow $3,805 disallow $4,240 disallow $3,805
1977 office disallow $3,624 disallow $3,924 disallow $2,799
1977 auto disallow $1,313 disallow $2,197 disallow $1,313
1978 gross receipts no change to tax $79,061 adjustment no change to
Schedule C return tax return
1978 interest $524 additional disallow $10,691 $554 additional
deduction deduction
1979 gross receipts $22,477 adjustment $22,477 adjustment no change to
Schedule C tax return
1979 gross receipts— $26,777 adjustment $26,777 adjustment no change to
Schedule E. Tinsley tax return
& Co
1979 interest disallow $7,111 disallow $16,379 no change to
tax return
1979 no change to tax disallow $1,156 no change to
legal/professional return tax return
fees
4. Petitioners' Litigation Costs
Petitioners' counsel before Appeals, and before this Court, was Thomas W. Ostrander. Mr. Ostrander is a partner in the Philadelphia law firm Duane, Morris & Heckscher. He has practiced law since 1978, primarily in the field of civil and criminal tax litigation. He has an LL.M. in taxation from New York...
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