Wasie v. Comm'r of Internal Revenue

• Decision Date: 12 May 1986
• Docket Number: Docket No. 27913-84.
• Citation: 86 T.C. 962,86 T.C. No. 57
• Parties: MARIE F. WASIE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

86 T.C. 962

86 T.C. No. 57

MARIE F. WASIE, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27913-84.

United States Tax Court

Filed May 12, 1986.

P, a foundation manager, was issued a statutory notice wherein respondent determined excise taxes under sec. 4941(a)(2) and (b)(2), I.R.C. 1954, for participation in an act of self- dealing. P had refused to extend the statute of limitations on assessment. Respondent did not issue a statutory notice to M, the self-dealer. Legislation which retroactively obviated respondent's determination was enacted shortly after the issuance of the statutory notice to P and before P's petition was filed. Respondent conceded the excise tax issues in his answer and P seeks costs and fees under sec. 7430, I.R.C. 1954, as amended. P contends that the Court should consider pre-petition or pre-litigation conduct of respondent in determining reasonableness of respondent's position. Further, P contends that respondent was statutorily without authority (and therefore unreasonable) to issue a statutory notice to a foundation manager under sec. 4941(a)(2) and (b)(2), I.R.C. 1954, without first issuing a statutory notice to the ‘self-dealer‘ under sec. 4941(a)(1) and (b)(1), I.R.C. 1954.

HELD, Baker v. Commissioner, 83 T.C. 822 (1984), vacated and remanded _____ F.2d _____ (D.C. Cir., Apr. 4, 1986, 57 AFTR2d 86-1106, 86-1 USTC par. 9311), followed to extent that fees or costs awarded under sec. 7430, I.R.C. 1954, are to be measured by looking at the reasonableness of respondent's position from the time of the filing of a petition. HELD FURTHER, determination of excise taxes under sec. 4941(a)(1) and (b)(1), I.R.C. 1954, against a ‘self-dealer‘ are not a prerequisite to a determination or the issuance of a statutory notice of deficiency to a foundation manager under sec. 4941(a)(2) and (b)(2). Patrick F. Flaherty, for the petitioner.

Jack Forsberg, for the respondent.

OPINION

GERBER, JUDGE:

This case is before the Court solely upon petitioner's motion for litigation costs pursuant to section 7430. ¹ The issues for consideration are (1) whether respondent's position in the civil proceeding was unreasonable, and (2) whether pre-litigation conduct of respondent should be considered in determining reasonableness and, if so, whether pre- and/or post- litigation costs should be awarded.

BACKGROUND

The record in this case consists of the parties' pleadings, motions, memoranda of authorities, documents attached to the above and oral argument offered at a September 18, 1985, hearing on petitioner's motion at Minneapolis, Minnesota.

Respondent, in a statutory notice of deficiency dated May 9, 1984, determined first tier excise tax deficiencies totaling $49,810.83 and second tier excise tax deficiencies totaling $30,000 against petitioner, a foundation manager, for the taxable years 1980, 1981 and 1982 pursuant to section 4941. The determination was based upon petitioner's participation, as a foundation manager, in an act of self-dealing between the Wasie Foundation (Foundation) and Murphy Motor Freight Lines, Inc. (Murphy).

In June 1980, Murphy purchased 438,680 shares of its own common stock from Foundation by a 25-percent cash payment and 75 percent in subordinated 7-year debentures bearing 8-1/4-percent interest for a certain period of time. During the period that the 8-1/4-percent debentures were outstanding, the prime rate ranged between 15 percent and 20 percent.

Murphy may be considered a ‘self-dealer‘ because of a donation to Foundation of less than $10,000 several years before. The section 4941(a)(1) (5-percent) initial excise tax on a self-dealer would have approximated $118,000 and the section 4941(b)(1) (200-percent additional) excise tax would have approximated $2,600,000 for the 3- year period. The section 4941(b)(1) additional tax can be avoided by correction of the act of self-dealing, which in this setting would have been payment of the excess of the fair market value of the use of money over the amount actually paid. Murphy might have had to pay over one-half million dollars to Foundation to correct the difference between the market rate and 8-1/4-percent rate on the debentures.

Petitioner argues that respondent took no action with regard to Murphy and instead permitted Murphy to obtain special legislation to alleviate any section 4941 burden concerning the purchase of the 438,680 shares of common stock. Petitioner goes a step further and accuses respondent of conspiring with Murphy to facilitate the statutory change which provided relief to Murphy. The explanation of section 312 of the Deficit Reduction Act of 1984, Pub. L. 98-369 (July 18, 1984), prepared by the staff of the Joint Committee on Taxation, did specifically mention Murphy, and the provisions clearly provide relief for petitioner's predicament. ²

Petitioner and Foundation were adverse to the statutory relief and at all times wished respondent to assert section 4941 excise tax against Murphy. If respondent had issued a statutory notice to both Murphy and petitioner, Foundation would have benefited from Murphy's correction on the self-dealing by payment of about one-half million dollars to Foundation and petitioner would have been responsible for only the first tier tax of about $50,000.

Apparently, in anticipation of the legislation, respondent did not issue a statutory notice to Murphy and requested petitioner to execute a waiver as to the statute of limitations on assessment. Petitioner refused and respondent issued a statutory notice to petitioner, without first issuing a notice to Murphy.

DISCUSSION OF PETITIONER'S MOTION

Petitioner contends that respondent is not permitted to issue a statutory notice to a foundation manager without first issuing a statutory notice to the self-dealer. Section 4941(a)(2) and 4941(b)(2) provide, ‘(i)n any case in which a tax (or an additional tax) is imposed by paragraph (1), (there is imposed on the foundation manager) * * *.‘ ‘(P)aragraph (1)‘ concerns the tax on self-dealers. Petitioner argues that the statutory use of the word ‘imposed‘ would require respondent to issue a statutory notice to the self-dealer before a statutory notice may be issued to the foundation manager. Although petitioner's argument infers that respondent did not have statutory authority to issue a statutory notice to her, petitioner did not file a motion to dismiss for lack of jurisdiction of summarily dispense with respondent's determination. Instead, petitioner filed a petition invoking the jurisdiction of the Court and alleging that respondent's notice was defective and that the second tier tax (sec. 4941(b)(2)) should not be imposed on petitioner because it is not within her control to correct the act of self- dealing. Furthermore, petitioner did not seek summary judgment or any other abbreviated method of case resolution.

The sequence of events is instructive in this case. The statutory notice was mailed on May 9, 1984, after petitioner's refusal to extend the statutory period of limitation on assessment. The ‘relief provision‘ (sec. 312) was enacted into law on July 18, 1984. The petition was filed on August 6, 1984, and respondent's answer conceding the section 4941 issues was filed on October 17, 1984. Six months later (on April 18, 1985) this case was noticed for trial on September 9, 1985. On September 9, 1985, the parties filed a stipulation of settled issues which disposed of all issues in the statutory notice in petitioner's favor, leaving for our consideration petitioner's motion under section 7430 for costs and fees.

DISCUSSION OF LAW

Petitioner contends that respondent's actions, both before and after the issuance of the statutory notice, were unreasonable within the meaning of section 7430(c)(2)(A)(i). Respondent agrees ³ that petitioner ‘substantially prevailed with respect to the amount in controversy,‘ but that respondent's position was not unreasonable and, even if it were, petitioner would be limited to recovery of costs and fees incurred in ‘litigation‘ (from the time of filing a petition with this Court).

This Court held that any fees or costs awarded under section 7430 are to be measured by looking at the reasonableness of respondent's position from the time of the filing of a petition. Baker v. Commissioner, 83 T.C. 822, 827 (1984), vacated and remanded _____ F.2d _____ (D.C. Cir., Apr. 4, 1986, 57 AFTR2d 86-1106, 86-1 USTC par. 9311).

The District of Columbia Circuit in its opinion vacating and remanding Baker, specifically supported this Court's interpretation of section 7430, as follows:

Our view of this case accords with that of the Tax Court a good part of the way. We agree that section 7430 and its legislative history are both literally and sensibly read to cover only costs incurred once litigation commences, and that the relevant POSITION of the United States is the one taken IN THE CIVIL PROCEEDING. * * * (57 AFTR2d 86-1106 at 86-1109; 86-1 USTC par. 9311 at 83,630. Emphasis supplied.)

This matter was remanded for a factual determination concerning the specific facts. The Court of Appeals' Baker holding regarding costs incurred once litigation commences is in accord with another Circuit Court and several District Courts, including petitioner's Minnesota district. United States v. Balanced Financial Management, Inc., 769 F.2d 1440 (10th Cir. 1985); Zielinsky v. United States, an unreported case (D. Minn. 1984, 54 AFTR 2d 84-5132, 84-1 USTC par. 9514); Walsh v. United States, an unreported case (D. Minn. 1985, 56 AFTR 2d 85- 5370, 85-1 USTC par. 9411); Contini v. United States, an unreported case (N.D. Cal. 1984, 55 AFTR 2d 85-419, 84-2 USTC par. 9969); Eidson v. United States, an unreported case (N.D. Ala. 1984, 53 AFTR 2d 84- 841, 84-1 USTC par. 9182); Brazil v. United States, an unreported case (D. Ore. 1984, 54 AFTR 2d 84-5707, 84-2 USTC par. 9596). One circuit and several districts have held that fees and costs and the measure of the...