Ellison v. Commissioner
This text of 1992 T.C. Memo. 741 (Ellison v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
MEMORANDUM FINDINGS OF FACTS AND OPINION
DRENNEN,
Petitioners Cecil and Catherine Ellison filed joint Federal income tax returns for 1982, 1983, and 1984. By statutory notice of deficiency, dated March 30, 1989, respondent determined the following deficiencies in, and additions to, petitioners' income tax for those years with increased interest under
| Additions to Tax | |||
| Year | Deficiency | Sec. 6653(a)(1) | Sec. 6653(a)(2) |
| 1982 | $ 41,309.58 | $ 2,065.48 | 1 |
| 1983 | 9,380.00 | 469.00 | |
| 1984 | 10,426.00 | 521.30 | |
| Additions to Tax | |||
| Year | Sec. 6621(c) | Sec. 6659 | Sec. 6661 |
| 1982 | 2 | $ 11,926.52 | -0- |
| 1983 | -0- | $ 2,345.00 | |
| 1984 | 2,831.22 | -0- | |
Petitioners filed their petition on July 3, 1989. At that time, they were residing in Houston, Texas.
On March 8, 1991, the parties filed a stipulated settlement document in which they agreed that respondent's determinations were correct to the extent that petitioners are liable for tax deficiencies for 1982 and 1984 in the respective amounts of $ 37,591.58 and $ 9,295; additions to tax under section 6659 for 1982 and 1984 in the respective amounts of $ 3,759.16 and $ 929.50; as well as additional interest on the entire deficiency for each of the years 1982 and 1984 pursuant to
After the parties informed the Court that they had settled all the underlying issues in this case, petitioners filed a motion for an award of litigation costs and attorney's fees pursuant to
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MEMORANDUM FINDINGS OF FACTS AND OPINION
DRENNEN,
Petitioners Cecil and Catherine Ellison filed joint Federal income tax returns for 1982, 1983, and 1984. By statutory notice of deficiency, dated March 30, 1989, respondent determined the following deficiencies in, and additions to, petitioners' income tax for those years with increased interest under
| Additions to Tax | |||
| Year | Deficiency | Sec. 6653(a)(1) | Sec. 6653(a)(2) |
| 1982 | $ 41,309.58 | $ 2,065.48 | 1 |
| 1983 | 9,380.00 | 469.00 | |
| 1984 | 10,426.00 | 521.30 | |
| Additions to Tax | |||
| Year | Sec. 6621(c) | Sec. 6659 | Sec. 6661 |
| 1982 | 2 | $ 11,926.52 | -0- |
| 1983 | -0- | $ 2,345.00 | |
| 1984 | 2,831.22 | -0- | |
Petitioners filed their petition on July 3, 1989. At that time, they were residing in Houston, Texas.
On March 8, 1991, the parties filed a stipulated settlement document in which they agreed that respondent's determinations were correct to the extent that petitioners are liable for tax deficiencies for 1982 and 1984 in the respective amounts of $ 37,591.58 and $ 9,295; additions to tax under section 6659 for 1982 and 1984 in the respective amounts of $ 3,759.16 and $ 929.50; as well as additional interest on the entire deficiency for each of the years 1982 and 1984 pursuant to
After the parties informed the Court that they had settled all the underlying issues in this case, petitioners filed a motion for an award of litigation costs and attorney's fees pursuant to
As the parties have settled their disputes with respect to all of the tax deficiencies and additions to tax determined by respondent in the deficiency notice, the remaining issues pertain only to whether petitioners qualify as the "prevailing party" entitled to an award of reasonable litigation costs by satisfying the conjunctive requirements of
Petitioners' case involved two sets of substantive tax issues which were ultimately settled before trial. One set of issues related to whether petitioners were entitled to certain pass-through loss deductions and investment tax credits claimed by them with respect to their investment in a partnership known as Eagle Film Co. The second set of issues dealt with whether petitioners were entitled to other loss deductions stemming from their investment in Gulf Consolidated Services, Inc. (hereinafter Gulf Consolidated), and whether petitioners had adequately substantiated their basis*780 in that corporation's stock. For the following reasons, we hold that the positions respondent took with respect to both sets of issues were substantially justified within the meaning of
FINDINGS OF FACT
The following facts are based on the entire record, including the pleadings; the pretrial hearing; the stipulated settlement agreements; the briefs, affidavits, and exhibits submitted by the parties with respect to this motion for litigation costs; as well as the parties' various other motions and supporting documents.
During the years in issue, petitioners were husband and wife and partners in Eagle Film Co. (hereinafter Eagle Film), an alleged partnership which purportedly was in the business of leasing and distributing master video tapes. The parties have stipulated that Eagle Film is part of the National Laser Tax shelter litigation project.
On Schedule E of their joint income*781 tax returns for 1982, 1983, and 1984, petitioners claimed deductions in the respective amounts of $ 3,553, $ 3,004, and $ 2,695, all of which purportedly stemmed from operating losses sustained by Eagle Film which were passed through to the investing partners.
Petitioners also claimed investment tax credits for all 3 years with respect to their involvement with Eagle Film, including a credit of $ 39,755 for 1982 and a credit of $ 9,437 for 1984.
In addition, on their 1983 tax return, petitioners claimed a loss deduction of $ 48,484, stemming from their investment as shareholders in Gulf Consolidated, a purported S corporation. All of petitioners' claimed loss deductions and investment tax credits with respect to their investments in Eagle Film and Gulf Consolidated were eventually disallowed by respondent in the deficiency notice.
In April 1985, the Commissioner began examining the partnership Eagle Film. Subsequently, the individual returns of all the Eagle Film partners, including petitioners' returns, were audited. In approximately July 1986, the Commissioner sent petitioners an examination report in which deficiencies in, and additions to, their 1982, 1983, and 1984 income*782 taxes were proposed. Petitioners timely filed a protest to the audit report and requested an administrative appeals conference.
In December 1987, petitioners' case was assigned to Mr. Gerald L. Savage, an IRS Appeals officer in the Houston Appeals Office. In an affidavit, dated June 3, 1991, Mr. Savage states that he was unable to settle petitioners' case at the administrative appeals stage because petitioners had not submitted documents substantiating their claimed loss deductions and investment tax credits, nor had they submitted sufficient information enabling him to determine the nature of the entities and the transactions involved which purportedly generated the deductions and tax credits. Petitioners have not disputed the contents of Mr. Savage's affidavit. Thus, we find that although petitioners did mail some documents to Mr. Savage in May 1988, they apparently did not comply with a further request by the Appeals officer for more documents in order to adequately substantiate the loss deductions and investment tax credits that they had claimed on their 1982, 1983, and 1984 returns with respect to their investments in Eagle Film and Gulf Consolidated.
On March 30, 1989, *783 respondent issued petitioners a deficiency notice for the years 1982, 1983, and 1984, in which she disallowed all of the loss deductions and investment tax credits that petitioners had claimed with respect to their purported investments in Eagle Film and Gulf Consolidated. Respondent determined additions to tax for all 3 years under section 6653(a)(1) and (2), for negligence or intentional disregard of the tax rules or regulations. Respondent also determined additions to petitioners' 1982 and 1984 taxes under section 6659 for valuation overstatements with respect to petitioners' investment in Eagle Film, as well as an addition to tax for 1983 under section 6661 for a substantial understatement of income tax. Finally, respondent determined there was interest due from petitioners for all 3 years, under
In her explanation attached to the deficiency notice, respondent cited the following reasons for disallowing the alleged partnership loss deductions and the investment tax credits that petitioners had claimed with respect to the partnership, Eagle Film. First, respondent asserted that petitioners*784 had "not established that the transactions in which the partnership was involved * * * were bona fide arm's length transactions at fair value, that such transactions constituted a trade or business, that such transactions had any economic substance other than the avoidance of taxes, or that such transactions were not sham transactions entered into for the purpose of obtaining deductions for purported tax losses and nondeductible items."
As alternative reasons for her disallowance of the alleged Eagle Film partnership losses, respondent stated that petitioners' method of accounting did not clearly reflect income and that they had failed to establish that they had any adjusted basis in the partnership from which to deduct the alleged losses, that any of the amounts deducted were paid or incurred, that any of the amounts deducted were ordinary and necessary business expenses, or that any of the amounts deducted were anything other than capital expenses.
Respondent stated that she had disallowed the investment tax credits that petitioners had claimed with respect to Eagle Film because, among other things, petitioners had failed to establish that the property in which they had allegedly*785 invested -- certain master tapes -- was tangible and new property, placed in service during the taxable year, having a useful life of 3 years or more, and that related persons or entities did not use the master tapes prior to their acquisition by the partnership, if, indeed the partnership ever acquired legal title to the master tapes. Moreover, according to respondent, petitioners had not established that they had any amount at risk in the Eagle Film partnership, as defined by section 465.
As an explanation of her disallowance of the ordinary loss deduction of $ 48,484 that petitioners had claimed for 1983 as shareholders of the purported S corporation, Gulf Consolidated, respondent stated that petitioners had failed to establish that any deductible loss had been sustained, that they had a sufficient basis in Gulf Consolidated to take any loss, or that they had any amount "at risk", as defined by section 465.
In their petition, petitioners generally disputed all of respondent's determinations as to their tax deficiencies and additions to tax. However, petitioners did not make any reference to specific documents or facts which would have substantiated their entitlement to the *786 loss deductions and investment tax credits that they claimed on their tax returns. Nor did petitioners assert any specific facts in their petition to show that they were not negligent or intentionally disregarding the rules and regulations.
Petitioners affirmatively alleged in their petition that respondent was barred by the 3-year statute of limitations under section 6501 from assessing tax deficiencies for 1982, 1983, and 1984. However, petitioners apparently conceded this issue after respondent, in her answer, set forth facts showing that petitioners had signed several Consents to Extend the Time to Assess Tax (Forms 872 and 872-A) which effectively extended the period for assessing petitioners' 1982, 1983, and 1984 tax deficiencies to June 30, 1989, a date later than the issuance date of the notice of deficiency. Thus, we find, contrary to petitioners' argument, that respondent is not barred by the statute of limitations under section 6501 from assessing the tax deficiencies for the years in issue.
The parties had only one pretrial conference, on January 16, 1990, at which time they reached a basis for settling all of the disputed deductions and tax credits relating to petitioners' *787 investment in Eagle Film. From the record, it appears the parties also discussed the second set of issues in this case, the claimed deductions purportedly generated by petitioners' investment in Gulf Consolidated.
On February 14, 1990, respondent sent petitioners a letter stating that petitioners, as Gulf Consolidated shareholders, had not yet adequately substantiated their basis in the S corporation from which they could deduct their claimed 1983 pass-through loss. In her letter, respondent asked petitioners to provide all documentation by March 16, 1990.
In a second letter, dated April 24, 1990, respondent acknowledged that petitioners had sent respondent enough documents to substantiate $ 36,363 of the $ 48,484 that they had claimed as their total basis in Gulf Consolidated for 1983. Respondent also repeated her request for documents to substantiate the remaining portion of petitioners' claimed basis, $ 12,121, representing petitioners' purported contribution of capital for the stock.
On June 28, 1990, the parties filed a Stipulation of Settlement resolving the issues pertaining to petitioners' involvement in Eagle Film, which is part of the National Laser tax shelter project. *788 The Eagle Film settlement was drafted by the IRS project attorney for the National Laser tax litigation project and subsequently signed by petitioners' attorney, Mr. Franklin. The Eagle Film settlement document did not address any of the issues relating to petitioners' investment in Gulf Consolidated.
In the Eagle Film settlement, the parties agreed that "petitioners are not entitled to any investment tax credits claimed with respect to the National Laser Tax shelter for 1982, 1983, and 1984, including investment tax credits in the amount of $ 39,755.05 and $ 9,437.40 claimed for 1982 and 1984, respectively." According to the settlement, petitioners are entitled to ordinary partnership expense deductions relating to the National Laser tax shelter in the amounts of $ 8,450, $ 3,006.16, and $ 3,123.42, for 1982, 1983, and 1984, respectively.
With respect to the additions to tax imposed by respondent in the deficiency notice, the parties agreed that petitioners are liable under section 6659 for 1982, and 1984, for making valuation overstatements, and that the "percentage of the underpayment" for purposes of computing the section 6659 addition to tax should be 10 percent. The parties*789 further agreed that the total amounts of Petitioners' underpayments of income taxes for 1982, 1983, and 1984, are "substantial underpayments attributable to tax motivated transactions". Accordingly, the parties stipulated that petitioners are liable for the interest provided by
The parties further stipulated that petitioners are not liable for any additions to tax for negligence under section 6653(a)(1) and (2), or for a substantial understatement of tax under section 6661, but only to the extent those additions are attributable to petitioners' involvement with Eagle Film, which is part of the National Laser tax shelter.
Once the parties had settled the issues pertaining to petitioners' involvement in Eagle Film, the remaining issues were set for a trial session beginning on February 25, 1991, in Houston, Texas. Those issues involved petitioners' entitlement to the loss deduction that they had claimed as Gulf Consolidated shareholders in 1983 and their basis in that corporation.
Shortly before the scheduled trial, petitioners apparently*790 gave respondent more documents to substantiate the full amount of their claimed basis in Gulf Consolidated so as to establish their entitlement to the loss deduction which they had claimed on their 1983 tax return. By the time of trial, all the issues in petitioners' case had been more or less settled, and the Court ordered the parties to submit a proposed stipulated decision reflecting their final settlement.
On March 8, 1991, the parties filed a second settlement agreement (hereinafter final settlement) disposing of all issues related to petitioners' involvement in Gulf Consolidated and incorporating petitioners' Eagle Film settlement. In their final settlement, the parties agreed that respondent's determinations were correct to the extent that there are deficiencies in petitioners' 1982 and 1984 income taxes in the respective amounts of $ 37,755 and $ 9,295; there is no deficiency in their 1983 income tax; there are additions to their 1982 and 1984 income taxes under section 6659 in the respective amounts of $ 3,759.16 and $ 929.50, as well as additional interest on their 1982 and 1984 income tax deficiencies pursuant to
The parties further agreed that there*791 are no additions to petitioners' 1982, 1983, or 1984 income taxes under section 6653(a)(1) and (2), or section 6661 as determined by respondent in the deficiency notice. Finally, the parties stipulated that upon entry of the decision by the Court, the petitioners waive the restrictions provided by section 6213(a) prohibiting the assessment and the collection of petitioners' tax deficiencies and additions to tax until the decision of this Court becomes final.
Petitioners moved for an award of litigation costs under
As the parties have settled their disputes with respect to all of the tax deficiencies and additions to tax determined by respondent in these cases, the issues before us pertain only to whether petitioners qualify as the "prevailing party" entitled to an award of reasonable litigation costs under
OPINION
Respondent concedes that, based on the parties' settlement agreement, petitioners have substantially prevailed with respect to all Gulf Consolidated issues, which constitute one of the two major sets of issues in petitioners' case. However, respondent contends that petitioners are nonetheless not entitled to litigation costs because they have not proven that any of the other elements of
Whether respondent's positions were substantially justified turns on a finding of reasonableness, based on all of the facts and circumstances, as well as legal precedents relating to the case. 3
The legislative history of Other factors the committee believes might be taken into account in making this determination include, (1) whether the government used the costs and expenses of litigation*796 against its position to extract concessions from the taxpayer that were not justified under the circumstances of the case, (2) whether the government pursued the litigation against the taxpayer for purposes of harassment or embarrassment, or out of political motivation, and (3) such other factors as the court finds relevant. * * * [H. Rept. 97-404, at 12 (1981).]
(A) the position taken by the United States in a judicial proceeding * * *, and (B) the position taken in an administrative proceeding * * * as of the earlier of -- (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency.
*797
Although petitioners' case was sent to the IRS Office of Appeals after petitioners protested the audit results, the parties have not submitted a "notice of decision" from the IRS Office of Appeals or a letter from that office functioning as such. Therefore, we evaluate respondent's position as of the date of the notice of deficiency.
From the record, we find that the facts known to respondent at the time the deficiency notice was issued demonstrate the reasonableness of respondent's actions. It is fundamental that deductions are a matter of legislative grace, and petitioners bear the burden of proving that all the*798 requirements of their claimed deductions are satisfied.
Whenever there is a factual determination with respect to a tax return, respondent is not obliged to concede the case until the necessary documentation is received to prove the taxpayer's contentions and claims.
In the explanation of her adjustments*799 attached to the deficiency notice, respondent states that petitioners did not include, with any of their tax returns, documents adequately substantiating their claimed deductions and investment tax credits. Nor did petitioners include such factual information showing their entitlement to the disallowed deductions and tax credits in their petition.
When petitioners filed their first stipulated settlement agreement in June 1990, they conceded that they were not entitled to any of the investment tax credits generated by their investment in Eagle Film. Apparently, petitioners eventually gave respondent some documentation of their claims with respect to Eagle Film since respondent allowed petitioners some ordinary partnership expense deductions for*800 1982, 1983, and 1984 in the settlement agreement. However, petitioners have not shown that respondent was unjustified in not conceding those deductions earlier than the date of the parties' first stipulated settlement in June 1990. We conclude, therefore, that respondent's actions were reasonable with respect to all the Eagle Film issues.
Although respondent concedes that petitioners prevailed with respect to the second set of issues pertaining to Gulf Consolidated, respondent was justified in refusing to concede these issues until petitioners had substantiated them. In March 1990, after petitioners provided respondent with documents substantiating part of their claimed basis in Gulf Consolidated, respondent immediately agreed to decrease petitioners' tax liability to the extent of their substantiated basis in the corporation. When petitioners shortly before their trial, provided documentation of the rest of their basis in Gulf Consolidated, respondent again made the corresponding concessions, thus resolving all issues in petitioners' case. Once again, we hold that the position taken by respondent was reasonable.
Having held that the positions taken by respondent throughout*801 this proceeding were substantially justified within the meaning of
Congress never intended that attorney's fees and litigation costs be awarded to the prevailing party in a tax proceeding as a general rule, but only in exceptional cases where the losing party's contentions cannot justify the expense incurred by the prevailing party in refuting fallacious arguments. H. Rept. 97-404, at 12 (1981); 131 Cong. Rec. S15482 (daily ed. Nov. 14, 1985) (See statement of Senator Domenici). 5 Presumably, that is why the requirements provided by
Petitioners' motion for litigation costs will be denied.
To reflect the foregoing,
Footnotes
1. Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure and all section references are to the Internal Revenue Code.↩
1. 50 percent of the interest computed on that portion of the underpayment attributable to negligence.↩
2. 120 percent of the interest due on the deficiency for the taxable year.↩
2. Petitioners' attorney, James L. Franklin, also served as Steven and Kerry Buxbaum's attorney in their Tax Court case, docket No. 16087-89.↩
3. The Tax Reform Act of 1986 changed the language describing the position of the United States from "unreasonable" to "not substantially justified", effective for civil tax actions or proceedings commenced after Dec. 31, 1985. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(d)(1), 100 Stat. 2085, 2752. However, this and other courts have held that the "substantially justified" standard is not a departure from the previous reasonableness standard.
Sokol v. Commissioner , 92 T.C. 760, 763-764 n.7 (1989)Sher v. Commissioner , 89 T.C. 79, 84 (1987)861 F.2d 131↩ (5th Cir. 1988) , and cases cited therein.4.
Sec. 7430(c)(7) applies to proceedings, such as petitioners' case, that commenced after Nov. 10, 1988.Sec. 7430(c)(7) was added to the Internal Revenue Code by sec. 6239(a) of the Technical and Miscellaneous Revenue Act (TAMRA) of 1988, Pub. L. 100-647, 102 Stat. 3743, for purposes of expanding the definition of the "position of the United States" for purposes ofsec. 7430 .Sokol v. Commissioner ,supra at 764 n.8sec. 7430(c)(7) by TAMRA,sec. 7430(c)(4) , since amended, defined "position of the United States" as follows:(4) POSITION OF THE UNITED STATES. -- The term "position of the United States" includes --
(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 administrative action or inaction) upon which such proceeding is based.↩
5. See also Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986 (J. Comm. Print 1987). The Joint Committee Explanation has been relied upon by courts in interpreting tax statutes.
FPC v. Memphis Light, Gas & Water Div ., 411 U.S. 458, 471-472 (1973)Todd v. Commissioner , 89 T.C. 912, 915 (1987)862 F.2d 540↩ (5th Cir. 1988) .
Related
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1992 T.C. Memo. 741, 64 T.C.M. 1684, 1992 Tax Ct. Memo LEXIS 776, Counsel Stack Legal Research, https://law.counselstack.com/opinion/ellison-v-commissioner-tax-1992.