MEMORANDUM FINDINGS OF FACT AND OPINION
SHIELDS, Judge: This matter is before us at this time on a motion by petitioner 1 for litigation costs pursuant to Rule 231 and section 7430. 2 Respondent agrees that under section 7430(c)(2)(A)(ii) (now section 7430(c)(4)(A)(ii)) petitioner has substantially prevailed with respect to the issues and the amounts involved in this proceeding. Respondent also agrees that petitioner exhausted all administrative remedies available to him within the Internal Revenue Service. Therefore, the only issues remaining are: (1) whether petitioner has established under section 7430(c)(2)(A)(i) (now section 7430(c)(4)(A)(i)) that the position of respondent in this proceeding was unreasonable; and (2) if so, the amount of litigation costs to which petitioner is entitled.
FINDINGS OF FACT
In a notice of deficiency dated June 6, 1985, respondent determined deficiencies in and additions to petitioner's income tax as follows:
| | Addition to Tax |
| Year | Deficiency | Section 6653(b) | Section 6654 |
| 1980 | $ 113,491 | $ 56,746 | $ 7,107 |
| 1981 | 151,340 | 75,670 | 11,653 |
On November 14, 1980, petitioner was convicted in a state court on two counts of brandishing firearms in violation of Cal. Penal Code section 417 (West 1988). As found by the Court of Appeals for the Ninth Circuit in a subsequent proceeding, United States v. Merchant, 760 F.2d 963 (9th Cir. 1985), the state court sentenced petitioner to (1) a three-year prison term which was suspended; (2) a three-year term of probation effective immediately; and (3) a six-month jail term, as a condition of probation. 3 As further conditions of probation, the trial court required petitioner to not possess any firearms and to consent to the search of "his person, residence or vehicle * * * at any time of day or night by a peace officer with or without a warrant." When petitioner and his counsel protested the sentence as being unduly harsh and stated an intention to appeal, the trial court stayed the sentence pending the outcome of the appeal.
On February 11, 1981, the assistant district attorney that prosecuted the case moved for a clarification or modification of the trial court's stay. At a hearing on February 27, 1981, the sentencing judge granted the prosecutor's motion, and ordered that "defendant will be reinstated on the terms of probation." Petitioner was not present at this hearing but his counsel was present and no objection was made to the motion.
Early on March 3, 1981, the assistant district attorney and nine state law enforcement officers appeared at petitioner's home and, without his consent and despite his insistence that he was not on probation, conducted what was purported to be a probation search with the expectation of locating weapons because the assistant district attorney had received reports of gunfire on the property. The officers continued the search even after being informed by telephone by petitioner's counsel that petitioner had not received notice of the order of February 27, 1981.
The search ultimately revealed more than 80 firearms, laboratory equipment and chemical supplies used in the manufacture of phencyclidine ("PCP"), over $ 300,000 in cash, and financial records indicating an illegal business activity. With at least part of the results of the "probation search," the state officers later in the same day obtained by telephone a search warrant for petitioner's residence. The state officers also notified special agents of respondent's Criminal Investigation Division ("CID") of the results of their search. The CID agents subjected petitioner to a lengthy interview on the evening of March 3 at the Santa Cruz county jail where he had been incarcerated by the state officers. On March 4 and March 5 the CID agents were present at petitioner's home while the state officers continued their search. While there, the CID agents reviewed documents seized by the state officers. The searching of petitioner's home which took place subsequent to the warrantless "probation search" was conducted pursuant to the search warrant obtained with the fruits of the initial search.
With the evidence obtained in the above search, petitioner was subsequently indicted in the United States District Court for the Northern District of California for manufacturing PCP and related charges in violation of 21 U.S.C. section 841(a), (b), and (d) (1982). In the District Court petitioner moved to suppress the evidence seized in the search of his home. After an evidentiary hearing, the District Court denied petitioner's motion finding that petitioner was on probation at the time of the initial search and, in the alternative, that the state officers' reasonable good faith belief that petitioner was on probation precluded application of the exclusionary rule under the good faith exception to the rule as established by the Supreme Court in United States v. Leon, 468 U.S. 897 (1984).
On appeal, the Court of Appeals found that petitioner was not on probation at the time the search was initiated because the stay which was granted by the state court applied to both the jail sentence and the probation, and the reinstatement order of the state court on February 27, 1981, was a nullity because of the absence of notice to petitioner. United States v. Merchant, 760 F.2d 963 (9th Cir. 1985). Therefore, the Court of Appeals concluded that the initial search of petitioner's home was not a probation search and consequently the evidence seized in the search was suppressible. It was also concluded that the state officers could not have had a reasonable good faith objective belief in the validity of the search, and consequently the good faith exception to the exclusionary rule was not applicable. Since the search warrant obtained by the state officers by telephone was premised upon the fruits of the improper probation search, the evidence seized pursuant to the search warrant was also suppressible. A petition by the government for a writ of certiorari with respect to the decision of the Court of Appeals was initially granted by the Supreme Court but the writ was subsequently dismissed on March 24, 1987. United States v. Merchant, 480 U.S. 615 (1987).
The decision of the Court of Appeals was filed on May 14, 1985. On June 6, 1985, respondent's notice of deficiency was mailed to petitioner. On March 12, 1986, respondent made a jeopardy assessment under section 6861 against petitioner of the deficiencies determined in the notice of deficiency and thereafter seized the cash discovered in the search.
The evidence obtained by the state officers in their search of petitioner's residence on March 3-5, 1981, was the basis of respondent's notice of deficiency and jeopardy assessment.
After timely filing a petition in this Court, petitioner filed an action under section 7429 for a review of the jeopardy assessment in the United States District Court for the Northern District of California and moved to suppress the use of the evidence seized by the state officers in the search of petitioner's home. In an unpublished Memorandum Decision and Order dated June 12, 1987, the District Court granted the motion to suppress and on July 24, 1987, ordered respondent to abate the jeopardy assessment and to refund the money collected thereunder.
On August 13, 1987, petitioner died and his mother, Margaret Norling Merchant, was appointed administrator of his estate. By letter dated November 24, 1987, petitioner's counsel was advised by respondent's District Counsel that respondent's position in the case before this Court would be fully defended because in the District Counsel's opinion petitioner's Fourth Amendment rights did not survive petitioner's death and his administrator had no standing to object to the introduction of the disputed evidence in this case. However, after a series of discussions with members of his national office, the District Counsel decided that the case should be conceded and on April 11, 1988, a stipulated decision that there were no deficiencies or additions to tax due from petitioner was entered. On December 19, 1988, the motion for litigation costs was filed.
OPINION
In a proceeding before this Court to determine the amount of a tax or addition to tax, we are authorized to award to any prevailing party other than the United States or a creditor of the taxpayer a judgment for the reasonable litigation costs incurred by such prevailing party. Sec. 7430. 4 Since respondent agrees that petitioner exhausted the administrative remedies available to him in the Internal Revenue Service and has prevailed in this proceeding with respect to the amounts in controversy and the issues presented, the principal issue remaining is whether the position of respondent in the proceeding was unreasonable. Petitioner bears the burden of proof on this issue. Rule 232(e); Sec. 7430(c)(2)(A).
In determining the reasonableness of respondent's position in cases of this nature which are filed in this Court we have concluded that the words "in the civil proceeding" as used in section 7430(a) limit "the position of the United States" to the government's conduct after the initiation of litigation by the taxpayer. See Baker v. Commissioner, 83 T.C. 822 (1984). Although reversing on other grounds, the District of Columbia Circuit approved our interpretation of section 7430. See Baker v. Commissioner, 787 F.2d 637, 641 and n.8 (D.C. Cir. 1986). In addition to the District of Columbia Circuit, the Eighth, Tenth, and Eleventh Circuits have approved this Court's interpretation of section 7430. Berks v. United States, 860 F.2d 841 (8th Cir. 1988); Ewing and Thomas, P.A. v. Heye, 803 F.2d 613, 615-616 (11th Cir. 1986); United States v. Balanced Financial Management, Inc., 769 F.2d 1440, 1450 (10th Cir. 1985); Ashburn v. United States, 740 F.2d 843, 848 (11th Cir. 1984). However, the First, Fifth, Sixth, and Ninth Circuits have concluded that section 7430 requires this Court to examine the pre-litigation conduct of respondent in determining whether his position at trial was "reasonable" within the meaning of the statute. Comer Family Trust v. Commissioner, 856 F.2d 775, 780 (6th Cir. 1988); Powell v. Commissioner, 791 F.2d 385, 388-392 (5th Cir. 1986); Kaufman v. Egger, 758 F.2d 1, 4 (1st Cir. 1985); and Sliwa v. Commissioner, 839 F.2d 602, 607 (9th Cir. 1988). Since venue for appeal of the instant case lies in the Ninth Circuit, we are constrained to follow its holding in Sliwa v. Commissioner, supra.Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).
Petitioner contends that respondent's CID agents acted in bad faith by participating with the state officers in an unconstitutional search. Petitioner also contends that respondent knew or should have known that under the doctrine of collateral estoppel this Court was bound by the District Court's finding in its review of the jeopardy assessment under section 7429 5 that the participation by the CID agents justified the suppression of the evidence obtained in the search. We do not agree. First, because from the record before us we are unable to determine the extent of the participation by the CID agents in the search; and secondly, because the doctrine of collateral estoppel is not applicable.
In Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), the conditions which must be met for collateral estoppel to apply were summarized as follows:
(1) The issue in the second suit must be identical in all respects with the one decided in the first suit.
(2) There must be a final judgment in the first suit rendered by a court of competent jurisdiction.
(3) The parties must be the same or their privies.
(4) The parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision.
(5) The controlling facts and applicable legal principles must remain unchanged from those in the prior litigation. [Citations omitted.]
Since there is no appeal from the District Court's review of the jeopardy assessment, its decision constitutes a final judgment. Sec. 7429(f); Zuluaga v. United States, 774 F.2d 1487 (9th Cir. 1985). Furthermore, Margaret Norling Merchant is in privity with William Davidson Merchant III by virtue of her position as administrator of his estate. Brown v. Fletcher's Estate, 210 U.S. 82 (1908); Fouke v. Schenewerk, 197 F.2d 234, 236 (5th Cir. 1952).It is clear, therefore, that in the case before us the second and third requirements for collateral estoppel are satisfied.
While the presence or absence of the first and fourth conditions for the application of collateral estoppel are not so clear we need not consider them since the fifth condition is obviously absent in this case. This is true because in the proceeding under section 7429 the District Court was empowered to conduct only a summary proceeding which is unrelated for substantive and procedural purposes to any subsequent action in this Court. See S. Rept. No. 94-938 (1976), 1976-3 C.B. 403, which states:
A determination made under new section 7429 will have no effect upon the determination of the correct tax liability in a subsequent proceeding. The proceeding under [section 7429] is to be a separate proceeding which is unrelated, substantively and procedurally, to any subsequent proceeding to determine the correct tax liability, either by action for refund in a Federal district court or the Court of Claims or by a proceeding in the Tax Court.
Consequently, the doctrine of collateral estoppel is not applicable and any finding by the District Court that the CID agents participated in the illegal search is not binding on this Court in a proceeding under section 7430. Therefore, respondent was not collaterally estopped from litigating in the proceeding in this Court any finding made by the District Court in the proceeding under section 7429. Peck v. Commissioner, supra.
We also find that respondent's position set forth in the notice of deficiency and respondent's handling of the case to its conclusion were not unreasonable. The legislative history of section 7430 provides the following guidelines for determining whether respondent's conduct was reasonable:
The committee intends that the determination by the court on this issue is to be made on the basis of the facts and legal precedents relating to the case as revealed in the record. 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 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).]
Thus, in order to determine whether respondent acted reasonably, we must consider the facts and circumstances known to him which formed the legal basis for the position he took during the litigation. DeVenney v. Commissioner, 85 T.C. 927, 931 (1985).
Furthermore, the use by respondent of inadmissible evidence as the basis for making a determination does not automatically void the statutory notice. Graham v. Commissioner, 82 T.C. 299, 310 (1984), affd. 770 F.2d 381 (3d Cir. 1985); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 328 (1974). When the notice of deficiency is not supported by any admissible evidence the effect is not to void the notice but to shift to respondent the burden of going forward with the evidence. United States v. Janis, 428 U.S. 433, 441-442 (1976); Zuhone v. Commissioner, 883 F.2d 1317 (7th Cir. 1989), affg. a Memorandum Opinion of this Court. The ultimate burden of proof remains on petitioner. Kluger v. Commissioner, 91 T.C. 969, 976-977 (1988). Therefore, if in this case petitioner had shown that there was no admissible evidence to support the determination made in the deficiency notice, that showing alone would not compel us to conclude that respondent's position was unreasonable.
The position of the government in seeking the admission of the evidence in this proceeding is also not without support. It is well established that the exclusionary rule is not applicable to evidence seized illegally by state officers without the involvement of Federal authorities when offered in a noncriminal Federal proceeding. United States v. Janis, 428 U.S. 433 (1976); Black Forge, Inc. v. Commissioner, 78 T.C. 1004 (1982); Guzzetta v. Commissioner, 78 T.C. 173 (1982).
In United States v. Janis,supra, the Supreme Court, while noting that such evidence could not be admitted in a state or Federal criminal trial, refused to extend the exclusionary rule to forbid the use in a Federal civil tax proceeding of evidence seized by a state criminal law enforcement agent in violation of the taxpayer's constitutional rights. 428 U.S. at 460. The holding in Janis was premised specifically on the assumption that there was no Federal involvement in the unconstitutional search. 428 U.S. at 455 n.31. In attempting to convince us that the CID agents were involved in the illegal search, petitioner relies solely upon the District Court's finding with respect to the participation by the agents. However, we have hereinbefore concluded that the District Court's finding is without collateral effect in this proceeding. Consequently, in the absence of any proof to the contrary, we must assume that the CID agents were not involved and under Janis the evidence seized by the state officers would have been admissible in this proceeding.
We note that in its review of the jeopardy assessment the District Court considered such evidence inadmissible under Adamson v. Commissioner, 745 F.2d 541 (9th Cir. 1984). In Adamson, the Ninth Circuit followed the Supreme Court's holding in United States v. Janis, supra, and allowed to be admitted in a Federal civil trial evidence that was assumed to have been illegally obtained by state police. In its review of the jeopardy assessment, the District Court relied on a statement by the Court of Appeals in Adamson that "[the contention of the taxpayer] presents us with the question of whether a bad faith violation of an individual's fourth amendment rights [by state police] requires application of the exclusionary sanction in a civil tax proceeding. We believe that it does * * *." Adamson v. Commissioner, supra at 545. However, that statement is dictum because the Court of Appeals in Adamson did not find bad faith. It is therefore still an open question in the Ninth Circuit whether a bad faith violation on the part of state authorities in obtaining evidence (which concededly existed here) requires exclusion of that evidence in a Federal tax proceeding. While such dictum may not have foretold success for his position, it is not unreasonable for respondent to pursue litigation that tends to clarify the law, even though his chances of success might have been slim. Don Casey Co. v. Commissioner, 87 T.C. 847, 862 (1986).
Subsequent to the adverse ruling by the District Court in the review of the jeopardy assessment, respondent considered the possibility of defending his determination in this Court on the ground that petitioner's fourth amendment rights did not survive his death and the administrator of his estate would not be permitted to assert such rights in this proceeding. Again, there is some support for this theory. See, e.g., Ravellette v. Smith, 300 F.2d 854, 857 (7th Cir. 1962).
Finally, the fact that respondent ultimately lost in the District Court and conceded the case in this Court does not mean that petitioner is entitled to an award of litigation costs. Wasie v. Commissioner, 86 T.C. 962, 968-969 (1986). Therefore, in view of all of the foregoing we are satisfied that respondent's position in this case was not unreasonable, and accordingly, petitioner is not entitled to an award of litigation costs. In view of our conclusion we need not consider the reasonableness of the claimed costs.
An appropriate order will be entered denying the petitioner's motion.