123 T.C. No. 10
UNITED STATES TAX COURT
THOMAS CORSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1025-03. Filed August 11, 2004.
P was an investor in a partnership involved in tax shelter litigation in this Court. In 1985, P entered into settlement agreements with R, pursuant to which P could not deduct losses in excess of payments he had made to or on behalf of the partnership for taxable years before 1980 or after 1982. In 1999, after the partnership litigation concluded, R assessed additional income tax and accrued interest for P’s taxable year 1983 attributable to P’s involvement in the partnership. P filed a claim for abatement of the interest. During P’s correspondence conference with R, P provided to R a copy of the settlement agreements and argued that he had settled the taxable year 1983. R refused to consider the content or effect of the settlement agreements and denied P’s request for abatement of interest. P then filed a petition with this Court, appealing R’s determination. After R filed an answer to the petition, R decided that P was entitled to a full abatement of interest for the taxable year 1983. P then filed a motion with this Court for reasonable litigation costs. - 2 -
Held: The settlement agreements constituted binding agreements between P and R; settled all taxable years after 1982 with respect to the partnership; and converted the partnership items into nonpartnership items, giving R 1 year in which to assess any income tax liabilities for taxable years included under the settlement agreements’ terms. Held, further, R delayed in performing the ministerial act of assessing P’s 1983 tax liability. Held further, R’s position in the answer was not substantially justified.
Held: P is entitled to an award of reasonable litigation costs.
Thomas Corson, pro se.
Matthew J. Bailie, for respondent.
OPINION
MARVEL, Judge: This case is before the Court on
petitioner’s motion for reasonable litigation costs filed
pursuant to section 7430 and Rule 231. Unless otherwise
indicated, all section references are to the Internal Revenue
Code in effect at the time petitioner filed the petition, and all
Rule references are to the Tax Court Rules of Practice and
Procedure. Petitioner resided in Saratoga, California, when his
petition in this case was filed.
On December 12, 2003, we filed the parties’ stipulation of
settled issues,1 and petitioner’s motion for reasonable
litigation costs. On February 11, 2004, we filed respondent’s
1 On Oct. 28, 2003, we entered the parties’ stipulated decision. Then, on Dec. 1, 2003, we filed petitioner’s motion to vacate the decision. On Dec. 12, 2003, we granted petitioner’s motion to vacate and filed the decision document as a stipulation of settled issues. - 3 -
response to petitioner’s motion. On March 15, 2004, we filed an
additional affidavit of petitioner pursuant to Rule 232(d), and
on March 25, 2004, we filed petitioner’s reply to respondent’s
response.
On February 19, 2004, in petitioner’s motion for leave to
file a reply, petitioner requested that we schedule a hearing
only if a relevant fact were in dispute. We have concluded,
however, that a hearing on this matter is not necessary. See
Rule 232(a)(2). In disposing of this motion, we rely on the
parties’ filings and attached exhibits.
Background
During the 1980s, petitioner was an investor in Boulder Oil
and Gas Associates (Boulder), a partnership involved in the
Elektra Hemisphere tax shelter litigation in this Court (the
partnership litigation).2 In 1985, petitioner signed Forms 906,
Closing Agreement on Final Determination Covering Specific
Matters, for the taxable years 1980 and 1982 (settlement
agreements). The settlement agreements provided that, for
taxable years before 1980 or after 1982, petitioner could not
deduct losses in excess of payments he had made to or on behalf
of the partnership. When petitioner executed the settlement
agreements, his taxable year 1981 remained open as a result of
2 See Krause v. Commissioner, 99 T.C. 132 (1992), affd. sub nom. Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994). - 4 -
the partnership litigation.
After the partnership litigation concluded, in a letter
dated September 14, 1999, respondent explained to petitioner that
respondent had adjusted petitioner’s 1983 income tax return as
described in an enclosed Form 4549A-CG, Income Tax Examination
Changes. The Form 4549A-CG indicated that petitioner owed
additional income tax for 1983 attributable to his involvement in
Boulder in the amount of $766 and interest in the amount of
$2,523.04.3 On November 29, 1999, respondent assessed the
additional income tax and accrued interest.
Believing that he had settled all taxable years other than
1981 when he signed the settlement agreements, petitioner first
attempted to resolve the matter with the Taxpayer Advocate’s
Office in January 2000. Then, on August 31, 2000, petitioner
submitted to respondent a Form 843, Claim for Refund and Request
for Abatement, requesting an abatement of interest for the
taxable year 1983. In a letter to Appeals Officer Paul Sivick
dated July 31, 2001 (July 31 letter), petitioner argued that he
had settled all taxable years other than 1981. As evidence,
petitioner attached copies of the settlement agreements.
In a letter dated September 18, 2001, Appeals Officer Sivick
addressed the arguments in petitioner’s July 31 letter.
Responding to petitioner’s argument that he had settled all
3 The interest was computed to Oct. 9, 1999. - 5 -
taxable years other than 1981, Appeals Officer Sivick stated:
“Your desire and belief are not the relevant factors considered
under the law in abatement of interest cases. Therefore, I would
not consider this argument to have any merit for purposes of a
request for abatement of interest.” Appeals Officer Sivick did
not address the content or effect of the settlement agreements.
In closing, Appeals Officer Sivick gave petitioner until October
17, 2001, to continue to present arguments.
In a notice of final determination dated July 26, 2002,
respondent denied petitioner’s request for an abatement of
interest. Respondent explained the denial of petitioner’s
request as follows: “We did not find any errors or delays on our
part that merit the abatement of interest in our review of
available records and other information for the period from April
15, 1984 to October 9, 1995.”
On January 21, 2003, petitioner filed a petition with this
Court pursuant to section 6404(h) and Rule 280 seeking review of
respondent’s refusal to abate interest under section 6404(e). In
his petition, petitioner primarily contended that, pursuant to
section 6231(b)(1)(C), when the parties executed the settlement
agreements, partnership items converted to nonpartnership items;
the conversion to nonpartnership items triggered the 1-year
statutory limitations period on assessment contained in section
6229(f) (section 6229(f) assessment period); respondent failed to - 6 -
assess petitioner’s 1983 tax liability during the section 6229(f)
assessment period; and respondent’s delay in making his demand
for payment was caused by respondent’s error or delay in
performing a ministerial or managerial act. In making the
section 6229(f) assessment period argument in his petition,
petitioner relied on Crnkovich v. United States, 41 Fed. Cl. 168
(1998), affd. per curiam 202 F.3d 1325 (Fed. Cir. 2000).
On March 7, 2003, respondent filed an answer to the
petition. In the answer, respondent maintained that his
determination not to abate interest pursuant to section 6404 was
not an abuse of discretion and that the interest for the taxable
year 1983 was timely assessed. Subsequently, the parties reached
a settlement, under which petitioner was entitled to a full
abatement of interest for the taxable year 1983.
From the preparation of the petition through the settlement
of the case, Stephen Benda served as petitioner’s attorney. On
January 11, 2003, petitioner had his first meeting with Mr.
Benda. Petitioner and Mr. Benda had a fee arrangement of $250
per hour. Petitioner now seeks litigation costs in the amount of
$2,676.32.4
4 In his motion for reasonable litigation costs filed on Dec. 12, 2003 (the motion), petitioner asked that we award litigation costs in the amount of $2,536.32. When petitioner filed his reply on Mar. 25, 2004, petitioner requested an additional $140 of litigation costs, part of which he had incurred since filing the motion. After examining petitioner’s attorney’s additional (continued...) - 7 -
Discussion
Section 7430(a) authorizes the award of reasonable
litigation costs to the prevailing party in court proceedings
brought by or against the United States in connection with the
determination of income tax. In addition to being the prevailing
party, in order to receive an award of reasonable litigation
costs, a taxpayer must exhaust administrative remedies and not
unreasonably protract the court proceeding. Sec. 7430(b)(1),
(3). Unless the taxpayer satisfies all of the section 7430
requirements, we do not award costs. Minahan v. Commissioner, 88
T.C. 492, 497 (1987).
Section 7430(c)(4)(A) and (B)(i) provides that a taxpayer is
a prevailing party if (1) the taxpayer substantially prevailed
with respect to the amount in controversy or the most significant
issue or set of issues, (2) the taxpayer meets the net worth
requirements of 28 U.S.C. section 2412(d)(2)(B) (2000), and (3)
the Commissioner’s position in the court proceeding was not
substantially justified. See also sec. 301.7430-5(a), Proced. &
Admin. Regs. Although the taxpayer has the burden of proving
4 (...continued) affidavit filed pursuant to Rule 232(d) and the attached detailed summary of costs, we conclude that the court costs and “fees paid or incurred for the services of attorneys in connection with the court proceeding” totaled $2,676.32. See sec. 7430(c)(1); see also Sokol v. Commissioner, 92 T.C. 760, 767 n.12 (1989) (“The costs incurred in seeking an award of litigation costs may be included in the award.”). - 8 -
that the taxpayer meets requirements (1) and (2), supra, the
Commissioner must show that the Commissioner’s position was
substantially justified. See sec. 7430(c)(4)(B)(i); Rule 232(e).
Respondent concedes that petitioner did not unreasonably
protract the court proceeding and that petitioner meets the net
worth requirement of 28 U.S.C. section 2412(d)(2)(B). In
addition, respondent does not dispute that petitioner
substantially prevailed with respect to the amount in
controversy. Respondent alleges, however, that respondent’s
position was substantially justified, that petitioner did not
exhaust the administrative remedies available to him, and that
the costs petitioner claims are unreasonable.
A. Whether Respondent’s Position Was Substantially Justified
For purposes of deciding a motion for reasonable litigation
costs, section 7430(c)(7)(A) defines the Commissioner’s
“position” as the position taken in the court proceeding. In the
present case, respondent took a position when respondent filed an
answer to petitioner’s petition. See Huffman v. Commissioner,
978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part, revg. in part
and remanding T.C. Memo. 1991-144; Maggie Mgmt. Co. v.
Commissioner, 108 T.C. 430, 442 (1997).
The Commissioner’s position is substantially justified if it
has a reasonable basis in both fact and law and is justified to a
degree that could satisfy a reasonable person. Huffman v. - 9 -
Commissioner, supra at 1147 n.8 (citing Pierce v. Underwood, 487
U.S. 552, 565 (1988)); Rosario v. Commissioner, T.C. Memo. 2002-
247; sec. 301.7430-5(c)(1), Proced. & Admin. Regs. In deciding
whether the Commissioner’s position was substantially justified,
a significant factor is whether, on or before the date the
Commissioner assumed the position, the taxpayer provided “all
relevant information under the taxpayer’s control and relevant
legal arguments supporting the taxpayer’s position to the
appropriate Internal Revenue Service personnel.”5 Sec. 301.7430-
5(c)(1), Proced. & Admin. Regs.
1. Section 6404(e)(1)6
Under section 6404(e)(1), the Commissioner may abate part or
all of an assessment of interest on any deficiency or payment of
income tax to the extent that any error or delay in payment is
attributable to erroneous or dilatory performance of a
5 “Appropriate Internal Revenue Service personnel” are those employees who are reviewing the taxpayer’s information or arguments, or employees who, in the normal course of procedure and administration, would transfer the information or arguments to the reviewing employees. Sec. 301.7430-5(c)(1), Proced. & Admin. Regs. 6 To the extent that petitioner’s allegations in the present case are based on sec. 6404(a)(2) and are in the nature of a claim for abatement that is prohibited by sec. 6404(b), we do not consider them in deciding whether respondent’s position with respect to petitioner’s petition for abatement of interest under sec. 6404(e) was substantially justified. See sec. 6404(b); Urbano v. Commissioner, 122 T.C. 384, 395 (2004); Kosbar v. Commissioner, T.C. Memo. 2003-190. - 10 -
ministerial act by an officer or employee of the IRS.7 A
ministerial act means a procedural or mechanical act that does
not involve the exercise of judgment or discretion and occurs
during the processing of a taxpayer’s case after all the
prerequisites to the act, such as conferences and review by
supervisors, have taken place. See Lee v. Commissioner, 113 T.C.
145 (1999); sec. 301.6404-2T(b)(1), Temporary Proced. & Admin.
Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).8 In contrast, a
decision concerning the proper application of Federal tax law, or
other applicable Federal or State laws, is not a ministerial act.
See sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs.,
supra.
In the legislative history of section 6404(e), Congress
observed that “issuing either a statutory notice of deficiency or
7 Sec. 6404(e) was amended by the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457 (1996), to permit the Commissioner to abate interest with respect to an “unreasonable” error or delay resulting from “managerial” or ministerial acts. The amendment applies to interest accruing with respect to deficiencies for taxable years beginning after July 30, 1996, and is inapplicable to the instant case. 8 The final regulations under sec. 6404 were issued on Dec. 18, 1998, and generally apply to interest accruing with respect to deficiencies or payments of tax described in sec. 6212(a) for taxable years beginning after July 30, 1996. See sec. 301.6404- 2(d)(1), Proced. & Admin. Regs. As a result, sec. 301.6404-2T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987), applies and is effective for interest accruing with respect to deficiencies for those taxable years beginning after Dec. 31, 1978, but before July 30, 1996. See sec. 301.6404-2(c), Proced. & Admin. Regs. - 11 -
notice and demand for payment[9] after all procedural and
substantive preliminaries have been completed” is a ministerial
act. H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1,
844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.
Congress further provided that “a ministerial act is a procedural
action * * *. For example, a delay in the issuance of a
statutory notice of deficiency after the IRS and the taxpayer
have completed efforts to resolve the matter could be grounds for
abatement of interest.” S. Rept. 99-313, supra at 209, 1986-3
C.B. (Vol. 3) at 209; see also H. Rept. 99-426, supra at 845,
1986-3 C.B. (Vol. 2) at 845.
Similar to the issuance of either a notice of deficiency or
a notice and demand for payment, the assessment of tax is a
procedural action that does not require the use of judgment or
discretion. In Fruit of the Loom, Inc. v. Commissioner, T.C.
Memo. 1994-492, affd. 72 F.3d 1338 (7th Cir. 1996), we observed
that “Assessment is the ministerial act of recording a taxpayer’s
Federal tax liability in the office of the District Director.”
Additionally, in Phillips v. Commissioner, 106 T.C. 176, 179-180
9 Sec. 6303(a) provides in part:
Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. * * * - 12 -
(1996), we stated that the “assessment of additional taxes shown
on an amended return is routine IRS procedure. * * * To ascribe
to this essentially ministerial act the same binding effect as a
considered judgment would make little sense as a practical
matter.”
2. The Parties’ Contentions
In arguing that respondent’s position was not substantially
justified, petitioner contends that respondent did not have a
reasonable basis in fact and law for the position that there were
no delays in the performance of ministerial acts. In particular,
petitioner alleges that respondent delayed in performing the
ministerial acts of assessing petitioner’s 1983 tax liability and
issuing notice and demand for payment. According to petitioner,
the terms of the settlement agreements clearly included the
taxable year 1983 and disallowed petitioner’s deductions of
partnership losses in excess of payments he had made to or on
behalf of the partnership. Once petitioner and respondent
entered into the settlement agreements, petitioner argues: “all
that remained was for Respondent to enforce the agreement
according to its terms, a ministerial act requiring no
discretion.”
In contrast, respondent disputes that there was a delay in
assessment that would reasonably warrant an abatement of
interest. According to respondent, the amount of time that - 13 -
elapsed before respondent made an assessment was attributable to
the partnership litigation, and petitioner’s 1983 tax liability
was assessed within 1 year of the partnership litigation’s
conclusion pursuant to section 6229(d). Citing Beagles v.
Commissioner, T.C. Memo. 2003-67, respondent further contends
that (1) the mere passage of time during the litigation phase of
a tax dispute does not establish a delay in performing a
ministerial act, and (2) decisions on how to proceed during the
litigation phase require the exercise of judgment and are not
ministerial acts.
3. Reasonableness of Respondent’s Position
Although we agree with respondent that decisions on how to
proceed during litigation are not ministerial acts, see id.,
petitioner’s taxable year 1983 was not involved in the
partnership litigation. To the contrary, in 1985, petitioner
signed settlement agreements, the terms of which settled all
taxable years after 1982 with respect to Boulder. The settlement
agreements constituted binding agreements between petitioner and
respondent. See sec. 6224(c)(1). The legal effect of the
settlement agreements was that the partnership items converted to
nonpartnership items, and respondent had 1 year in which to
assess any income tax liabilities for taxable years included
under the settlement agreements’ terms. See secs. 6229(f),
6231(b)(1)(C). Respondent, however, did not assess petitioner’s - 14 -
1983 tax liability until the partnership litigation concluded in
1999, even though the settlement agreements were not based on the
outcome of the partnership litigation.
Under the circumstances, respondent’s position that there
were no delays in the performance of a ministerial act lacked a
reasonable basis in both fact and law. Considering the
explicitness of the settlement agreements and the absence of
petitioner’s taxable year 1983 from the partnership litigation,
there is no reasonable explanation for respondent’s delay in
performing the ministerial act of assessment. If Appeals Officer
Sivick had consulted the Internal Revenue Manual, the section
pertaining to “Agreement Forms” for the settlement of tax shelter
cases would have informed him of the following:
Closing agreements should be avoided in settlements when subsequent years are TEFRA. On the date they are executed by the Service these agreements convert partnership items to nonpartnership items for the future years involved, triggering a one year assessment period under I.R.C. Section 6229(f) for those years.
See 4 Administration, Internal Revenue Manual (CCH), sec.
8.3.1.2.4, at 27,134 (Apr. 13, 1998). Furthermore, the record
contains no evidence that any significant aspect of the delay was
attributable to petitioner. See S. Rept. 99-313, supra at 208,
1986-3 C.B. (Vol. 3) at 208.
The record also indicates that petitioner appropriately
provided all relevant information under his control and all
relevant legal arguments supporting his position. See sec. - 15 -
301.7430-5(c)(1), Proced. & Admin. Regs. In the July 31 letter,
approximately a year and a half before respondent filed the
answer, petitioner alerted respondent to the possibility of an
error or delay in the assessment of his 1983 tax liability.
Petitioner argued that he had settled the taxable year 1983, and
petitioner enclosed copies of the settlement agreements.
Respondent does not dispute receiving the July 31 letter or
copies of the settlement agreements. Instead of considering the
effect of the settlement agreements on petitioner’s 1983 tax
liability and consulting the Internal Revenue Manual, respondent
brushed off petitioner’s settlement argument as petitioner’s
irrelevant “belief”.
At the time of the exchange with respondent regarding the
July 31 letter, petitioner was not represented by counsel, and
the record contains no evidence that petitioner had any legal
expertise. Nevertheless, petitioner provided respondent with the
factual information respondent needed to verify that respondent
delayed assessing petitioner’s 1983 interest liability.
Petitioner was entitled to expect that respondent would give due
consideration to petitioner’s claims.10
4. Conclusion
Respondent has not established that the position in the
10 In a letter dated June 18, 2001, Appeals Officer Sivick provided to petitioner a “Review of the Law and related material”. The review contained references to secs. 6224(c) and 6229(a) and (b) but did not mention secs. 6229(f) or 6231(b). - 16 -
answer was substantially justified. Consequently, we conclude
that petitioner is the prevailing party.
B. Exhaustion of Administrative Remedies
Section 7430(b)(1) provides in part: “A judgment for
reasonable litigation costs shall not be awarded under subsection
(a) in any court proceeding unless the court determines that the
prevailing party has exhausted the administrative remedies
available to such party within the Internal Revenue Service.” In
general, in order to exhaust administrative remedies, the
taxpayer or the taxpayer’s qualified representative must
participate in an Appeals Office conference. Sec. 301.7430-
1(b)(1)(i), Proced. & Admin. Regs. “Participation” in an Appeals
Office conference is defined as “[disclosure] to the Appeals
office [of] all relevant information regarding the party’s tax
matter to the extent such information and its relevance were
known or should have been known to the party or qualified
representative at the time of such conference.” Sec. 301.7430-
1(b)(2), Proced. & Admin. Regs.
The documents in the record indicate that the parties
conducted petitioner’s conference through oral and written
correspondence and that the conference began in July 2001 and
ended on October 17, 2001. During this period, in the July 31
letter, petitioner argued that he had settled the taxable year
1983, and petitioner attached copies of the settlement - 17 -
agreements. In responding to petitioner’s argument, Appeals
Officer Sivick did not address the content of the settlement
agreements or their possible effect on petitioner’s 1983 taxable
year. Indeed, the substance of Appeals Officer Sivick’s response
suggests that he was unaware of the settlement agreements’
relevance to petitioner’s tax matter.
Overall, petitioner made a reasonable and good-faith effort
to disclose to Appeals Officer Sivick all relevant information in
the context and development of the case at the time of the
conference. See Allen v. Commissioner, T.C. Memo. 2002-302.
Accordingly, we conclude that petitioner exhausted the
administrative remedies available to him.
C. Reasonableness of Costs Claimed
Section 7430(c)(1) defines reasonable litigation costs to
include, among other things, reasonable court costs and
reasonable fees paid or incurred for the services of attorneys in
connection with the court proceeding (attorney’s fees).
Attorney’s fees are limited by statute and adjusted for cost of
living. Sec. 7430(c)(1)(B)(iii) (and flush language). For
purposes of this motion, the statutory rate for attorney’s fees
is $150 per hour. See Rev. Proc. 2002-70, 2002-2 C.B. 845, 850.
A taxpayer may recover attorney’s fees in excess of the statutory
limit in the presence of one or more of the following special
factors: (1) Limited availability of qualified attorneys for the - 18 -
proceeding, (2) difficulty of the issues presented in the case,
or (3) local availability of tax expertise. Sec.
7430(c)(1)(B)(iii).
Respondent contends that the costs petitioner claims are
unreasonable, because the $250 per hour fee arrangement between
petitioner and Mr. Benda exceeds the statutory limit, and
petitioner has not shown that any of the three special factors
applies. On the other hand, petitioner asserts that this case
involves an uncommon and difficult issue, which entitles him to
the full amount of attorney’s fees incurred in connection with
the court proceeding.11
We disagree with petitioner that he is entitled to enhanced
attorney’s fees. Petitioner has not established that the issue
in this case is of sufficient difficulty to qualify as a special
factor under section 7430(c)(1)(B)(iii). We award petitioner
reasonable litigation costs in the amount of $1,631.32.
We have considered the remaining arguments of both parties
for results contrary to those expressed herein, and, to the
extent not discussed above, we find those arguments to be
irrelevant, moot, or without merit.
11 Although petitioner established that Mr. Benda was qualified to act as petitioner’s attorney in this proceeding, petitioner submitted no evidence with respect to the availability of qualified attorneys or the local availability of tax expertise. - 19 -
To reflect the foregoing,
An appropriate order and
decision will be entered.