* Judge Emilio M. Garza concurs in this opinion except for footnote 49. United States Court of Appeals,

Fifth Circuit.

No. 93-5534.

Rita B. BOUTERIE, Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Nov. 8, 1994.

Appeal from a Decision of the United States Tax Court.

Before REYNALDO G. GARZA, WIENER and EMILIO M. GARZA, * Circuit Judges.

WIENER, Circuit Judge:

Petitioner-Appellant Rita B. Bouterie ("Taxpayer") appeals an order of the United States Tax

Court ( "Tax Co urt ") denying her request for the costs incurred in litigating a Petition for

Redetermination of Taxes ("Petition for Redetermination"), which she filed in response to a Noti ce

of Deficiency ("Notice") issued by the IRS. The Tax Court found that Taxpayer had failed to

establish that the IRS' litigation position was not "substantially justified" and thus held that Taxpayer

was not entitled to costs pursuant to 26 U.S.C. § 7430. We find to t he contrary that Taxpayer

established beyond serious question that the IRS' position was wholly lacking in justification, whether

substantial or otherwise, given the absence of any defensible basis for that position in law or in fact.

We therefore reverse the decision of the Tax Court and remand for a determination of the reasonable

litigation costs that Taxpayer may recover.

I

FACTS AND PROCEDURE

The facts and state law issues of this case are no longer in dispute. Taxpayer and William H.

Boyle ("Mr. Boyle") were married in 1966 without executi ng a pre-nuptial agreement. As of

November 1978, the spouses were d o miciled in Louisiana, and accordingly were subject to the

community property laws of that state.1 See Boyle v. Boyle, 459 So.2d 735 (La.Ct.App.1984), cert. denied, 462 So.2d 651 (La.1985).

Taxpayer had also sought a partnership interest in renewal commissions for policies written after

the termination of the marital community, so she appealed the trial court's decision denying this

claim. A Louisiana appellate court, however, affirmed the trial court's decision. Taxpayer then

filed a petition for certiorari with the Louisiana Supreme Court, but the writ was denied. On November 13, 1978, Taxpayer sued her husband in Louisiana for a "separation from bed

and board" (legal separation), which was granted on May 31, 1979. Even though the final judgment

of divorce was not rendered until 1985, the 1979 judgment granting the legal separation had the effect

of terminating the "community of acquets and gains" (marital community) between Taxpayer and Mr.

Boyle ipso facto, but retroactively to November 13, 1978, the date Taxpayer had filed her petition

for legal separation.

Mr. Boyle was a life insurance agent who was paid on commission. For each insurance policy

he sold, he earned both a current "sales commission" and the right to future "renewal commissions"

for each subsequent year that the policy remained in force. Mr. Boyle continued to receive renewal

commissions on policies he had sold prior to the termination of the marital community with Taxpayer,

but he did not share these commissions with her.

Taxpayer subsequently filed a suit in Louisiana to partition all property formerly belonging

to the marital community, including the right to receive future renewal commissions on policies sold

during the existence of the marital community, i.e., those policies sold prior to November 13, 1979.

In 1983, a Louisiana court ruled on the suit, holding, inter alia, that:

Commissions payable to William Boyle on renewal premiums for policies of insurance written

prior to Nov e mber 13, 1978, are community property

. Commissions payable to William

Boyle on renewal premiums for policies of insurance written on or after November 13, 1978,

are the separate property of William Boyle.

This decision was affirmed on appeal. 1

Even after that judgment became final and executory, though, Mr. Boyle continued to oppose

vigorously the payment to Taxpayer of her one-half of any renewal commission income from policies

written prior to the date that the marital community was terminated. Beginning September 1, 1985,

however, all renewal commission payments on policies written before the termination of the marital

community were deposited into an escro w account. On June 17, 1988, pursuant to a parti al2 Subsequently, the IRS discovered that it erroneously calculated the amount of renewal

commissions earned by Mr. Boyle, and adjusted his tax deficiency accordingly.

3 The Tax Court found that Taxpayer did not file returns for 1982 and 1983, see slip op. at 564;

the IRS, in its Answer to Taxpayer's Petition for Redetermination, alleged that Taxpayer did not

file returns in 1981 and 1982. Taxpayer, in her Reply to the IRS' Answer, admitted that she did

not file a return in 1981, but asserted that she did file a return in 1982. In two separate pieces of

correspondence—a letter dated September 1, 1986 from the IRS Service Center in Austin, Texas

and a January 1992 letter from the IRS district counsel—the IRS referred to information

contained in Taxpayer's 1982 income tax return. It suffices that, based on this record, it is

impossible to determine whether Taxpayer failed to file one or two returns, but the answer to that

question does not affect this appeal. settlement agreement, all funds in the escrow account were divided equally bet ween the former

spouses, who also agreed that all future renewal commissions resulting from policies written before

the termination of the marital community would be shared equally. It was not until October 16, 1990,

however, that the Louisiana trial court entered an order partitioning the remainder of the assets that

had formerly belonged to the marital community, including renewal commissions. As a result, that

court ordered Mr. Bo y le to pay Taxpayer in excess of $488,000 to equalize the partition; the

majority of this amount was required to account for renewal commissions received by Mr. Boyle

between 1978 and 1984 (but never shared with Taxpayer) on policies written before November 13,

1978.

In May 1989, while the Louisiana suit was still pending, the IRS issued a Notice to Mr. Boyle,

claiming deficiencies of over $400,000 for tax years 19 78 through 1984 (except for 1982), 2 an

eight-year period during which Mr. Boyle apparently had not filed income tax returns. During this

same period Taxpayer also had neglected to file two income tax returns. 3 In the Notice, the IRS

determined that Mr. Boyle should have reported as ordinary income (1) one-half of the amount of the

renewal commissions he was paid in 1978 (before the marital community was terminated), and (2)

the total amount of the renewal commissions he was paid thereafter, regardless of when the policies

which generated those renewals had been written.

In August 1989, Mr. Boyle filed a Petition for Redetermination in the Tax Court. He alleged,

inter alia, that the IRS erred in determining his filing status for tax years 1978 through 1984 and in

finding that he owed taxes on the total amount of the renewal commissions for policies written before4 In its decision, the Tax Court referred only to Mr. Boyle's allegation that the IRS erred in

determining his filing status. Slip op. at 571-72. In discussing Mr. Boyle's Petition, the IRS

vaguely states that he "contest[ed] the Commissioner's determinations." In her Reply Brief filed in

this court, Taxpayer states that in the Tax Court Mr. Boyle took the position "that he should only

be taxed on one-half (1/2) of the commissions," which was "inconsistent" with his earlier

contention that he had a 1007 interest in the renewal commissions.

5 The service also calculated additions to tax in excess of $40,000 and other interest. As with

Mr. Boyle's deficiency, the IRS subsequently discovered that it had erroneously calculated the

amount of the renewal commissions and adjusted Taxpayer's purported deficiency accordingly. the termination of the marital community. 4

On January 25, 1991—after the Louisiana judgment of partition had been rendered—the IRS

for the first time issued a Notice to Taxpayer, claiming that she owed taxes on renewal commissions

resulting from policies written up until the marital community ended but paid in full thereafter to Mr.

Boyle between 1978 and 1984. Seizing on the 1983 state co urt decision, which imprecisely

characterized the renewal commissions as "community property"—failing to distinguish between the

rights to receive such commissions (which had been community assets) and the commissions actually

earned and paid wholly to Mr. Boyle after the marital community terminated—the IRS insisted that

Taxpayer had an immediately taxable one-half interest in this renewal commission income regardless

of her lack of actual receipt and her legal and factual inabilit y to obtain her share. This determination

was clearly inconsistent with the position taken by the IRS in its May 1989 Notice to Mr. Boyle, in

which the IRS had claimed t hat Mr. Boyle was required to declare as his income all renewal

commission income received after the marital community was terminated. Nevertheless, based on

its bald assertion that Taxpayer owned a community property interest in the renewal commissions,

the IRS calculated that she owed an income tax deficiency of $289,562.33 for tax years 1978-82 and

1984. 5

In April 1991, Taxpayer filed a Petition for Redetermination in the Tax Court, arguing that

the deficiencies calculated on the basis of her alleged "community property" interest in the renewal

commissions were improper, as they were grounded in an erroneous interpretation of Louisiana law.

She also pointed out that any taxes allegedly owed for the 1978 tax year were time bar red. In its

answer, the IRS conceded that co llect ion efforts for 1978 taxes were barred by the statute of6 There is nothing in the record to indicate that Taxpayer unilaterally had the power to demand

that she be paid directly a one-half share of the renewal commissions in which she held an interest,

we thus presume that Taxpayer lacked such authority. Moreover, as Taxpayer's right to renewal

commissions was not established until the June 3, 1983 judgment, and the commissions at issue

were paid between 1978 and 1984, it is unlikely that Taxpayer could have demanded direct

payment for the majority of the payments. In any event, because the IRS never advanced the limitations, but reasserted its contention that Taxpayer had a currently taxable community property

interest in the renewal commissions when and as they became payable, and that she thus owed taxes

on one-half of the amount of the renewal commissions paid by the company to her husband for the

years in which he received such payments.

Resp o nding to an informal discovery request in January of 1992, the IRS reiterated its

position that Taxpayer owned a community property interest in the renewal commissions paid to Mr.

Boyle in years after termination of the marital community on policies written before its termination.

[Taxpayer] is taxable on her share of the income from the Policy renewals in the year in which

the Policy Renewals were generated. The divorce court ruled that the insurance policies

...

were community assets. Under La. Civil Code Article 2338, the ... revenues from community

assets are community property

. Therefore, by operation of Louisiana law, [Taxpayer] is

taxable on

... one-half of the community income generated by the Policy Renewals in the years in which the income was generated.

In this same letter, the IRS admitted "[a]t this time, we do not have any information to indicate that

[Taxpayer] "actually' physically received the income from the policy renewal s in the years 1978

through 1984." But, for the first time, the IRS proffered another rationale purporting to support its

contention that Taxpayer owed taxes on this in come: "[I]t is [the IRS'] position that [Taxpay er]

"constructively' received the policy renewal income because it was deposited into an escrow account

for the benefit of both spouses during the divorce proceedings."

Taxpayer responded promp t ly by letter dated February 24, 1992, citing authority for the

propositions that: (1) after the termination of the marital community, the renewal policies (like every

other asset) were no longer community assets but were as set s held by the former spouses as

co-owners in indivision; (2) the renewal commissions earned after November 13, 1978 were—and

could only be—separate income of the co-owners, one-half each; and (3) Taxpayer was not taxable

on her share of the renewal commissions because she had neither actually nor constructively received

the income. 6position that Taxpayer possessed the power to obtain payment directly, and thus constructively

received renewal commission payments, the reasonableness of such a position is not before us.

7 Taxpayer also alleged that documents provided to the IRS on January 17, 1992 made it

apparent that the escrow account was established for renewal commissions paid after August

1985. In the same February 1992 letter, Taxpayer also pointed out to the IRS that: (1) as a matter

of law, Louisiana Civil Code Article 2338, cited by the IRS, is inapposite to Taxpayer as it applies

only to income earned during the existence—but not after the termination—of the marital community;

and (2) as a matter of fact, no renewal commissions paid between 1978 and 1984 were deposited into

the escrow account, as that account had not even been established un t il August 1985, for

commissi ons pai d thereafter. 7 In concluding, Taxpayer's counsel insisted that the IRS "should

immediately concede the renewal premium income issue in full," suggested that he and the IRS meet

"for the purpose of bringing this matter to a mutually satisfactory conclus ion and to resol ve any

questions," and offered "to recommend that [Taxpayer] concede her right to recover the reasonable

litigation costs of this proceeding, provided settlement can be achieved without further expense to

her."

In an April 8, 1992 letter , apparently responding to an April 6, 1992 telephone conference

with the IRS, counsel for Taxpayer provided the IRS with citations to and brief summaries of sixteen

Louisiana state court cases which uniformly and conclusively established that, upon termination of

a Louisiana marital community, all assets fo rmerly belonging to the erstwhile marital community

automatically become assets co-owned in indivi sio n by each former spouse; and that such assets

could not possibly be community property

, given that the marital community no longer exists. In this

letter, Taxpayer's counsel also warned the IRS that "[y]our continued refusal to concede this issue

in full is not substantially justified."

The IRS, however, was not to be deterred. Two days later, in a letter to Taxpay er and

without citing to any authority, the IRS dog gedly maintained that "[b]ased on the information we

have at t his t ime and after consideration of the law cited by you, it is our position that the policy

renewals earned on the community accounts in this case are community income. Consequently, under8 The IRS retained a $30,000 adjustment for the year 1982 (resulting in a deficiency of $3,191).

This previously unreported income was alimony Taxpayer received from her husband. Louisiana law, [Taxpayer] ... is taxable on her share...."

Citing a commonality of interests, on April 20, 1992 the IRS moved to consolidate Mr.

Boyle's and Taxpayer's Tax Court cases. On April 24, 1992, the consolidation motion was granted;

trial was scheduled to commence June 1, 1992.

Sometime early in May, 1992, Taxpayer provided the IRS with an expert opinion dated May

1, 1992. The expert explained that the phrase "community property," as used by the Louisiana court

in its 1983 judgment, was simply a shorthand widely used in Louisiana for distinguishing assets of the

former marital community from assets of the separate estate of each spouse.

Around the same time, the IRS and Mr. Boyle apparently reached a settlement in Mr. Boyle's

case: Mr. Boyle agreed to report as his income all of the renewal commissions paid between 1978

and 1984. On or about May 23, 1992—a mere eight days before the scheduled June 1, 1992 trial

date (and almost one and one-half years after issuing the Notice to Taxpayer)—the IRS offered to

settle Taxpayer's case by conceding that she was not liable for any taxes on the renewal commission

income. 8 Taxpayer accepted the offer, and in July 1992, the Tax Court entered a stipulated decision,

incorporating the terms of the settlement agreement.

Taxpayer subsequently filed a motion requesting that the Tax Court vacate its decision so that

she could file a motion for litigation costs. The Tax Court granted the motion to vacate its decision

but denied Taxpayer's request for litigation costs, finding that she had failed to prove that the IRS'

position was not substantially justified, as required by § 7430. This appeal followed, raising only the

issue whether the Tax Court erred when it denied Taxpayer's request for litigation costs.

II

ANALYSIS

A. L ITIGATION C OSTS U NDER § 7430

Section 7430 allows a "prevailing party" (other than the United States or any creditor of the9 26 U.S.C. § 7430(a)(1) (1988).

10 Id. § 7430(c)(4)(A).

11 In 1988, Congress amended § 7430 to bring its language more in line with that of the EAJA,

28 U.S.C. § 2412. Hanson v. Commissioner, 975 F.2d 1150, 1153 (5th Cir.1992).

12 Lennox v. Commissioner, 998 F.2d 244, 248 (5th Cir.1993) (quoting Pierce v. Underw ood,

487 U.S. 552, 565, 108 S.Ct. 2541, 2550, 101 L.Ed.2d 490 (1988)); Hanson, 975 F.2d at 1153.

13 Lennox, 998 F.2d at 248 (quoting Pierce, 487 U.S. at 565, 108 S.Ct. at 2550 and citing

Hanson, 975 F.2d at 1153).

14 Hanson, 975 F.2d at 1153 (citing Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 420-

21, 98 S.Ct. 694, 699-700, 54 L.Ed.2d 648 (1978)).

15 Hanson, 975 F.2d at 1153 (citing Estate of Perry v. Commissioner, 931 F.2d 1044, 1046

(5th Cir.1991) and S & H Riggers & Erectors, Inc. v. OSH Review Comm'n, 672 F.2d 426, 430

(5th Cir.1982)); see Lennox, 998 F.2d at 248 (citing Estate of Perry ).

16 Lennox, 998 F.2d at 248 (citing Estate of Johnson v. Commissioner, 985 F.2d 1315, 1318

(5th Cir.1993)). taxpayer involved) in tax proceedings to recoup reasonable litigation costs, including attorney's fees. 9

For a taxpayer to be a prevailing party, however, she must meet several statutory requirements. In

the instant case, the IRS has conceded that Taxpayer has satisfied all statutory requisites except one:

"that the position of the United States in the proceeding was not substantially justified." 10

In determining whether the government's position is substantially justified under § 7430, we

draw on our longer experience with the Equal Access to Justice Act ("EAJA"). 11 Borrowing from

the jurisprudence under the EAJA, we have stated that "[t]he position of the United States is

substantially justified if it is "justified to a degree that could satisfy a reasonable person.' " 12 "It is not

enough that a position simply possesses enough merit to avoid sanctions for frivolousness; it must

have a "reasonable basis both in law and fact.' " 13 We have noted, however, that the standard "is not

as lenient as the standard presently governing fee awards in Title VII cases." 14

Although the fact that, virtually on the courthouse steps, the IRS conceded its case in the

underlying litigation does not compel an award of costs, the outcom e of the lawsuit remains a factor

to be considered. 15 Still, "[t]he burden of proving no substantial justification [remains] with the

taxpayer[ ]." 1617 Id.; Hanson, 975 F.2d at 1153.

18 Lennox, 998 F.2d at 248.

19 See Bode v. United States, 919 F.2d 1044, 1047 (5th Cir.1990). In the instant case , t he Tax Court concluded that Taxpayer failed to establish that the

positions taken by the IRS were not substan t ially justified, as (1) the IRS' Notice to Taxpayer, in

which the IRS asserted a position inconsistent with that taken in the Notice to Mr. Boyle, was

necessary to protect the public fisc; (2) the IRS' position that Taxpayer possessed an immediately

taxable community property interest in the renewal commissions was based on the 1983 judgment of

a Louisiana court; (3) the IRS conceded its position within "a short time" after receiving "new

evidence" (the expert's opinion) that clarified the "mislead i ng" terminology in the 1983 judgment;

and (4 ) Taxpayer cit ed "no authority on the proper Federal tax treatment of income generated by

former community assets of a former Louis iana marital community," the Tax Court thus was "not

satisfied" that federal law on the treatment of such income was settled. We review these rulings for

abuse of discretion. 17 Accordingly, we "will reverse only if we have a definite and firm conviction that

an error of judgment was committed." 18 We review the Tax Court's subsidiary findings of fact for

clear error. 19

B. T HE P OSITION OF THE IRS

Throughout this dispute—in its Notice to Taxpayer, in its answer to Taxpayer's Petition in

Tax Court, in its response to Taxpayer's informal discovery requests, and in its correspondence to

Taxpayer as late as one month before the scheduled trial date—the IRS consistently took the position

that Taxpayer had a community property interest in the renewal commissions from insurance policies

written by her husband prior to the termination of their marital community, but neither payable nor

actually paid to her husband until after such termination. Based on this patently erro neo us legal

conclusion, the IRS continued to insist that Taxpayer was required to report this income for the years

in which the commissions were paid to her husband, regardless of whether she had received any of

the income or had any way short of litigation to obtain direct payment (which she did not).

As noted, in January 1992, the IRS articulated another "reason" why Taxpayer was deficient20 We note that the IRS' primary position, that the renewal commissions were community

property, remained constant ever since the IRS issued the Notice to Taxpayer; it was during

litigation before the Tax Court that the district counsel first contended that Taxpayer

constructively received commission renewal income. These positions therefore are undoubtedly

the positions "taken by the United States" in this proceeding. See Lennox, 998 F.2d at 247-48

(stating that "[t]here is no question that it is the position taken by the United States on the [date

that the notice of deficiency was issued] which we must consider"); Estate of Johnson, 985 F.2d

at 1319 (stating that "we must not consider the position of the IRS prior to the time the district

counsel entered the picture"); Hanson, 975 F.2d at 1152 n. 2 (discussing but not deciding the

instant at which the position of the United States is established for the purpose of analyzing a

request for administrative expenses). in the payment of her federal taxes between 1978 and 1984: that she " "constructively' received ...

policy renewal income because it was deposited into an escrow account for the benefit of both

spouses during the divorce proceedings." This position was as factually wrong (because the account

was not established until 1985) as the community property position of the IRS was legally wrong.

As t hese were the only two positions proffered by the United States in contending that

Taxpayer was deficient on her taxes between 1978 and 1984, it is to these positions only that we may

look for a reasonable basis in law and fact. 20 We first explain why the IRS' argument that Taxpayer

constructively received renewal commission income had no basis in fact; we then demonstrate why

the IRS' position that Taxpayer had a community property interest in the assets formerly belonging

to the marital community, and thus to the income therefrom, had no basis in fact or law.

C. T HE IRS' P OSITIONS W ERE N OT S UBSTANTIALLY J USTIFIED

1. The IRS' Position That Taxpayer "Constructively Received" Renewal Commission Payments Had

No Reasonable Basis In Fact

In a January 31, 1992 letter to Taxpayer, the IRS stated that "[T axpayer] "constructively'

received ... policy renewal income because it was deposited into an escrow account for the benefit

of both spouses du ring t he divorce proceedings." Taxpayer responded to the IRS' contention by

letter dated February 24, 1992, wherein she provided significant evidence that the IRS' posi ti on

lacked any basis in fact whatsoever.

Taxpayer explained that the escrow account to which the IRS referred was established

November 20, 1985 to receive deposits of renewal commissions paid to Mr. Boyle after August 31,

1985. Taxpayer furnished the IRS several documents confirming these facts.21 United States v. Mitchell, 403 U.S. 190, 197, 91 S.Ct. 1763, 1768, 29 L.Ed.2d 406 (1971).

22 Id.; United States v. Burglass, 172 F.2d 960, 961 (5th Cir.1949); Westerdahl v.

Commissioner, 82 T.C. 83, 86, 1984 WL 15522 (1984); Sharer v. Commissioner, T.C. Memo

1994-453, 1994 WL 483902.

23 L A

. C IVIL C ODE A NN . art. 2369.1 (West Supp.1994) ("After termination of the community

property regime, the provisions governing co-ownership apply unless there is contrary provision

of law or juridical act."); Due v. Due, 342 So.2d 161, 163 (La.1977) ("Included among the assets

of the community, thus subject to inventory and spouses' joint ownership at the community's

dissolution, are obligations based upon the right to receive money to become due in the

future...."); Lentz v. Lentz, 411 So.2d 59, 61 (La.Ct.App.1982) ("Our long settled jurisprudence

is that following termination of the community between a husband and wife the two parties

become owners in indivision of the immovable property which had belonged to the

community...."); Dhuet v. Taylor, 383 So.2d 1061, 1062 (La.Ct.App.1980) ("On dissolution of

the community the parties become co-owners, each with an individual interest."). Taxpayer's explanation and supporting evidence conclusively established that no renewal

commissions paid to Mr. Boyle during the period at issue here (1978 through 1984) were deposited

int o the escrow account—nor could they have been. For that account was not even creat ed unt il

1985! Accordingly, there was absolutely no basis in fact for the IRS to argue that these payments

went into an escrow account (which consisted solely of renewal commissions paid after August 1985)

and thus co nst ituted constructive receipt by Taxpayer of renewal commissions paid to Mr. Boyle

between 1978 and 1984. In fact, the IRS itself appears to have recognized that this position was

untenable; after receiving Taxpayer's explanation, the IRS never again raised the constructive receipt

argument. This apparently failed to convince the IRS to cease and desist pressing its baseless claims,

however. Rather, the IRS retreat ed to its original position that the subject commissions were

community property

, a position which, as we next exp lain, had no substantially justifiable basis in

either fact or law.

2. The IRS' Position That Taxpayer Possessed a Community Property Interest in the Renew al

Commissions Had No Reasonable Basis in Fact or Law

Well prior to the time the IRS issued its Notice to Taxpayer, the following principles were

well-settled by applicable federal and state law. "[F]ederal income tax liability follows ownership." 2 1

Ownership, in turn, is determined by state law. 22 Fo r almost 200 years Louisiana law has

unwaveringly provided that, after the termination of a marital community, each former spouse is an

equal co-owner in indivision of the assets that formerly belo nged t o t he marital community. 2 324 West v. Ortego, 325 So.2d 242, 245-46 (La.1975) ("Once the community is terminated,

certain property which has been community ceases to be so.... The community ceases to exist as

a legal entity, and future income or other enrichments belong alone to the party receiving it.").

25 Mitchell, 403 U.S. at 197, 91 S.Ct. at 1768. Consequently, in Louisiana it is a legal impossibilit y for a former spou se to own a "com m uni ty

property " interest in any asset of the former community: The mar it al community simply vanishes;

it ceases to exist. 24 And, absent a marital community, there simply can be no "community" property.

On the basis of Taxpayer's post-1978 income tax returns, the 1983 Louisiana court decision

in the partition suit, or its January 1991 Notice to Taxpayer (which the IRS addressed to "Ms. Rita

B. Bouterie (formerly Rita B. Boyle)" and in which the IRS itself determined that Taxpayer's filing

status for taxable years 19 79 t hrough 1984 was single) the IRS knew or should have known that

Taxpayer's marital c o mmunity terminated in 1978, pretermitting the existence of any "community

property ." Nevertheless, the IRS persistently claimed—until May 1992—that Taxpayer owned a

community property interest in the renewal commi ssio ns, t he rights to which had been acquired

during the existence of the former marital community but the entitlement to which was not earned

until after the community terminated. As long-settled Louisiana law completely forecloses any such

argument, the IRS had no reasonable basis in fact or law to assert this position.

Having established that settled Louisiana law dictated that Taxpayer possessed an undivided

one-half int e rest as a co-owner—not a community property interest—in renewal commissions

ac cruing and payable after termination of the marital community (albeit the r ight to receive such

commissions when and if they eventually accrue had been acquired during the existence of the marital

community), we next consider the federal tax implications of this determination. For that, we turn

to federal law, as it is federal law that determines when and how a legal interest shall be taxed. 25

The Tax Court fo und t hat the IRS' position that Taxpayer was deficient on taxes between

1978 and 1984 was substantially justified because that court "was not satisfied

... that the law on the

Federal income taxation of the payments in question was settled or clear, in view of the fact that there

were at that time no Federal tax cases dealing with t he t axat io n of ordinary income generated by26 Slip op. at 573.

27 26 U.S.C. § 61 ("[G]ross income means all income from ... commissions...."); id. § 451(a)

("The amount of any item of gross income shall be included in the gross income for the taxable

year in which received by the taxpayer...."); see, e.g., Farrell v. Commissioner, 134 F.2d 193,

194 (5th Cir.) (finding that payments owed but not yet paid to a cash-basis taxpayer are not

taxable until such payments have been actually or constructively received) (citing North Am. Oil

Consolidated Co. v. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197 (1932)), cert. denied,

320 U.S. 745, 64 S.Ct. 47, 88 L.Ed. 442 (1943).

28 Slip op. at 573.

29 Kelly v. Commissioner, 16 T.C. Memo. 34, 1957 WL 650 (1957) ("[W]here a disputed sum

is recovered as the result of litigation, it is includable in income in the year recovered and not

within the income of the years in which it accrued."); see, e.g., Farrell, 134 F.2d at 194; Osceola

Heard Davenport v. Commissioner, 12 T.C. Memo. 1494 (1953); Davenport v. Commissioner,

12 T.C. Memo 860 (1953).

30 North Am. Oil Consolidated Co., 286 U.S. at 423, 52 S.Ct. at 615 (holding that taxpayer

"was not required ... to report as income an amount which it might never receive"). assets of a former Louisiana marital community." 26 We, however, find such reasoning untenable; we

are satisfied that the applicable law was not only "settled," but was not even open to serious question.

We find nothing remarkable—certainly nothing unsettled—about the application of federal

tax law to income generated by assets co-owned in indivision by a cash-basis taxpayer. The fact that

such co-ownership result s fro m t he termination of the marital community is of no consequence

whatsoever. The law has lo ng been clear: Such income is taxed to a cash-basis taxpayer upon

receipt. 27 This simple and direct rule does not somehow become murky merely by virtue of the

income in question having been generated by the "assets of a former Louisiana marital community." 28

The conclusion that a cash-basis taxpayer c o uld no t possibly owe taxes on income never

received is particularly clear in instances when, as here, the right to the income is disputed and the

income is never paid or reduced to Tax payer's control and di sposi ti on. 2 9 In fact, even though

Taxpayer has been found by a state court to be entitled as a co-owner in indivision to receive one-half

of the renewal commission income which is the subject of the litigation, there is a very real possibility

that she may never receive a penny of this income. 30 In light of these facts and the settled law—as

repeatedly demonstrated to the IRS by counsel for Taxpayer—the IRS should have conceded its case31 In January 1992, the IRS conceded that it did "not have any information to indicate that

[Taxpayer] "actually' physically received the income from the policy renewals in the years 1978

through 1984." The IRS also should have known by no later than February 1992 that Taxpayer

had not constructively received renewal commission income.

32 Taxpayer cited as authority 26 U.S.C. §§ 61, 451, Farrell v. Commissioner, 134 F.2d 193

(5th Cir.1943), Kelly v. Commissioner, 16 T.C. Memo. 34, 1957 WL 650 (1957), and Davenport

v. Commissioner, 12 T.C. Memo. 860 (1953). In Kelly, a case where each party's respective

ownership rights were determined under the law of Wisconsin, the Tax Court held that income

from co-owned property is taxable to a co-owner in the year when actually or constructively

received—regardless of when the income may have been received by another co-owner.

33 The Tax Court merely concluded that the law was "unsettled" because the Taxpayer did not

cite a decision applying the principle to property held in Louisiana, and the IRS responded by

arguing that the renewal commissions were community property or, in the alternative, that the

income had been constructively received.

34 Cf. McAdams v. Commissioner, 15 T.C. 231, 1950 WL 267 (1950) (applying federal tax law

identically to determine when cash-basis taxpayer could claim deductions for expenses incurred in

drilling and developing oil wells in Texas and Louisiana that taxpayer co-owned), aff'd, 198 F.2d

54 (5th Cir.1952). against Taxpayer long before late-May 1992, on the eve of tr ial. 31 There is no legal or factual

justification whatsoever for the persistence of the IRS in relentlessly pursuing Taxpayer.

Taxpayer t imely cited a plethora of precedent to the IRS to establish that income generated

from property held in co-ownership is not taxed until receipt, actual or constructive. 32 Notably,

neither the Tax Court nor the IRS questioned Taxpayer's statement of the law. 33 Nevertheless, the

Tax Court considered Taxpayer's authority to be distinguishable, on the sole ground that the cases

relied on by Taxpayer arose under the community property law of Texas.

In fact, however, the cases cited by Taxpayer demonstrate the proper application of federal

law to ordinary income generated by assets that are co-owned; it is nothing more than happenstance

that the ownership interests inv o lved in the cases cited were determined pursuant to Texas and

Wisconsin law. As t he income at issue in these cases was generated from property that was

co-owned, and as we can discern no principled reason and no state law differences to account for why

federal law should or would draw a distinction in taxing income generated from assets co-owned in

Texas or Wisconsin from those co-owned in Louisiana, 34 we are satisfied that the fact that the cases

cited by Taxpayer arose in Texas and Wisconsin, rather than in Louisiana, is at most a disti ncti on

without a difference—if it is a distinction at all.35 See Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir.1991).

Finally, we note in passing another insurmountable problem with the Tax Court's finding that

the IRS position was substantially justified becau se t he application of federal law was unsettled.

Section 7430(c)(7) requires that we evaluate "the position taken by the [IRS]." Yet nowhere in the

record is there any indication that the IRS ever advanced the position that federal law was unsettled.

Neither was the argument advanced that Taxpayer held the property in undivided co-ownership but

owed taxes nonetheless because federal law provides that such income is taxable when genera ted,

regardless of receipt.

To the c o ntrary, the IRS consistently asserted—erroneously—that Taxpayer owed taxes

because the renewal commis sions w ere community property. In fact, in responding to Taxpayer's

wealth of authority exposing the fallaciousness of the IRS' community property argument, the IRS

never espoused the rejoinder that receipt was immateria l even if the renewal commissions were

co-owned. Rather, the IRS asserted what it apparently believed t o be a more "settled"—albeit

factually erroneous—position: that the renewal commissions had been "constructively received" by

being deposited into an escrow account.

Then, when Taxpayer proved irrefutably that the IRS' constructive receipt argument had no

basis in fact, the IRS again failed to argue that receipt was immaterial. Instead, the IRS retreated to

more familiar ground—reasserting its position that the commissions were community property.

We find the IRS' litigation positions to be either puzzling inconsistencie s o r implicit

acknowledgements that it realized that receipt of income is necessary before a cash-basis taxpayer

is required to report income generated by property held in undivided co-ownership.

The IRS' steadfast refusal—even in the face of Taxpayer's i r refutable logic and citation of

solidly established law and uncontested fact—to acknowledge that its positions had no basis in law

or fact was wholly unre aso nable and unjustifiable. As we have previously noted in the context of

circuit-shopping in hopes of creating a conflict, the IRS is certainly free to relitigate settled issues of

law, but it does so at the risk of incurring the o bligation to reimburse taxpayers for their litigation

costs, pursuant to § 7430. 3536 The Tax Court found that "ultimately [the IRS] conceded that [its] interpretation of this

aspect of Louisiana law was incorrect." The Tax Court "attribute[d] [the IRS'] concession to the

fact that [Taxpayer's] attorney obtained an expert opinion from a specialist in Louisiana domestic

relations law," explaining the "misleading" use of the term "community property" in the Louisiana

district court's opinion. The Tax Court noted that, once the IRS received the expert opinion, the

agency conceded the point "within a short time." 3. The IRS Cannot Reasonably Rely On "Misleading" Nomenclature in a Louisiana State Court's

Opinion

Unlike the Tax Court, we cannot embrace the notion that the IRS was somehow duped by

"misleading" nomenclature in the Louisiana state court's decision partitioning the assets of Taxpayer's

former marital community. 36 In its judgment, the Louisiana court wrote that "[c]ommissions payable

to William Boyle on renewal premiums for policies of insurance written prior to November 13, 1978,

are community property

. Commissions payable to William Boyle on renewal premiums for policies

of insurance written on or after Novem ber 13, 1978, are the separate property of William Boyle."

As explained above, however, the term "community property " in this context is universally recognized

shorthand, consistently used in Louisiana to distinguish assets of the former marital community from

the assets of each former spouse's pre-existing separate estate. That is obviously the way that the

Louisiana court used the term in this instance—and the fact that the Louisiana court here adopted this

widely understood, customary parlance should have been readily apparent to a District Counsel's

Office located in New Orleans.

The IR S cannot remain deliberately ignorant of such a basic tenet of state law, especially

when, as here, the IRS is bombarded by correct analyses, citations, and expert opinions timely

furnished by counsel for Taxpayer. As discussed above, Louisiana law is crystal clear on this point:

A spouse has an undivided co-ownership interest in the assets formerly belonging to the terminated

marital community. To read the Louisiana court 's o pinio n to mean that Taxpayer mystically

possessed a community property interest in these assets long after the marital community ceased to

exist, the IRS would have to blind itself to this long-settled precedent and engage in a flight of legal

fantasy.

Second, in many of the cases Taxpayer cited to the IRS, Louisiana courts used the shorthand37 See, e.g., Williams v. Williams, 509 So.2d 77, 78-79 (La.Ct.App.1987) ("This is an appeal

from a judgment of partition of community property .... Each ow ner in indivision is entitled to

possess or use the common property ...." (emphasis added)); Michel v. Michel, 484 So.2d 829,

830 (La.Ct.App.1986) ("This is a suit to partition community property .... A co-ow ner in

possession is entitled to be reimbursed expenses for the preservation of the common property following the judgment of separation." (emphasis added)); Dhuet v. Taylor, 383 So.2d 1061,

1062 (La.Ct.App.1980) ("Appellant lastly argues that the trial judge erred in ordering Mr. Dhuet

to pay her ... total and complete portion of the community. We agree. On dissolution of the

community the parties become co-ow ners, each with an individual interest.... We know of no

authority that would allow the trial judge to adjudicate the community property to one spouse upon payment of a certain sum of money to the other spouse." (emphasis added)); see also Due

v. Due, 342 So.2d 161 (La.1977) ("In Louisiana, all property acquired by the labor and industry

of the spouses during the marriage belongs to the community of acquets and gains existing

between them.... [A]ssets of the community, thus subject to inventory and spouses' joint

ownership at the community's dissolution, are obligations based upon the right to receive money

to become due in the future." (emphasis added)).

38 Slip op. at 572-73 (emphasis added). "community property " to refer to property that actually was held in undivided co-ownership. 37 The

fact that the Louisiana court here also adopted this convention should have been particularly apparent

fro m t he context: The state court used the phrase in the first of two consecutive clauses to

distinguish assets of the former community from Mr. Boyle's separate assets.

Third, if—as Taxpayer's expert opined, the IRS apparently agreed, and we recognize—it is

the " custom in domestic relations courts in Louisiana to use the term "community property ' in lieu of

the more cumbersome, but understood, phrase "assets of the former marital community,' " 38 we

cannot believe that the District Counsel Office in New Orleans (which undoubtedly handles myriad

cases in which property interests are governed by Louisiana law) could not have been aware of this

convention. Assuming arguendo that such was the case, however, we decline to excuse such

ignorance.

Time and again Taxpayer tried to explain the situation to the District Office and offered to

introduce an expert to testify to as much. The IRS, however, remained deaf to Taxpayer's

clarifications and spurned her entreaties, responding that it needed no expert to interpret Louisiana

law and vowing to resist any attempt to introduce such an expert to explain Louisiana law. If it has

demonstrated nothing else, the IRS has proved that it certainly did need such expert assistance. As

the IRS deemed itself sufficiently adept at Louisiana law to eschew the need for expert assistance,39 See Lennox v. Commissioner, 998 F.2d 244, 248 (5th Cir.1993).

40 The Tax Court in the past has "urge[d] the Commissioner ... to indicate clearly to the

taxpayer [when a] claim is being presented in the alternative and that there is no intention to tax

the same income twice." Doggett v. Commissioner, 66 T.C. 101, 104, 1976 WL 3604 (1976).

Nowhere in the record, however, is there evidence that the IRS indicated that its claim against

Taxpayer was being litigated in the alternative or that Taxpayer's alleged deficiencies would be

collected only if the IRS were unable to collect from Mr. Boyle.

41 In its Notices to Taxpayer and Mr. Boyle, the IRS took inconsistent positions regarding who

was liable for the taxes on the renewal commissions. "The IRS may take an inconsistent position

to protect revenue, if it does so with good cause." Pow ell v. Commissioner, 91 T.C. 673, 679,

1988 WL 98350 (1988), rev'd on other grounds, 891 F.2d 1167 (5th Cir.1990).

42 The Tax Court concluded that it was impossible for the IRS to determine whether Mr. Boyle

and Taxpayer would treat the renewal commissions consistently, but the record reveals that, if

true, this problem arose because of Mr. Boyle's omissions—not from anything Taxpayer did or

failed to do.

Taxpayer's returns both during and after the applicable period reveal that she

treated income generated by the renewal commissions as taxable upon receipt. During the we decline to excuse its steadfast hewing to legal error, now that the IRS' interpretation of the law

has been shown conclusively and admittedly to be wrong.

For these very same reasons, we reject the IRS' argument on appeal that not until it received

the letter from Taxpayer's expert did it have "any indication that in Louisiana, in the context presented

here, the term "community property ' is sometimes used as a shorthand to denote assets of the former

community." Accordingly, we find clearly erroneous the Tax Court's factual finding (and equally

erroneous its legal conclusion) that this letter from Taxpayer's expert constituted "new evidence." 39

It was at best cumulative of the kind of evidence that the Taxpayer had implored the IRS to consider

time after time. We conclude t hat the IRS knew, or should have known, of this convention long

before May 1992.

4. Putative Justifications for the IRS' Positions

The Tax Court in its opinion, and the IRS in its brief, search for some justifications for the

IRS' taking inconsistent positions in this case. 40 On the one hand, the Tax Court found that the IRS

was justified in taking inconsistent positions regarding who was liable for the taxes on the renewal

commissions, 41 because by failing to file returns, Mr. Boyle and Taxpayer had made it impossible for

the IRS to determine whether the former spouses would treat the renewal payments consistently. 42applicable period, Taxpayer filed returns every year, with the exception of, at most, two.

In these returns, Taxpayer did not report income from the renewal commissions, and the

IRS ultimately conceded that this treatment was correct. Moreover, in 1988 when

Taxpayer finally did receive income from a escrow fund established in 1985 for renewal

commissions that accrued during the years 1985 through 1988, she promptly reported

such income. Taxpayer therefore consistently treated the renewal commissions as though

she owned them in co-ownership in indivision, and reported commission income as taxable

upon receipt. The Tax Court's factual finding to the contrary—that Taxpayer's position

was "nonexistent"—was clearly erroneous.

43 See Estate of Johnson v. Commissioner, 985 F.2d 1315, 1320 (5th Cir.1993). There is

nothing in the record to indicate that the IRS proffered either of these positions during the

underlying litigation. Accordingly, as with the Tax Court's conclusion that federal law was

unsettled, neither of these rationalizations were "positions taken by the United States."

44 Doggett, 66 T.C. at 103 ("It is also well established that in tax litigation the Commissioner

may, in notices of deficiency, present alternative claims for deficiencies w hen there is a basis for

doing so. " (emphasis added)).

45 We agree, albeit for different reasons. The record is unclear as to whether Mr. Boyle ever

took the position that he did not own all of the income from the renewal commission income paid

after the termination of the marital community. It is clear, however, that at least until litigation

commenced in Tax Court, far from acting as though the commissions were "community The IRS, on the other hand, argues that it ado pted its inconsistent litigation positions to avoid a

"whipsaw" situation. A whipsaw occurs when taxpayers treat the same transactio n invo lving the

same income inconsistently, thus creating the possib ility that the income could go untaxed. Aside

from the fact that, based on this record, these explanations "look[ ] an d smell[ ] like p ost hoc

rationalizations," 43 they, at most, help explain why the IRS chose to adopt inconsistent positions as

a litigation strategy. They do not, however, excuse the IRS for pursuing a litigation position wholly

lacking in a reasonable basis in fact or law.

We do not question that there are instances in which the IRS may be required to adopt

inconsistent positions to protect the public fisc. Even in such instances, though, the positions taken

by the United States still must have a reasonable basis in fact and law if the government is to avoid

liabilit y for litigation costs under § 7430. 44 Otherwise, the "good cause" provision would become an

exception that would entirely swallow the "substantial justification" rule; it would allow the IRS to

pursue a position without a reasonable basis in both law and fact.

Further, regarding the IRS' allegation that it faced a whipsaw, we no t e with considerable

interest that the Tax Court did not so find. 45 The Tax Court explicitly stated that "the positions ofproperty," for years Mr. Boyle had vigorously asserted his claim to all of the renewal commissions

as his separate property, and between 1978 and 1984, he never paid his wife one penny of the

income received therefrom. Taxpayer, on the other hand, consistently contended that she was

entitled to an undivided co-ownership in these commissions and eventually established this

position in 1983.

46 Slip op. at 571. The Tax Court did express its concern that some renewal commission

income might have escaped taxation if Mr. Boyle had established the position that he was taxable

on only 50 percent of the income and the IRS had not issued a Notice to Taxpayer. The Tax

Court, however, did not attribute this potential situation to the fact that the IRS faced a whipsaw

situation, but rather to the fact that, in the Tax Court's opinion, the IRS was proceeding in the

dark as a result of both taxpayers' failure to file taxes.

47 842 F.2d 1005 (8th Cir.1988).

48 The court acknowledged that the Fifth Circuit construed the same section differently,

permitting an inquiry in the IRS' position in either in-court or administrative proceedings.

Wickert, 842 F.2d at 1008 (citing Pow ell v. Commissioner, 791 F.2d 385, 388-92 (5th Cir.1986)). the [formerly] related taxpayers were not so much inconsistent as nonexistent." 46

The IRS' also misplaces its reliance on Wickert v. Commissioner. 47 In W ickert, the IRS was

confronted with a classic whipsaw situation. A former husband sought to deduct certain payments

to his wife as alimo ny, while his former wife sought to exclude these same payments from her taxable

income, claiming they were part of a property settlement. To avoid this whipsaw, t he IRS issued

notices of deficiency to both fo rmer spo uses, disallowing the former husband's deduction and

requiring the former wife t o include the payments as income. When the former husband did not

contest the disallowance, the IRS conceded its case against his former wife. The former wife then

sought litigation costs, which both the Tax Court and the Eighth Circuit denied. The IRS argues that

Taxpayer's case is similar to Wickert. We disagree.

In Wickert, the Eighth Circuit held that in analyzing the reasonableness of the IRS' position,

the then-applicable version of § 7430 required that the court look only to the IRS' in-court litigation

position—not to the IRS' position during the administrative proceedings. 48 Accordingly, the court

limit ed its review to the IRS' position once litigation commenced in the Tax Court. Accordingly, the

Eighth Circuit considered only the reasonableness of the IRS' decision to concede the case shortly

after filing its answer. As the IRS never wavered from that decision and it did not unreasonably delay

in executing a stipulation to end th e lit igat ion, the court held that the IRS' in-court position was"eminently reasonable."

The court i n W

ickert did not—as the IRS here intimates—hold that it was "eminent l y

reasonable" for the IRS to issue Notices against both husband and wife whenever the IRS is faced

with a potential whipsaw situation. In its concluding paragraph, the W ickert court expressly stated

t hat it did not reach this issue: "We do not consider whether the Commissioner's activit ies in

connection with the initial deficiency determination

... were reasonable because they were not part

of the IRS' in-court litigating position, but rather occurred at the administrative level." W ickert thus

pro vides no support for the argument that the IRS acts reasonably whenever its issues Not ices t o

taxpayers who for tax purposes treat the same transaction invo lving the same income inconsistently.

Much less does Wickert support the notion that the IRS is substant ially just ified in maint aining a

clearly erroneous legal position up until the eve of trial for the sole purpose of protecting revenue that

is at risk only if the Tax Court rules contrary to well-established law.

In sum, we cannot avoid the conclusion that the Tax Court abused its discretion in finding the

position of the United States substantially justified. The IRS has conceded that Taxpayer satisfied

all other statutory requisites for entitlement to costs leaving inescapable the result that Taxpayer is

entitled to all reasonable litigation costs provided by § 7430. As the Tax Court did not calculate these

costs, we must remand this case to that court for t he limited purpose of determining the amount

Taxpayer shall recover.

III

CONCLUSION

As is by now obvious, we find the actions of the IRS in this Taxpayer's nightmare to be much

worse than merely not

substantially justified. We find them to be wholly unjustified. Accordingly,

that part of the Tax Court's Order and Decision denying Taxpayer's request for costs is REVERSED,

and this proceeding is REMANDED for the sole purpose of permitting the Tax Court to determine

the quantum of costs due to the Taxpayer under § 7430, including reasonable costs and attorney's49 In light of the foregoing analysis and other recent jurisprudence of this circuit addressing the

application of § 7430, we entreat the Tax Court henceforth to be a bit less chary when

considering taxpayers' claims under that section. fees for this appeal. 49