United States Tax Court

T.C. Memo. 2023-70

HARUKI YAMADA,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

YASUKO OGAWA,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 2718-14, 3020-14.1 Filed June 13, 2023.

—————

Haruki Yamada, pro se in Docket No. 2718-14.

Yasuko Ogawa, pro se in Docket No. 3020-14.2

Michael W. Tan, Casinova O. Henderson, and Juan M. Sarinana, for 

respondent.

1 Petitioner Haruki Yamada filed a Petition at Docket No. 2718-14. Petitioner 

Yasuko Ogawa filed a Petition at Docket No. 3020-14. The Court consolidated the 

cases on February 12, 2015.

2 Petitioners were represented by Joseph E. Mudd at the time of the filing of 

the Motion papers. Mr. Mudd is now deceased. The Court withdrew him as counsel 

on May 22, 2020.

Served 06/13/23
2

[*2] MEMORANDUM OPINION

KERRIGAN, Chief Judge: This case is before the Court on 

petitioners’ Motion for Reasonable Litigation or Administrative Costs

pursuant to section 7430. Respondent has largely conceded the case, as 

noted in the parties’ First Supplemental Stipulation of Settled Issues 

and the record of each case.3 The only issue for consideration is whether 

petitioners are entitled to litigation fees for 232 hours of work billed at 

the statutory rate plus $1,903 in administrative costs.

Unless otherwise indicated, all statutory references are to the 

Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, 

and all Rule references are to the Tax Court Rules of Practice and 

Procedure. We round all monetary amounts to the nearest dollar.

Background

The following facts are derived from the parties’ pleadings and 

Motion papers, including the Declarations and Exhibits attached 

thereto. Petitioners resided in Japan when they timely filed their 

Petitions.

In the early 2000s petitioners were married and living in 

Southern California. At that time petitioner Mr. Yamada was a dual 

American-Japanese citizen operating a construction business. 

Petitioner Ms. Ogawa was a Japanese citizen living with her husband 

in the United States on a series of work visas. She worked for a 

brokerage company. In 2007 Mr. Yamada’s business began to falter, and 

3 The parties filed Stipulations of Settled Issues in both Mr. Yamada’s and Ms. 

Ogawa’s cases. In Mr. Yamada’s case, for tax year 2008 the parties agreed that Mr. 

Yamada has unreported gross receipts or sales of $36,300 that should have been 

reported on Schedule C, Profit or Loss From Business. He is not entitled to attribute 

one-half of his self-employment income to Ms. Ogawa as community property for tax 

year 2008. For tax year 2009 the parties agreed that Mr. Yamada has unreported 

Schedule C1 gross receipts or sales of $23,300. He is not entitled to attribute one-half 

of his self-employment income to Ms. Ogawa as community property for tax year 2009. 

For tax year 2011 the parties agreed that Mr. Yamada has unreported Schedule C1 

gross receipts or sales of $23,600. He is not entitled to attribute one-half of his selfemployment income to Ms. Ogawa as community property for tax year 2011. The 

parties agreed that Mr. Yamada is not liable for any additions to tax for 2008, 2009, or 

2011 (years in issue).

In Ms. Ogawa’s case, respondent conceded the deficiency as to her for all years 

in issue. Respondent also conceded that Ms. Ogawa was not liable for additions to tax 

for any of the years in issue.
3

[*3] the couple decided to sell their U.S.-based assets and moved back 

to Japan.

Petitioners filed their last U.S. return in 2007. They listed their 

residential address in Laguna Niguel, California. On July 20, 2012, 

respondent selected Mr. Yamada for audit for the years in issue.

On July 31, 2012, respondent mailed Form 4759, Address 

Information Request – Postal Tracer, to the Postmaster in Laguna 

Niguel. It requested that the Postmaster verify Mr. Yamada’s last 

known address in Laguna Niguel or provide a forwarding address. The 

Postmaster indicated that Mr. Yamada’s forwarding address was in 

Aliso Viejo, California.

Also on July 31, 2012, respondent mailed Form 4759 to the 

Postmaster in Aliso Viejo. It similarly requested that the Postmaster 

confirm Mr. Yamada’s last known address. The Postmaster verified that 

mail was being delivered to Mr. Yamada’s Aliso Viejo address as of 

August 11, 2012.

On August 29, 2012, respondent mailed Mr. Yamada a copy of 

Form 2039, Service of Summons, Notice and Recordkeeper Certificates 

and Summons, which was sent to Bank of America. Delivery of the 

copies by certified mail was accepted at Mr. Yamada’s Aliso Viejo 

address as indicated by a signature on the return receipt.

On January 14, 2013, respondent selected Ms. Ogawa for audit 

for the years in issue. On April 16, 2013, respondent mailed to each 

petitioner Letter 3798 at their Aliso Viejo address. The letter indicated 

that petitioners had failed to file tax returns for the years in issue and 

scheduled an in-person conference for May 21, 2013, at respondent’s 

Laguna Niguel office. Petitioners did not respond to the letter or show 

up for the conference.

On June 5, 2013, respondent summoned bank account 

information from three banks: Bank of America, U.S. Bank, and Union 

Bank. Respondent conducted bank deposit analyses on the information 

received from the banks and determined that petitioners had 

unreported taxable deposits of $302,360, $494,469, and $324,498 for 

taxable years 2008, 2009, and 2011, respectively.

On July 29, 2013, respondent mailed a Letter 950 (30-day letter)

to each petitioner at their Aliso Viejo address. The 30-day letters 

included examination reports showing the proposed changes to 
4

[*4] petitioners’ tax for the years in issue and indicated that they could 

request a conference with Appeals.4 Petitioners did not respond to the 

letters, nor did they request an Appeals conference.

On August 28, 2013, respondent prepared substitutes for returns 

for petitioners for the years in issue. On September 17, 2013, 

respondent mailed notices of deficiency to both petitioners at their Aliso 

Viejo address as well as their address in Yokohama, Japan. The notice

addressed to Mr. Yamada determined deficiencies for the years in issue 

and additions to tax under sections 6651 and 6654 as follows:

Year Deficiency

Additions to Tax

§ 6651(a)(1) § 6651(a)(2) § 6654

2008 $53,754 $12,095 $13,439 –

2009 91,450 20,576 –5 $2,190

2011 55,324 12,448 – 1,095

The notice addressed to Ms. Ogawa determined deficiencies for 

the years in issue and additions to tax under sections 6651 and 6654 as 

follows:

4 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent 

Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 

983 (2019). We will use the name in effect at the times relevant to this case, i.e., the 

Office of Appeals or Appeals.

5 The deficiency notice determined that for tax years 2009 and 2011, the section 

6651(a)(2) additions to tax would be computed at a later date.
5 

Year Deficiency

Additions to Tax

§ 6651(a)(1) § 6651(a)(2) § 6654

2008 $36,493 $8,211 $9,123 – 

2009 69,599 15,660 –6 $1,666

2011 39,364 8,857 – 779

The notices sent to petitioners’ Aliso Viejo address were returned 

as undeliverable. Petitioners received the notices mailed to their 

address in Japan. Mr. Yamada and Ms. Ogawa filed their Petitions on 

February 14 and 18, 2014, respectively.

On April 24 and 25, 2014, Appeals informed petitioners that their 

case had been received for consideration. At the December 11, 2014, 

Appeals conference, petitioners’ counsel stated that he needed 

additional time to obtain documents from petitioners that would prove 

they had no U.S.-source income during the years in issue.

On January 27, 2015, petitioners’ counsel moved unopposed to

continue the March 2015 trial session to allow him time to gather 

additional documents from petitioners (in Japan) and have them 

translated. The Court granted that motion and set a new trial date for 

October 5, 2015.

On January 8, 2015, petitioners’ counsel informed respondent 

that he had received approximately 100 pages of documents that would 

need to be translated. He asserted that the only source of income 

petitioners had was not a U.S. source but from a Japanese corporation. 

Petitioners’ counsel requested copies of all bank statements and deposit 

information that the revenue agent had used to conduct the bank deposit 

analyses. Respondent sent counsel the requested information.

On September 16, 2015, respondent moved unopposed to continue 

the trial to provide petitioners additional time to obtain translations. 

The Court granted that motion and struck the case from the October 5, 

2015, trial session.

6 The deficiency notice determined that for taxable years 2009 and 2011 the 

section 6651(a)(2) additions to tax would be computed at a later date.

[*5]
6

[*6] On July 13, 2016, the parties met and conferred over potential 

settlement of the cases. Petitioners did not agree to respondent’s 

proposed terms. They instead requested audit reconsideration. After 

completing the audit reconsideration, respondent discovered that Mr. 

Yamada was allowed to deduct additional expenses.

On May 16, 2018, respondent moved unopposed to calendar the 

cases for trial. The Court granted that motion and set the cases for trial 

on November 26, 2018. On November 26, 2018, the parties came to a 

settlement of the cases. On December 20, 2018, they filed a Stipulation

of Settled Issues wherein they agreed to reduce the deficiencies and 

eliminate the additions to tax. Petitioners filed the Motion at issue on 

January 18, 2019; they seek legal fees and administrative costs 

pursuant to section 7430.

Discussion

I. Legal Standards

Section 7430(a) provides that the prevailing party may be 

awarded reasonable administrative or litigation costs for any 

proceedings brought by or against the United States in connection with 

the determination, collection, or refund of any tax, interest, or penalty.

To recover costs, the taxpayer must establish that (1) the taxpayer is the 

prevailing party, (2) he or she did not unreasonably protract the 

proceedings, (3) the amount of the costs requested is reasonable, and 

(4) he or she exhausted the administrative remedies available. Friends 

of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. 107, 

111–12 (2018).

The “prevailing party” means any party which has substantially 

prevailed with respect to the amount in controversy or the most 

significant issue or set of issues presented. § 7430(c)(4)(A)(i). The 

section 7430 requirements are conjunctive, and the failure to satisfy any 

one of them will preclude an award of costs. Minahan v. Commissioner, 

88 T.C. 492, 497 (1987). As the moving party, petitioners have the 

burden of proving that they satisfy each requirement of section 7430. 

See Rule 232(e).

II. Analysis

Respondent conceded that petitioners have substantially 

prevailed with respect to the amount in controversy or the most 

significant issue or set of issues presented. Respondent also conceded
7

[*7] that petitioners have met the net worth requirement pursuant to

section 7430(c)(4)(A)(ii).

In the Response, respondent argues that petitioners’ Motion 

should be denied because respondent was substantially justified in 

determining that petitioners had taxable, unreported income for the 

years in issue. Pursuant to section 7430(c)(4)(B)(i), a party is not treated 

as the prevailing party if the United States establishes that its position 

was “substantially justified.”

Respondent bears the burden of showing that respondent’s 

position was substantially justified. See § 7430(c)(4)(B)(i); Rule 232(e). 

To be substantially justified, respondent’s position must have a 

reasonable basis in both fact and law. See Pierce v. Underwood, 487 U.S. 

552, 565 (1988). Respondent’s legal position is substantially justified if

based on supportable interpretations of federal tax statutes and

caselaw. See TKB Int’l, Inc. v. United States, 995 F.2d 1460, 1468 (9th 

Cir. 1993). The litigation position of the United States is generally 

established at the time the Government files its answer in the judicial 

proceeding. See § 7430(c)(7); Huffman v. Commissioner, 978 F.2d 1139, 

1148 (9th Cir. 1992), aff’g in part, rev’g in part T.C. Memo. 1991-144; 

Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997).

Respondent argues that petitioners should not be treated as the 

prevailing party because respondent was substantially justified in 

respondent’s position that petitioners had unreported income for the 

years in issue. Respondent asserts that he formed this position on the 

basis of the revenue agent’s bank deposit analyses, which indicated that 

petitioners had unreported deposits from various sources. Respondent 

contends that because Mr. Yamada was a U.S. citizen—and respondent

assumed Ms. Ogawa was still a lawful permanent resident—it was 

justifiable to determine that the income was taxable by the United 

States.

Respondent further argues that it was justifiable to maintain this 

position because petitioners failed to prove that they were entitled to tax 

benefits under the United States-Japan treaty. They also failed to 

provide certified translations of the foreign documents they submitted

which allegedly proved that the deposited income was tax exempt. 

Respondent contends that petitioners’ own failure to update their 

mailing address resulted in their receipt of deficiency notices before any 

other communication.
8

[*8] Petitioners argue that respondent was not substantially justified 

in determining that they had unreported income because there was no 

evidence that they were engaged in a U.S. business or income-producing 

activity. Because there was no evidence of a U.S. business, petitioners 

argue, respondent was not justified in conducting bank deposit analyses. 

Petitioners further argue that once they received the deficiency notices, 

they provided all requested information. They contend that certified 

translations were not necessary to prove the income was tax exempt in 

the United States. They claim that the filing itself was sufficient to show 

that they had no U.S.-source income.

We agree that respondent was substantially justified in 

determining that petitioners had unreported, taxable income. After 

summoning account information from Bank of America, U.S. Bank, and 

Union Bank on June 5, 2013, respondent discovered that petitioners had 

unreported deposits from the years in issue totaling $1,121,327.

At the time the deposits were made, Mr. Yamada was a U.S. 

citizen. Although Ms. Ogawa was not a U.S. citizen, respondent believed 

her to be a lawful permanent resident at that time because petitioners 

never provided respondent with an updated mailing address. 

Petitioners concede that they failed to notify respondent of their address 

change once they left the United States. Because respondent was under 

the belief that petitioners remained U.S. residents at the time the 

deposits were made, it was reasonable for respondent to assume that 

petitioners remained liable for U.S. tax on their worldwide income. See 

Cook v. Tait, 265 U.S. 47, 56 (1924).

Respondent therefore was substantially justified in asserting that 

petitioners were liable for tax on the unreported income solely on the 

basis of the bank deposit analyses. See Clayton v. Commissioner, 102 

T.C. 632, 645 (1994) (“Bank deposits are prima facie evidence of income 

. . . and the taxpayer has the burden of showing that the determination 

is incorrect.”). Since respondent’s position was substantially justified, 

petitioners are not entitled to an award of costs pursuant to section 

7430.

We have considered all of petitioners’ arguments, and to the 

extent not discussed above, we find them to be irrelevant, moot, or 

without merit. 
9

[*9] To reflect the foregoing,

An appropriate order will be issued, and decisions will be entered

for respondent.