T.C. Memo. 1997-389

UNITED STATES TAX COURT

GLENN L. WITTSTADT, JR. AND LYNNE M. WITTSTADT, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

 Docket No. 7123-93. Filed August 25, 1997.

Robert G. Cassilly, for petitioners.

 

 Alan R. Peregoy, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to the provisions of section

7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
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1 Unless otherwise indicated, all section references are

to the Internal Revenue Code in effect for 1989, the taxable year

in issue. However, all references to section 7430 are to such

section in effect at the time that the petition was filed. 

Unless otherwise indicated, all Rule references are to the Tax

Court Rules of Practice and Procedure.

2 Also pending before the Court is petitioners' Motion

for Entry of Decision. However, at the hearing on that motion,

the parties agreed that there is an overpayment in petitioners'

Federal income tax for 1989 in the amount of $50,808.78, which

amount, as well as interest thereon, has been refunded to

petitioners. Accordingly, we need not address petitioners'

Motion for Entry of Decision in this memorandum opinion. 

3 Respondent concedes: (1) Petitioners exhausted their

administrative remedies, see sec. 7430(b)(1); (2) petitioners did

not unreasonably protract the court proceeding, see sec.

7430(b)(4); (3) petitioners substantially prevailed in the court

proceeding, see sec. 7430(c)(4)(A)(ii); and (4) petitioners

satisfy the applicable net worth requirement, see sec.

7430(c)(4)(A)(iii). 

 Rules 180, 181, and 183.1 The Court agrees with and adopts

the Opinion of the Special Trial Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

ARMEN, Special Trial Judge: This case is before the Court

on petitioners' Motion for Costs, as amended, filed pursuant to

section 7430 and Rule 231.2 Petitioners seek to recover

approximately $16,000 incurred in resisting respondent's

deficiency determinations for the taxable year 1989.

After concessions by respondent,3 the issues for decision

are as follows:

(1) Whether respondent's position in the proceedings was

substantially justified; and, if not, 
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4 Respondent concedes that all but $150 of the costs

incurred by petitioners constitute "reasonable litigation costs"

within the meaning of sec. 7430(c)(1).

(2) whether the attorney's fees and other costs that

petitioners seek to recover are reasonable in amount.4

We consider these issues in the context of a case wherein

decision was originally entered essentially in respondent's favor

pursuant to a memorandum opinion of this Court, but such decision

was subsequently reversed on appeal. 

Neither party requested an evidentiary hearing, and the

Court concludes that such a hearing is not necessary for the

proper disposition of petitioners' motion. Rule 232(a)(3). We

therefore decide the matter before us based on the record that

has been developed to date. 

I. Background

Glenn L. Wittstadt, Jr. (petitioner) and Lynne M. Wittstadt

resided in Edgewood, Maryland, at the time that their petition

was filed with the Court.

A. The Notice of Deficiency

By notice of deficiency dated March 11, 1993, respondent

determined a deficiency in petitioners' Federal income tax for

the taxable year 1989, as well as deficiencies in petitioners'

Federal excise taxes under sections 4973 and 4980A, in the total

amount of $89,740.84. The linchpin for the deficiencies was

respondent's determination that a distribution (the so-called
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Transfer Refund) that was received by petitioner from the

Maryland State Teachers' Retirement System (the Retirement

System) did not qualify for tax-free rollover treatment under

section 402(a)(5). In turn, this determination was premised on

respondent's ultimate determination that the Transfer Refund was

not made "on account of" petitioner's separation from the service

of the Baltimore County Public Schools; i.e., petitioner's

retirement as a teacher, but rather was made "on account of"

petitioner's election to transfer from the Retirement System to

the Maryland State Teachers' Pension System (the Pension System).

B. The Parties' Pleadings

On April 9, 1993, petitioners filed a timely petition (the

Petition) in which they contested the deficiencies determined by

respondent. In the Petition, which they filed pro se,

petitioners alleged, in part, as follows:

The issue in this case was whether my [Transfer

Refund] distribution met the IRS requirements for a tax

free roll-over or not * * * .

The December 4, 1992 final appeal decision letter

from the local IRS Appeals Division states that [the

Transfer Refund] did not [qualify for tax-free rollover

treatment] because the distribution WAS NOT received

because of "Separation from the job" (retirement) as

required; but because I signed an "election form to

transfer participation from the old ... retirement fund

to the new ... retirement fund".

** * * * * *

Following the June 30, 1989 separation

[petitioner's final day of employment] the State had

only one, single, required course of action, namely to

make the distribution to me on or after July 1, 1989,
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as requested and contracted for on the effective

documents, and that was subsequently carried out. The

fact that the amount and nature of the distribution was

the result of a choice had nothing to do with when it

had to be paid and was, i.e. after retirement as

requested and contracted for, thus satisfying the rollover requirement.

On June 10, 1993, respondent filed an answer (the Answer) to

the Petition. In the Answer, respondent admitted the first two

of the above-quoted paragraphs in the Petition and denied the

third.

C. Petitioners' Motion for Summary Judgment

On January 31, 1994, petitioners, again acting pro se, filed

a motion for summary judgment. In their motion, petitioners

argued that the Transfer Refund was made on account of

petitioner's retirement and not on account of petitioner's

election to transfer from the Retirement System to the Pension

System. The penultimate sentence of petitioners' motion stated

as follows: "But for his retirement, Mr. Wittstadt would not

have elected to receive the lump-sum payment and no such

distribution would have been made." Petitioners also alleged

that petitioner's election to transfer from the Retirement System

to the Pension System was invalid under Maryland State law.

On March 23, 1994, a hearing was conducted in Washington,

D.C., on petitioners' motion for summary judgment. At that time,

the parties indicated that they were attempting to obtain facts

and documents from the Maryland State Retirement Agency. 

Respondent's counsel stated, in part, as follows:
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5 We note that at no time did respondent ever file any

cross-motion for summary judgment. As will be discussed infra in

the text above, respondent thought that there were factual issues

in dispute.

I have had conversations with the assistant

attorney general of the State of Maryland concerning

what their testimony and official records would be. 

They indicate to me merely that there is disputed facts

to the extent that their records do not coincide with

allegations of fact that Mr. Wittstadt has made.

And, therefore, I think, ultimately if Mr.

Wittstadt would waive his disclosure privilege with the

State of Maryland, the State would be able to provide

an affidavit that would show that material facts are in

dispute in this case.

The Court agreed to continue petitioners' motion for summary

judgment for further hearing. In agreeing to do so, the Court

stated, in part, as follows:

What the Court would expect is that, to the extent

possible, the parties would stipulate or agree to facts

not reasonably in dispute, and indicate so you can

highlight to the Court what facts are left in dispute,

and whether or not to support -- Respondent seems to be

saying that he believes that summary judgment is not

appropriate here because there may be a dispute on

facts. But it would be certainly helpful to have a

record in which the Court can decide that by

stipulation.

On April 20, 1994, a further hearing was conducted in

Washington, D.C., on petitioners' motion for summary judgment.5

However, contrary to the Court's directive expressed at the prior

hearing, no executed stipulations were filed by the parties. In

this regard, respondent's counsel acknowledged that information

had been obtained from the Maryland State Retirement Agency;

respondent's counsel stated that he had prepared stipulations of
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agreed and unagreed facts, but that petitioners had declined to

execute such stipulations. Petitioner confirmed this

representation, indicating that he thought such stipulations were

irrelevant to his motion. 

Respondent's counsel then identified what he considered to

be two disputed factual matters: First, the effective date of

petitioner's election to transfer from the Retirement System to

the Pension System; and second, the reason why the Transfer

Refund was paid to petitioner. 

Regarding the first disputed factual matter, respondent took

the position that the effective date of petitioner's election to

transfer from the Retirement System to the Pension System was

June 1, 1989, a date that preceded the effective date of

petitioner's retirement. In contrast, petitioner took the

position that the effective date of his election was July 1,

1989, a date that followed the final day of petitioner's

employment. 

The second disputed matter involved causation; i.e., what

caused the State of Maryland to make the Transfer Refund to

petitioner. In this regard, respondent took the position that

the Maryland made the Transfer Refund because of petitioner's

election to transfer from the Retirement System to the Pension

System. In contrast, petitioner took the position that Maryland

made the Transfer Refund because of petitioner's retirement. 
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As previously indicated, petitioner took the position that

the effective date of his election to transfer from the

Retirement System to the Pension System came after the final day

of his employment. Petitioner's position in respect of this

issue was consequential for two reasons: First, because it

facilitated petitioners' principal argument that the Transfer

Refund was made because of petitioner's retirement; and second,

because it facilitated petitioners' ancillary argument that the

Transfer Refund was not made because of petitioner's election to

transfer from the Retirement System to the Pension System because

such election was invalid under Maryland State law.

At the conclusion of the hearing, the Court denied

petitioners' motion. The Court took this action essentially for

two reasons: First, and principally, because the record was so

incomplete so as to preclude a rational disposition of the case;

and second, because factual issues appeared to be in dispute. 

Near the end of the hearing, the following colloquy took place

between the Court and petitioner:

THE COURT: * * * Mr. Wittstadt, at this point, I

am not clear what your position is with respect to the

stipulation of facts. But when this case was continued

last time, and as I understand it from respondent's

counsel that there are some documents, the Court does

not now have those documents. Without those documents,

I couldn't come close--let the Court finish--couldn't

come close to ruling in your favor on this motion.

A motion for summary judgment requires that there

be no genuine material issue of fact in dispute. So I

don't have any facts or certainly anywhere near

sufficient facts to rule in your favor. Even if you do
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6 The parties stipulated 10 exhibits; the remaining 20

exhibits were offered during the course of the trial, most of

which were received into evidence.

stipulate, respondent's counsel seems to be saying that

there are a couple of areas of factual matters that are

in dispute.

 * * * * * * *

What would you like to do with this case?

PETITIONER: In other words, we can't do it by

motion?

THE COURT: It sure doesn't look like it. I think

you understand why, that there are matters here in

dispute and respondent is saying there are matters in

dispute. You don't seem to be disagreeing with that,

that there are some matters which require some

testimony.

If that is the case, it's clear that the Court

cannot rule in your favor on the summary judgment

motion. You can't get a dispositive answer, which is

what you want. So the next step is trial.

D. Entry of Appearance by Petitioners' Counsel

On July 18, 1994, petitioners' counsel entered his

appearance in this case. On the following day, petitioners, by

counsel, commenced formal discovery against respondent by serving

a request for production of documents.

E. The Hylton Case

On January 23, 1995, the Court filed its memorandum opinion

in Hylton v. Commissioner, T.C. Memo. 1995-27. That case, which

was decided after a trial at which a representative of the

Maryland State Retirement Agency testified and 30 exhibits were

offered into evidence,6 presented facts strikingly similar to

those involved in the present case. Thus, in Hylton, the
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taxpayer, a Maryland public school teacher, elected to transfer

from the Retirement System to the Pension System, effective

January 1, 1990, and received thereafter a Transfer Refund. In

May 1990, the taxpayer applied for retirement and retired in

fact, effective July 1, 1990. Hylton concluded as follows:

Petitioners have shown that petitioner's election

to transfer to the Pension System, due to which

election he received the Transfer Refund, was related

to his retirement planning. In other words, they have

demonstrated that the decision to retire was a "link in

the chain of causalities" leading to the receipt of the

Transfer Refund. [Citation omitted.] However, we view

petitioner's separation from service as no more than a

"mere link in the chain of causalities" leading to the

receipt of the Transfer Refund. [Citation omitted.]

Accordingly, we hold that petitioner did not

receive the Transfer Refund on account of his

retirement. Rather, he received the Transfer Refund

because of his election to transfer from the Retirement

System to the Pension System, an election that, under

Maryland law, lacked the requisite connection to

petitioner's separation from service.

In reaching the foregoing conclusion, we relied heavily on

Gunnison v. Commissioner, 54 T.C. 1766 (1970), affd. 461 F.2d 496

(7th Cir. 1972), where we considered the meaning of the phrase

"on account of" in an earlier version of the operative statute

and construed it narrowly. Id. at 1773. 

Hylton was never appealed, and the decision in that case

became final on April 25, 1995. See sec. 7481(a)(1), 7483; cf.

Fed. R. App. P. 13(a).
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7 Brown v. Commissioner, T.C. Memo. 1995-93 was

ultimately reversed without published opinion per curiam, 97 F.3d

1446 (4th Cir. 1996), on the basis of Adler v. Commissioner, 86

F.3d 378 (4th Cir. 1996), vacating and remanding T.C. Memo. 1995-

148. See infra.

F. The Notice of Trial

On February 1, 1995, the Court calendared the present case

for trial at a Special Session of the Court scheduled to commence

on April 24, 1995, in Baltimore, Maryland.

G. Progeny of the Hylton Case

On March 6, 1995, the Court filed Brown v. Commissioner,

T.C. Memo. 1995-93.7 That case, which was decided on the basis

of a fully-stipulated record, presented facts virtually

indistinguishable from those in the present case. Thus, in

Brown, the taxpayer, a Maryland public school teacher, elected to

transfer from the Retirement System to the Pension System,

effective June 1, 1989. The taxpayer also applied to retire,

effective July 1, 1989. Thereafter, the taxpayer received a

Transfer Refund. Applying the same analysis as in Hylton v.

Commissioner, supra, we held in Brown that the taxpayer did not

receive the Transfer Refund on account of his retirement, but

rather on account of his election to transfer from the Retirement

System to the Pension System. 
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8 The taxpayer's appeal in Dorsey was ultimately

dismissed. Dorsey v. Commissioner, 91 F.3d 129 (4th Cir. 1996).

On March 8, 1995, the Court filed its memorandum opinion in

Dorsey v. Commissioner, T.C. Memo. 1995-97.8 Once again, we

relied heavily on Hylton v. Commissioner, supra, in holding that 

the taxpayer's Transfer Refund was not received on account of the

taxpayer's retirement, but rather on account of the taxpayer's

election to transfer from the Retirement System to the Pension

System. 

On April 4, 1995, the Court filed Adler v. Commissioner,

T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir. 1996). That

case, which was decided after a trial at which a representative

of the Maryland State Retirement Agency testified, presented

facts virtually indistinguishable from those in the present case. 

Thus, in Adler, the taxpayer, a Maryland State employee, elected

to transfer from the Retirement System to the Pension System,

effective June 1, 1990. The taxpayer also applied to retire,

effective July 1, 1990. Thereafter, the taxpayer received a

Transfer Refund. Applying the same analysis as in Hylton v.

Commissioner, supra, we held in Adler that the taxpayer did not

receive the Transfer Refund on account of his retirement, but

rather on account of his election to transfer from the Retirement

System to the Pension System. 
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9 Thus, on brief, petitioners argued as follows:

Petitioner's election to receive a [Transfer

Refund] was an election made pursuant to the retirement

policy legally established by the Board and was not

made pursuant to the statutory transfer option in [Md.

Ann. Code, art. 73B] Section 83(8). In order to elect

the retirement option as established by the Board's

policy it was necessary for Petitioner Glenn L.

(continued...)

H. The Trial

On April 26, 1995, the present case was called for trial in

Baltimore, Maryland. At that time the Court filed the parties'

stipulation of facts, which included some 16 exhibits. The Court 

also filed the parties' trial memoranda. Petitioners' trial

memorandum estimated trial time at 6 hours and stated that

petitioners expected to call 3 witnesses, including a

representative of the Maryland State Retirement Agency. 

As it turned out, the trial of this case lasted less than 2

hours, and the only witness who was called to testify was

petitioner, who was examined and cross-examined. 

A principal thrust, if not the principal thrust, of

petitioners' presentation at trial (and on brief) was that the

Transfer Refund was not made pursuant to Maryland State law

(because the Transfer Refund would have been invalid if made

pursuant to Maryland State law), but rather was made pursuant to

an administrative policy of the Maryland State Retirement Agency,

which administrative policy required petitioner to retire in

order to receive the Transfer Refund.9
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9(...continued)

Wittstadt to have retired. Because Petitioner's

retirement was a necessary condition precedent to his

participation in the policy distribution option, the

distribution by the Board to Petitioner was made "on

account of" Petitioner Glenn L. Wittstadt's "separation

from service," as those terms are used in I.R.C.

Section 402(a)(5)(D). Consequently, the distribution

to Petitioner qualified for tax free treatment as

provided for in Section 402(a)(5)(D).

After the conclusion of trial, the Court directed the

parties to file seriatim briefs. See Rule 151(b). Petitioners'

opening brief includes 8 pages of proposed findings of fact. See

Rule 151(e)(3). Respondent's answering brief includes 5 pages of

objections to petitioners' proposed findings of fact and 4 pages

of respondent's proposed findings of fact. Id. Petitioners'

reply brief includes 4-1⁄2 pages of objections to respondent's

proposed findings of fact. Id.

I. The Memorandum Opinion

In T.C. Memo. 1995-492, filed October 11, 1995, the Court

decided the present case. In our memorandum opinion, we rejected

petitioners' argument that petitioner's Transfer Refund had not

been received pursuant to Maryland State law but rather pursuant

to some administrative policy. Regardless, we went on to hold

that the Transfer Refund was received on account of petitioner's

election to transfer from the Retirement System to the Pension

System and not on account of petitioner's retirement. In so

holding, we relied heavily on Hylton v. Commissioner, T.C. Memo.

1995-27, as well as a number of other "Transfer Refund cases"
- 15 -

10 Respondent also assessed interest. See sec. 6601(a),

(e)(1).

that we had previously decided, specifically including Adler v.

Commissioner, T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir.

1996).

J. Appeal, Assessment, and Collection

Following a Rule 155 computation, the Decision in the

present case was entered on January 31, 1996. On February 20,

1996, petitioners filed a notice of appeal. Petitioners did not,

however, file a bond to stay assessment and collection. See sec.

7485(a). Accordingly, on May 21, 1996, respondent assessed the

deficiencies in income and excise taxes as redetermined in our

Decision.10

Subsequently, petitioners made two substantial payments in

partial satisfaction of the foregoing assessment. Thereafter, in

response to a "final notice" dated July 29, 1996, petitioners

entered into an installment payment agreement with respondent on

August 20, 1996. See sec. 6159. Petitioners ultimately made the

following payments on the indicated dates:

Date Amount 

6/5/96 $25,000

7/16/96 25,000

9/10/96 243

10/7/96 286

11/7/96 286
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On October 22, 1996, respondent filed a notice of Federal

tax lien in the county of petitioners' residence. Also, by

notice dated December 25, 1996, respondent reminded petitioners

that their next payment pursuant to the installment payment

agreement was due on January 8, 1997.

K. The Adler Case on Appeal

On June 21, 1996, the Court of Appeals for the Fourth

Circuit decided Adler v. Commissioner, 86 F.3d 378, which vacated

and remanded our decision in T.C. Memo. 1995-148. In Adler v.

Commissioner, the Court of Appeals agreed that the phrase "on

account of" requires "a causal connection between the employee's

separation from service and the distribution from the qualified

plan." 86 F.3d at 380. However, the Court of Appeals construed

the phrase "on account of" to mean "incident to" and concluded

that the requisite degree of causality required by the operative

statute had been satisfied. In so holding, the Court of Appeals

stated: "As the purpose of the statute [section 402] is to

protect and encourage retirement savings, it is plain that a

distribution to an employee that occurs incident to his

retirement should be entitled to rollover treatment." 86 F.3d at

381.

On September 10, 1996, the Solicitor General of the United

States decided that a petition for a writ of certiorari would not

be filed in respect of Adler v. Commissioner, 86 F.3d 378. Cf.

28 U.S.C. sec. 2101(c)(1994).
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L. Reversal and Subsequent Developments

On or about November 8, 1996, and after some prodding by

petitioners, respondent filed a motion with the Court of Appeals

asking that the Tax Court's Decision entered on January 31, 1996,

be reversed on the basis of Adler v. Commissioner, 86 F.3d 378

(4th Cir. 1996). Shortly thereafter, on November 14, 1996, the

Court of Appeals issued an order granting respondent's motion and

reversing our Decision. 

No later than November 22, 1996, respondent's counsel

undertook action to suspend any further collection in respect of

the May 1996 assessment against petitioners, pending abatement of

such assessment and the refund of amounts previously paid. 

Respondent's counsel specifically advised respondent's problem

resolution officer for the Delaware-Maryland district that "Mr.

Wittstadt no longer owes the deficiency for 1989" and directed

the officer to "take whatever steps [are] necessary to terminate

the required payment agreement." Nevertheless, during the fall

of 1996, petitioners incurred costs in trying to have collection

terminated.

On January 9, 1997, the record in this case was returned by

the Court of Appeals and received by this Court. Thereafter, by

Order dated January 28, 1997, the Court vacated the Decision

entered January 31, 1996, and directed the parties either to

furnish an agreed form of decision suitable for entry of decision

by the Court or to move for such relief as they thought might be
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11 Respondent contends that petitioners' motion for costs

was filed out of time and should be "dismissed" for that reason. 

We reject respondent's contention and do not consider it further.

12 Technical and Miscellaneous Revenue Act of 1988 (TAMRA),

Pub. L. 100-647, sec. 6239(a), 102 Stat. 3342, 3743-3746 is

generally applicable to proceedings commenced after Nov. 10,

1988. TAMRA sec. 6239(d), 102 Stat. 3746. Congress amended sec.

7430 most recently in the Taxpayer Bill of Rights 2 (TBOR2), Pub.

L. 104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996). 

However, the amendments made by TBOR2 apply only in the case of

proceedings commenced after July 30, 1996. TBOR2 secs. 701(d),

702(b), 703(b), and 704(b), 110 Stat. 1463-1464. Inasmuch as the

petition herein was filed on April 9, 1993, the amendments made

by TBOR2 do not apply in the present case. Maggie Management Co.

v. Commissioner, 108 T.C. (June 11, 1997).

warranted under the circumstances then present. Petitioners then

filed their motion for costs, as well as their motion for entry

of decision.11 

II. Discussion

We apply section 7430 as amended by the Technical and

Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec.

6239(a), 102 Stat. 3342, 3743-3746.12

A. Requirements for a Judgment under Section 7430

Under section 7430(a), a judgment for litigation costs

incurred in connection with a court proceeding may only be

awarded if a taxpayer: (1) Is the "prevailing party"; (2) has

exhausted his or her administrative remedies within the IRS; and

(3) did not unreasonably protract the court proceeding. Sec.

7430(a), (b)(1), (4). A taxpayer must satisfy each of these

three requirements in order to be entitled to a judgment under

section 7430. Rule 232(e).
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Respondent concedes that petitioners exhausted their

administrative remedies within the IRS. Respondent also concedes

that petitioners did not unreasonably protract the court

proceeding. Accordingly, we must decide whether petitioners

qualify as the "prevailing party" in the court proceeding.

B. Prevailing Party

 In order to qualify as the "prevailing party", a taxpayer

must establish: (1) The position of the United States in the

proceeding was not substantially justified; (2) the taxpayer has

substantially prevailed with respect to the amount in controversy

or the most significant issue or set of issues presented; and (3)

the taxpayer satisfies the applicable net worth requirement. 

Sec. 7430(c)(4)(A). 

Respondent concedes that petitioners substantially prevailed

within the meaning of section 7430(c)(4)(A)(ii). Respondent also

concedes that petitioners satisfy the applicable net worth

requirement. However, respondent contends that the position

taken by respondent in the court proceeding was substantially

justified.

Petitioners bear the burden of proving that respondent's

position in the court proceeding was not substantially justified. 

Rule 232(e); Dixson Corp. v. Commissioner, 94 T.C. 708, 714-715

(1990); Gantner v. Commissioner, 92 T.C. 192, 197 (1989), affd.

905 F.2d 241 (8th Cir. 1990). Accordingly, we must decide

whether petitioners have carried their burden of proving that
- 20 -

respondent's position in the court proceeding was not

substantially justified. 

C. Respondent's Position in the Court Proceeding

Whether respondent's position was not substantially

justified is a question of fact. We resolve such issue by the

application of a reasonableness standard. See Pierce v.

Underwood, 487 U.S. 552, 565 (1988) (construing similar language

in the Equal Access to Justice Act (EAJA), 28 U.S.C. sec. 2412

(1988)); see also Maggie Management Co. v. Commissioner, 108 T.C.

 , , (June 11, 1997) (slip op. at 18-19); Sokol v.

Commissioner, 92 T.C. 760, 763 n.7 (1989); Sher v. Commissioner,

89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988). 

The position of the United States that must be examined

against the reasonableness standard is the position taken by the

Commissioner in the answer to the petition and thereafter. 

Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir. 1991);

Sher v. Commissioner, 861 F.2d at 134-135; Maggie Management Co.

v. Commissioner, supra (slip op. at 19); see sec. 7430(c)(7)(A). 

The fact that the Commissioner eventually loses a case does

not, by itself, establish that the Commissioner's position was

unreasonable. Estate of Perry v. Commissioner, 931 F.2d 1044,

1046 (5th Cir. 1991); Swanson v. Commissioner, 106 T.C. 76, 94

(1996); Powers v. Commissioner, 100 T.C. 457, 471 (1993).

In the present case, respondent's position in the court

proceeding was that petitioner's Transfer Refund did not qualify
- 21 -

13 Petitioners acknowledge that if the Court had rendered

summary judgment for respondent (even though respondent never

filed any cross-motion for summary judgment), petitioners would

not have been spared the cost of appeal. 

for tax-free rollover treatment under section 402(a)(5) because

the Transfer Refund was not made on account of petitioner's

retirement as a teacher, but rather on account of petitioner's

election to transfer from the Retirement System to the Pension

System. Respondent consistently maintained this position

throughout the court proceeding until respondent conceded the

case on November 8, 1996, in the Court of Appeals. 

D. Petitioners' Contentions

Petitioners contend that respondent's position was

unreasonable for at least three reasons:

First, petitioners contend that respondent's position was

contrary to congressional intent "to preserve retirement funds".

Second, petitioners contend that respondent should not have

opposed petitioners' motion for summary judgment, but rather

should have permitted the Court to adjudicate the disputed issues

in this case in a summary fashion. If the Court had done so,

then, so the argument goes, petitioners would have been spared

the cost of trial.13 

Third, petitioners contend that respondent was unreasonable

in pursuing collection of the assessed deficiencies, at least

after the Court of Appeals decided Adler v. Commissioner, 86 F.3d

378 (4th Cir. 1996).
- 22 -

We consider each of petitioners' contentions in turn.

E. Congressional Intent

Petitioners contend that respondent's position in the court

proceeding was not substantially justified because respondent's

position "is in conflict with stated Congressional intent." In

this regard, petitioners rely on the statement made by the Court

of Appeals in reversing Adler v. Commissioner, T.C. Memo. 1995-

148, that "As the purpose of the statute [section 402] is to

protect and encourage retirement savings, it is plain that a

distribution to an employee that occurs incident to his

retirement should be entitled to rollover treatment." Adler v.

Commissioner, 86 F.3d at 381.

Petitioners' contention is tantamount to arguing that

respondent's position was unreasonable because respondent lost

the case. However, as previously stated, the fact that the

Commissioner eventually loses a case does not, by itself,

establish that the Commissioner's position was unreasonable. 

Estate of Perry v. Commissioner, supra; Swanson v. Commissioner,

supra; Powers v. Commissioner, supra. 

Further, we recall that respondent did not lose the present

case in this Court. Rather, respondent ultimately lost the case

on appeal. Under these circumstances, a taxpayer ordinarily has

a heavy burden in contending that respondent's position was

unreasonable. The legislative history of section 7430 states

that "when a taxpayer loses in the trial court and obtains a
- 23 -

reversal of that decision in the appellate court, the appellate

court would not normally award attorney's fees to the taxpayer

since the trial court, by definition, had found the government's

position to be reasonable." H. Rept. 97-404, 15 (1981). See

Staff of Joint Comm. on Taxation, General Explanation of the

Revenue Provisions of the Tax Equity and Fiscal Responsibility

Act of 1982 (J. Comm. Print 1982) 450; 127 Cong. Rec. S-32078

(1981); Auto-Ordnance Corp. v. United States, 14 Cl. Ct. 295, 300

(1988); see also H. Conf. Rept. 97-760, 686-687 (1982).

Further, respondent's position was consistent with the

holding of this Court as expressed in four cases with similar, if

not indistinguishable, facts that had been decided prior to the

trial of the present case. Thus, in Hylton v. Commissioner, T.C.

Memo. 1995-27, Brown v. Commissioner, T.C. Memo. 1995-93, Dorsey

v. Commissioner, T.C. Memo. 1995-97, and Adler v. Commissioner,

T.C. Memo. 1995-148, this Court held that a Transfer Refund was

received not on account of retirement, but rather on account of

the taxpayer's election to transfer from the Retirement System to

the Pension System. Indeed, the decision in the first of the

foregoing cases, Hylton v. Commissioner, supra, was final at the

time of trial of the present case.

Finally, in view of the fact that a linchpin for our

decision in Hylton v. Commissioner, supra, was Gunnison v.

Commissioner, 54 T.C. 1766 (1970), affd. 461 F.2d 496 (7th Cir.

1972), a case in which we construed narrowly the phrase "on
- 24 -

account of" in an earlier version of the operative statute, we

think that respondent's position was reasonable, both at the time

that the notice of deficiency was issued in March 1993 and at the

time that the Answer was filed in June 1993. See Pierce v.

Underwood, 487 U.S. 552, 565 (1988)(the Commissioner's position

must have a reasonable basis in law). 

In view of the foregoing, we reject petitioners' first

contention.

F. Petitioners' Motion for Summary Judgment

Petitioners also contend that respondent was unreasonable in

"refus[ing] to submit the case for decision by way of summary

judgment". We disagree.

Petitioners' contention overlooks a number of matters. 

First, the Court denied petitioners' motion for summary judgment

principally because of a record so incomplete that a rational

disposition of the case was not possible. Because petitioners

were the moving party, petitioners bore responsibility for

ensuring that the record provided a basis for their motion. 

Second, the Court also denied petitioners' motion for

summary judgment because genuine issues of material fact appeared

to be in dispute. Here we recall that in an effort to more

clearly determine this matter, the Court had directed the parties

to stipulate facts, and the Court even continued the original

hearing on petitioners' motion for that purpose. Respondent's

counsel complied with this directive by preparing stipulations of
- 25 -

14 In addition, submission of the case by the parties on a

fully stipulated basis pursuant to Rule 122 provided an

alternative to trial. However, the record is silent regarding

any effort by petitioners to encourage respondent to submit the

case on that basis. We find this curious in view of petitioners'

contention that there were no genuine issues of material fact in

this case. We note that Brown v. Commissioner, T.C. Memo. 1995-

93, revd. without published opinion per curiam 97 F.3d 1446 (4th

Cir. 1996), was decided by this Court on a fully stipulated

basis. 

agreed and unagreed facts; however, petitioners declined to

execute either stipulation or to otherwise cooperate in the

process.

Further, petitioners had raised matters that clearly

implicated factual issues. Thus, petitioners had questioned the

effective date of petitioner's election to transfer from the

Retirement System to the Pension System; petitioners had

challenged the validity of that election; and petitioners had

raised the fundamental issue of causation; i.e., the reason why

the Transfer Refund had been paid. Indeed, petitioners alleged

that "But for his retirement, Mr. Wittstadt would not have

elected to receive the lump-sum payment and no such distribution

would have been made." 

Third, the Court did not deny petitioners' motion with

prejudice. Thus, petitioners were free to cure the defects as

identified by the Court at the hearing on April 20, 1994, and

refile their motion. However, they chose not to do so.14

Fourth, the initial Transfer Refund case, Hylton v.

Commissioner, T.C. Memo. 1995-27, was decided after a trial at
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which a representative of the Maryland State Retirement Agency

testified and at which numerous exhibits were offered in evidence

at trial. Moreover, the Transfer Refund case that led to a

published opinion by the Court of Appeals, Adler v. Commissioner,

T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir. 1996), was

decided by this Court after a trial. 

Fifth, the decision in Hylton v. Commissioner, supra, became

final before the trial of the present case. If petitioners

regarded their case as presenting nothing other than a pure issue

of law, they could have agreed to entry of decision on the basis

of Hylton and then appealed. Instead, petitioners went forward

at trial on the theory that the Transfer Refund was not made

pursuant to Maryland State law, but rather pursuant to an

administrative policy that required petitioner to retire in order

to receive the Transfer Refund. Petitioners' strategy was

obviously to present a theory that might serve to distinguish

their case from Hylton, Brown, Dorsey, and Adler and thereby

avoid the need to appeal. However, the fact that petitioners'

strategy was unsuccessful does not mean that respondent's

position was unreasonable. 

Finally, we do not think that respondent was under any

obligation to move for summary judgment. Indeed, respondent

thought that there were genuine issues of material fact. And the

reasonableness of respondent's view as to the existence of

disputed factual issues is demonstrated, if by no other fact, by
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15 The pages of objections in each party's post-trial

brief to the other party's proposed findings of fact demonstrate

the parties' perception that more than a pure issue of law was

involved in this case.

We also note that the day after petitioners' counsel entered

his appearance in this case, petitioners commenced formal

discovery against respondent. Again, such action demonstrates

petitioners' perception that more than a pure issue of law was

involved in this case. 

petitioners' theory at trial regarding an alleged administrative

policy that required petitioner to retire in order to receive the

Transfer Refund.15 Accordingly, we do not comprehend how

decision in this case could have been entered pursuant to any

motion for summary judgment.

In view of the foregoing, we reject petitioners' second

contention. 

G. Respondent's Collection Activity

Finally, petitioners contend that respondent was

unreasonable in pursuing collection of the assessed deficiencies,

at least after the Court of Appeals decided Adler v.

Commissioner, 86 F.3d 378 (4th Cir. 1996). 

We begin by recalling that petitioners did not file a bond

to stay assessment and collection when they filed their notice of

appeal. Accordingly, respondent was permitted, by law, to assess

and collect the deficiencies in income and excise taxes as
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16 Sec. 7485 provides, in relevant part, as follows:

SEC. 7485 BOND TO STAY ASSESSMENT AND COLLECTION.

(a) Upon Notice of Appeal.--Notwithstanding any

provision of law imposing restrictions on the

assessment and collection of deficiencies, the review

under section 7483 shall not operate as a stay of

assessment or collection of any portion of the amount

of the deficiency determined by the Tax Court unless a

notice of appeal in respect of such portion is duly

filed by the taxpayer, and then only if the taxpayer--

(1) on or before the time his notice of

appeal is filed has filed with the Tax Court a

bond in a sum fixed by the Tax Court not exceeding

double the amount of the portion of the deficiency

in respect of which the notice of appeal is filed,

and with surety approved by the Tax Court,

conditioned upon the payment of the deficiency as

finally determined, together with any interest,

additional amounts, or additions to the tax

provided for by law * * * 

17 We need not decide whether it was unreasonable for

respondent to pursue further collection between June 21, 1996,

and Oct. 1, 1996, because that issue appears to be moot. In this

regard, we note that during such period petitioners did not incur

any attorney's fees and that the only cost in respect of which

petitioners seek reimbursement appears to represent a $65 payment

for Westlaw service related to petitioners' reply brief filed in

the Court of Appeals before Adler v. Commissioner, 86 F.3d 378

(4th Cir. 1996), was decided. Cf. Estate of Perry v.

(continued...)

redetermined in our Decision, see sec. 7485(a),16 and respondent

was not unreasonable to have done so.

On June 21, 1996, the Court of Appeals decided Adler v.

Commissioner, supra. Petitioners contend that it was

unreasonable for respondent to pursue further collection after

that date. In contrast, we conclude that it was unreasonable for

respondent to pursue further collection after October 1, 1996.17 
- 29 -

17(...continued)

Commissioner, 931 F.2d 1044 (5th Cir. 1991); Keasler v. United

States, 766 F.2d 1227 (8th Cir. 1985).

After the Court of Appeals decided Adler v. Commissioner,

supra, respondent had a 45-day period to petition the Court of

Appeals for rehearing or rehearing en banc, see Fed. R. App. P.

35(c), 40(a), and a 90-day period to petition the Supreme Court

to file a petition for a writ of certiorari, see 28 U.S.C. sec.

2101(c)(1994). On September 10, 1996, the Solicitor General

decided that a petition for a writ of certiorari would not be

filed in Adler v. Commissioner, supra. 

We think that by the end of September 1996, respondent

should have concluded that the decision of the Court of Appeals

in Adler would control the disposition of the present case and

respondent should have terminated collection against petitioners. 

Nevertheless, on October 22, 1996, respondent filed a notice of

Federal tax lien in the county of petitioners' residence. 

Moreover, by notice dated December 25, 1996, a date more than a

month after the Court of Appeals had reversed our Decision in the

present case, respondent reminded petitioners that their next

payment pursuant to the installment payment agreement was due on

January 8, 1997. During this period, petitioners incurred costs

in trying to persuade respondent to terminate collection that

should have terminated earlier.
- 30 -

18 See supra note 4. Further, we note that respondent

neither cites nor relies upon either sec. 301.7430-3(a)(4),

Proced. & Admin. Regs., or sec. 301.7430-3(b), Proced. & Admin.

Regs. Accordingly, no consideration is given to the possible

effect of those provisions of the regulation. Cf. Lavallee v.

Commissioner, T.C. Memo. 1997-183 at n.14; Ball v. Commissioner,

T.C. Memo. 1995-520; see also Gustafson v. Commissioner, 97 T.C.

85, 93 (1991).

19 The total amount for "services and expenses" according

to such invoice is $976.75.

In view of the foregoing, we hold that it was unreasonable

for respondent to pursue further collection after October 1,

1996.

H. Amount of Recoverable Costs

Finally, we turn to the matter concerning the amount of

recoverable costs. Here we observe that respondent concedes that

all but $150 of the costs incurred by petitioners constitutes

"reasonable litigation costs" within the meaning of sec.

7430(c)(1).18 The disputed $150 amount, however, does not

pertain to any cost incurred after September 1996. Accordingly,

we conclude that the costs incurred for the months of October

1996 through February 1997, as enumerated in petitioners'

counsel's single invoice for those months, are recoverable by

petitioners.19 

III. Conclusion

Based on the foregoing, we hold that respondent's position

in the court proceeding was not unreasonable through September

1996, but that respondent acted unreasonably thereafter by not
- 31 -

20 See supra note 2.

terminating collection. Accordingly, we shall award costs to

petitioners in the amount of $976.75.

To reflect the foregoing, as well as the agreed disposition

of petitioners' Motion for Entry of Decision,20

An appropriate order and

decision will be entered (1)

granting petitioners' Motion

for Costs, as amended, to the

extent indicated; and (2)

granting petitioners' Motion

for Entry of Decision, in the

amount of the agreed

overpayment.