T.C. Mem o. 2 01 3- 15 6

UNITED STAT ES TAX COURT

THOUSAND O AKS RESIDENTIAL CARE HOME I, INC., ET AL., Pet it io ne rs 1 v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 44 8- 10 , 14 80 -1 0, File d J un e 2 0, 2 01 3.

14 81 -1 0.

Ps fil eda m ot io n fo r rec ov ery of reas on ab le adm in is tra ti ve an d li ti ga ti on co st s p ur su an t t o I.R .C. se c. 74 30 . Held : R’s p os it io n was subs tant ia ll y jus ti fie d. P i s n oten ti tl ed to reco ve ry

of r eas on ab le adm in is tra ti ve an d l it ig at io n c os ts .

Cas es of t he fol lo win g p et it io ne rs are co ns ol id at edhe rewi th : Th ou sa nd 1 Oak s R es id en ti al Care Hom e I, In c., do ck etNo. 1 48 0- 10 ; an d R ob ertA. Flet ch er an d P earl Fle tc he r, do ck etNo. 1 48 1- 10 . On Dece m be r 15 , 20 11 , we gra nt ed m ot io ns to ch an ge th e cap ti on s i n d oc ke t No s. 1 44 8- 10 an d 1 48 0- 10 .- 2 -

[* 2] Mat th ew Tag ga rt, Ry anAndrews , Mic ha el B. Luft m an , andCh arl es Kol st ad , for

pe ti ti on ers . Kris H. An, fo r res po nd en t.

MEMORANDUM OPINION W HERRY, Ju dg e: Thi s m at te r is be fo re the Co urt o n p et it io ne rs ’ m ot io n fo r adm in is tra ti ve an d l it ig at io n c os ts fil edpurs ua ntto sec ti on 74 30 an d Ru le s 2 30 an d 2 31 . Res po nd en t fi le d ares po ns e o pp os in g p et it io ne rs ’ m ot io n. 2 As d is cu ss edinde ta il be lo w, we con cl ud e th atres po nd en t’s p os it io n i n the se pr oc eed in gs was s ub st an ti al ly j us ti fie d, an d c on se qu en tl y we wil l d en y

pe ti ti on ers ’ m ot io n. Bac kg ro un d Afte r anex haus ti ve rev ie w of m ul ti pl e fac to rs , onJan ua ry 14 , 20 13 , th is Co urt d et erm in edth atm os t o f th e Fl et ch ers ’ co m pe ns at io n was reas on ab le an d de du ct ib le un de r se ct io n 1 62 . Tho us an d Oak s R es id en ti al Care Hom e I, In c. v. Co m m is si on er, T.C. Mem o. 2 01 3- 10 , at * 33 . Res po nd en t h as co nc ed edth at Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 2 Rev enue Co de of 1 98 6, as am en de d andineffe ctat a ll rel ev an t t im es . All R ul e refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e. Thes e cas es are ap pe al ab le to th e U.S. Co urt o f App eal s fo r th e Nin th Cir cu it .- 3 -

[* 3] th eref

or e p et it io ne rs ha ve “ subs tant ia ll y pre va il edwith re sp ectto th e m os t si gn ifi can t i ss ue s o r se t o f is su es in* * * [t he ir] cas e[s ] an d tha t p et it io ne rs m eet th e n etwort h re qu ire m en ts of I .R.C. § 74 30 .” Res po nd en t, h owe ve r, arg ue s tha t pe ti ti on ers ha ve no t es tabl is he d tha t the y have in cu rredan y

of t he admin is tra ti ve an d l it ig at io n c os ts an d tha t p et it io ne rs were n otth e p rev ai li ng parti es be cau se res po nd en t’s p os it io ns were s ub st an ti al ly j us ti fie d. Dis cu ss io n Purs uantto sec ti on 74 30 (a), a p rev ai li ng party m ay be award edreas on ab le adm in is tra ti ve an d l it ig at io n c os ts in cu rredinan y adm in is tra ti ve or c ou rt pr oc eed in g b ro ug htby or ag ai ns t the Uni te d S ta te s i n c on ne ct io n wi th th e de te rm in at io n, co ll ect io n, o r refu ndof any tax , in te res t, o r pe na lty . The t erm

“pr ev ai li ng party” m ean s an y party (othe r th anth e Uni te d S ta te s o r a cre di to r of th e ta xp ay er) wh ic h h as subs tant ia ll y pre va il edwith re sp ectto th e am ou ntin co nt ro ve rs y

or t he m os t s ig ni fic an t i ss ue or s etof i ss ue s an d m eet s the ne t wo rth requi rem en ts of 2 8 U.S.C. s ec. 2 41 2( d) (2 )(B) . See s ec. 7 43 0( c)(4 )(A). A pa rty m eet in g the se requi rem en ts sh al l n otbe tre at edas t he pre va il in g p arty , ho wev er, i f th e Uni te d S ta te s es tabl is he s tha t i ts po si ti on inth e p ro ceed in g was subs tant ia ll y jus ti fie d. Se c. 74 30 (c)( 4) (B).- 4 -

[* 4] Inord er t o e st ab li shth atth e p os it io n was subs tant ia ll y jus ti fie d, re sp on de nt m us t s ho w th atth e p os it io n was “ ‘j us ti fie d t o ade gr ee tha t co ul d s at is fy a reas on ab le pe rs on ’” or th atitha d a“ ‘reaso nabl e b as is bo th inlaw an d fact .’ ” Swan so n v . Comm is si on er, 1 06 T.C. 76 , 86 (19 96 ) (quo ti ng Pie rce v . Und erwo od , 48 7 U.S. 5 52 , 56 5 (1 98 8) ). “ A po si ti on ha s a r eas on ab le ba si s i n fa ct if t he re i s re le va ntev id en ce tha t a r eas on ab le m in d m ig htacce ptas a de qu at e to supp ort a c on cl us io n.” Corkr ey v. Co m m is si on er, 1 15 T.C. 36 6, 3 73 (20 00 ) (ci ti ng Pie rce, 4 87 U.S. at 5 64 -5 65 ). In d et erm in in g wh ethe r th e p os it io n was subs tant ia ll y

jus ti fie d, we m

us t “ ‘con si de r th e b as is forth e * * * leg al po si ti on an d th e m an ne r inwhi chth e p os it io n was m ai nt ai ne d’.” Id. (quo ti ng W as ie v. Co m m is si on er, 8 6 T.C. 9 62 , 96 8- 96 9 (1 98 6) ). The “po si ti on of t he Uni te d S ta te s” is ev al ua te d a t two s ta ge s o f th e cas e: fir stat the adm in is tra ti ve pro ceed in g l ev el an d s eco ndat t he co urt p ro ceed in g le ve l. See Huff

m anv. Co m

m is si on er, 9 78 F.2d11 39 , 11 47 (9t h C ir. 1 99 2) , aff’g inpart, re v’g i n p artT.C. Mem o. 1 99 1- 14 4. Inth es e cas es , th e p os it io n o f th e adm in is tra ti ve pro ceed in g was est ab li sh edby the App eal s Off ic e’s de ci si on an d th e p os it io n o f th e co urt p ro ceed in g was th attak eninres po nd en t’s an swe r to th e pe ti ti on . See s ec. 7 43 0( c)(7 ); M ag gi e Mg m t. Co . v. Co m

mis si on er, 1 08 T.C. 43 0, 44 2 (1 99 7) . Res po nd en t ar gu es an d we f in d tha t h is po si ti on inbo th pro ceed in gs- 5 -

[* 5] was s ub st an ti al ly the same. Res po nd en t’s p os it io n i n the se cas es onth e is su e of whet he r th e co m

pe ns at io n p ack ag es pa idto th e Fl et ch ers for th e 2 00 3, 2 00 4, an d 2 00 5 t ax y ears were d educ ti bl e und er s ect io n 1 62 was s ub st an ti al ly j us ti fie d. Sect io n 1 62 (a)( 1) pro vi de s a d educ ti on forord in ary an d n eces sary bu si ne ss ex pe ns es , in cl ud in g “ a rea so nabl e al lo wan ce fo r sa larie s o r ot he r co m pe ns at io n fo r pe rs on al servi ces actua ll y ren de red ”. Incas es ap pe al ab le to th e U.S. Co urt o f App eal s fo r th e Nin th Cir cu it , th e rea so nabl en es s o f th e p aym en ts is co ns id ered with re fere nc e to bro adfact or s s etforth inEll io tt s, In c. v. Co m m is si on er, 7 16 F.2d 12 41 (9t h C ir. 1 98 3) , rev ’g T.C. Mem o. 1 98 0- 28 2, an d M etro Leas in g & Dev. Co rp . v. Co m

m is si on er, 3 76 F.3d10 15 , 10 19 (9t h C ir. 2 00 4) , aff’g 1 19 T.C. 8 (2 00 2) . The rea so nabl en es s o f co m pe ns at io n i s a que st io n o f fac t t o b e d et erm in ed on th e b as is of a ll th e fac ts an d c irc um st an ces . Pac. Grai ns , Inc . v. Co m m is si on er, 39 9 F .2d60 3, 6 06 (9t h C ir. 1 96 8) , aff’g T.C. Mem o. 1 96 7- 7. Whe th er co m

pe ns at io n was reas on ab le is ne ces sa ril y a qu es ti on of f

act s an d ci rcu m st an ces . This Co urt re qu ire d aful l tria l co m pl et e wit h e xp ertwitne ss es on bo th si de s i n o rd er t o m ak e a d et erm in at io n wi th res pe ctto th e rea so nabl en es s o f th e co m pe ns at io n. Of the fact or s the Co urt l oo ke d a t, i t fo un d tha t thr ee o f th e si x fact or s wei gh edinfav orof r es po nd en t an d n ot edth atan othe r fac to r on ly sli gh tl y fav or edpe ti ti on er. Afte r car efu l an al y si s an d c on si de rat io n the Co urt fo un d tha t- 6 -

[* 6] m os t o f th e co m

pe ns at io n p ai d t o the Fle tc he rs was re as on ab le ; h owe ve r, a m at eri al po rti on , $2 82 ,61 5, o f th e co m pe ns at io n p ack ag e as itrel at edto de ferr ed co m pe ns at io n p ro vi de d b y

th e ret ire m en t p lan was fou ndto be no nd educ ti bl e an d un reas on ab le . It was als o d et erm in edth atpe ti ti on er Th ou sandOaks Res id en ti al Care Hom e I, In c.’s own er-e m pl oyees h addra in ed , th ro ug h c om pe ns at io n, the co rp or at io n’s p ro fit s, es se nt ia ll y lea vi ng no return fo r sh areh ol de rs on th ei r cap it al in ve st m en t. The cas es , with re sp ectto th e o wne r-em pl oyees andth ei r rea so nabl e co m pe ns at io n, i nc lu di ng co m pe ns at io n fo r ear li er y ears when th ey were un de rco m

pe ns at ed , were co m

pe ti ti ve . The t es ti m on y

of r es po nd en t’s ex pe rt, the nu m ero us factua l i ss ue s s urro un di ng th e d eci si on , andth e to ta l d is al lo wan ce o f al l co m pe ns at io n p ai d t o the own er-e m pl oyees’ dau gh te r Ms . Stri ckde m on st rat e th at res po nd en t ac te d re as on ab ly giv enth e fac ts an d c irc um st an ces . 3 Inacco rd an ce wi th th e fo reg oi ng , we ho ldth atres po nd en t’s p os it io n i n th es e cas es was re as on ab le an d s ub st an ti al ly j us ti fie d u nd er s ect io n 7 43 0( c)(4 )(B) .

W e n ot e th atha d p et it io ne rs ch os ento subm ita qu al ifi edoff er p ur su an t t o 3 se c. 74 30 (g ) whi chreco gn iz edno t o nl y res po nd en t’s ex ces si ve zeal , bu t al so it s own an d tha t o f it s s ha reh ol de r own ers , m uc h o f it s $ 15 1,5 03 of l it ig at io n c os ts an d tho se of r es po nd en t m ig htha ve be enav oi de d. Inan y ev en t i f th e qua li fie d of fer h adbe enreas on ab le , pet it io ne rs wou ldha ve tru m pe d re sp on de nt ’s sec . 74 30 (c)( 4) (B) d efen se an d m ig htha ve reco ve redth ei r co st s i n thi s m at te r. See se c. 74 30 (c)( 4) (E).- 7 -

[* 7] It f ol lo ws tha t p et it io ne rs are n otth e p rev ai li ng party with inth e m ean in g o f se ct io n 7 43 0, an d we wi ll th eref or e d en y pe ti ti on ers ’ m ot io n. 4 To re fle ctth e fo reg oi ng , App ro pr ia te ord ers an d d eci si on s wil l b e en te red .

Bec au se we co nc lu de d tha t re sp on de nt ’s po si ti on was s ub st an ti al ly 4 jus ti fie d, we n eedno t ad dr es s re sp on de nt ’s arg um en t tha t p et it io ne rs have no t es tabl is he d tha t the y

ha ve in curredan y

of the adm in is tra ti ve an d l it ig at io n c os ts .