T.C. Summary Opinion 2006-126

UNITED STATES TAX COURT

GARY C. AND MARU E. JOHANSEN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6643-05S. Filed August 10, 2006.

Gary C. and Maru E. Johansen, pro sese.

Gavin L. Greene, for respondent.

DEAN, Special Trial Judge: This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code of 1986, as amended, and all Rule references are to

the Tax Court Rules of Practice and Procedure. The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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This matter is before the Court on petitioners’ motion for

administrative and litigation costs under section 7430 and Rule

231 (motion).

Although petitioners’ motion sought an award for both

litigation and administrative costs, petitioners do not appear to

have any administrative costs. The first time entry on the

billing statement submitted by petitioners’ certified public

accountant (C.P.A.) was “Prepare Tax Court petition”. This time

entry and the nine time entries that followed were not dated. 

Based on the descriptions, the Court concludes that these entries

represent costs that were incurred in connection with either the

preparation or the filing of the petition with the Court. Hence,

they are litigation costs. See sec. 7430(c)(1); sec. 301.7430-

4(c)(3), Proced. & Admin. Regs. The remaining time entries are

also litigation costs, because they were dated after the

petition’s filing date. Sec. 301.7430-4(c)(3), Proced. & Admin.

Regs. Accordingly, the Court will treat petitioners’ motion as a

motion for the recovery only of litigation costs. 

Respondent agrees that petitioners: (1) Have not

unreasonably protracted the court proceedings; (2) have claimed a

reasonable amount of costs; (3) have substantially prevailed with

respect to the amount in controversy and with respect to the most

significant issue presented in the court proceedings; and (4)

have met the net worth requirements as provided by law.
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Respondent does not agree: (1) That petitioners have

exhausted their available administrative remedies within the

Internal Revenue Service (IRS), and (2) that petitioners are a

“prevailing party”, because (i) the qualified offer provision

does not apply, and (ii) respondent’s position in the court

proceedings was substantially justified.

The parties have not requested a hearing in this case, and

the Court concludes that a hearing is not necessary to decide

this motion. See Rule 232(a)(2). Accordingly, the Court rules

on the motion based on the parties’ submissions and the record in

this case.

Background

At the time the petition in this case was filed, petitioners

resided in Los Angeles, California.

For the year in issue, petitioners were self-employed,

operating a small consulting business. Petitioners jointly filed

a Form 1040, U.S. Individual Income Tax Return, for 2002, which

they prepared without the assistance of a professional.

By letter dated August 10, 2004, Tax Compliance Officer Mark

Harris (TCO Harris) notified petitioners that their 2002 return

had been selected for examination. At the same time, TCO Harris

sent to petitioners Form 4564, Information Document Request, to

request documentation establishing certain expense deductions

that petitioners claimed on their Schedule A, Itemized
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Deductions, and on their Schedule C, Profit or Loss From

Business.

By letter dated September 14, 2004, respondent sent to

petitioners a letter of proposed deficiency (30-day letter),

along with an examination report. The 30-day letter notified

petitioners that they had a right to request a conference with an

Appeals officer if they did not agree with the changes shown on

the examination report.

By letter dated September 27, 2004, TCO Harris informed

petitioners that he was reluctant to issue a statutory notice of

deficiency without a reply to the proposed changes from

petitioners. He offered petitioners an opportunity to discuss

the proposed adjustments in the examination report. TCO Harris

also stated in the letter that he would recommend the issuance of

a notice of deficiency if petitioners failed to respond. 

By a notice of deficiency dated January 4, 2005, respondent

determined for 2002 a deficiency in petitioners’ Federal income

tax of $14,220 and a section 6662(a) accuracy-related penalty of

$2,844. The notice also asserted computational adjustments for

tuition and fees, self-employment adjusted gross income, selfemployment deduction, and an additional tax for early withdrawal

from an individual retirement account.

In early January of 2005, petitioners retained a C.P.A.,

Martin A. Kapp (Mr. Kapp), to file a petition with the Court and

to assist them in negotiating with respondent. 
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By letter dated April 1, 2005, Mr. Kapp, on behalf of

petitioners, sent to respondent a “qualified offer” pursuant to

section 7430(g), in which petitioners offered to settle the 2002

deficiency for $500.

On April 8, 2005, petitioners filed a petition with the

Court, challenging respondent’s determinations in the notice of

deficiency. Shortly thereafter, petitioners received from the

Appeals Office a letter dated May 12, 2005, in which an Appeals

officer noted that petitioners “did not have the opportunity to

present documents, books, records” to support the deductions

claimed on their return.

On February 6, 2006, the parties settled all of the disputed

tax adjustments, and the terms of the settlement were read into

the record by respondent. Petitioners subsequently filed their

motion, in which they seek to recover the fees for services

performed by Mr. Kapp and his accounting firm. Concurrently with

the motion, the parties filed with the Court a stipulation of

settled issues that reflects the resolution of petitioners’

Federal income tax liabilities for 2002.

Discussion

Requirements Under Section 7430

Section 7430(a) authorizes the award of reasonable

litigation costs incurred in a court proceeding that is brought

by or against the United States in connection with the
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determination, collection, or refund of any tax, interest, or

penalty under the Internal Revenue Code. 

Litigation costs may be awarded only if the taxpayers

satisfy all of the requirements set forth in section 7430. 

Goettee v. Commissioner, 124 T.C. 286, 289 (2005). The taxpayers

must establish that they: (1) Are the prevailing party, (2) have

exhausted available administrative remedies, (3) have not

unreasonably protracted the court proceedings, and (4) have

claimed litigation costs that are reasonable. Sec. 7430(a) and

(b)(1), (3). 

To be a prevailing party, the taxpayer must substantially

prevail with respect to either the amount in controversy or the

most significant issue or set of issues presented and must

satisfy the applicable net worth requirements under 28 U.S.C.

section 2412(d)(2)(B) (2000). Sec. 7430(c)(4)(A). Even if the

taxpayer satisfies all of the stated requirements, the taxpayer

shall not be treated as a prevailing party if the Commissioner’s

position in the court proceeding was substantially justified. 

Sec. 7430(c)(4)(B). The Commissioner has the burden of proving

that his position was substantially justified. See sec.

7430(c)(4)(B)(i); Rule 232(e). 

Subject to certain limitations, under section 7430(c)(4)(E),

a party shall be treated as the prevailing party if “the

liability of the taxpayer pursuant to the judgment in the

proceeding (determined without regard to interest) is equal to or
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less than the liability of the taxpayer which would have been so

determined if the United States had accepted a qualified offer of

the party under subsection (g).” Sec. 7430(g). The qualified

offer provision of section 7430(c)(4)(E) applies without regard

to whether the Commissioner’s position in the proceeding is

substantially justified. See Haas & Associates Accountancy Corp.

v. Commissioner, 117 T.C. 48, 59 (2001), affd. 55 Fed. Appx. 476

(9th Cir. 2003); McGowan v. Commissioner, T.C. Memo. 2005-80.

The issues in this case are: (1) Whether petitioners

exhausted their available administrative remedies, (2) whether

the qualified offer provision applies, and (3) whether

respondent’s position in the court proceeding was substantially

justified.

Exhaustion of Available Administrative Remedies

Section 7430(b)(1) requires that taxpayers take advantage of

all available administrative remedies to be eligible for an award

of litigation costs. Haas & Associates Accountancy Corp. v.

Commissioner, supra at 57.

Section 301.7430-1(b)(1), Proced. & Admin. Regs., provides:

A party has not exhausted the administrative remedies

available within the Internal Revenue Service with

respect to any tax matter for which an Appeals office

conference is available under §§601.105 and 601.106 of

this chapter (other than a tax matter described in

paragraph (c) of this section) unless–-

(i) The party, prior to filing a petition in the

Tax Court * * * participates * * * in an Appeals office

conference; or 
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(ii) If no Appeals office conference is granted,

the party, prior to the issuance of a statutory notice

in the case of a petition in the Tax Court * * *

 (A) Requests an Appeals office conference in

accordance with §§601.105 and 601.106 * * *; and

 (B) Files a written protest if a written protest

is required to obtain an Appeals office conference. 

Petitioners do not meet the requirement under section

301.7430-1(b)(1)(i), Proced. & Admin. Regs., because they did not

participate in an Appeals Office conference prior to filing a

petition. Petitioners did not expressly advance an argument

under section 301.7430-1(b)(1)(ii), Proced. & Admin. Regs. 

Instead, petitioners argue that they are deemed to have exhausted

their available administrative remedies, because they meet the

exception under section 301.7430-1(f)(2), Proced. & Admin. Regs. 

The Court will nevertheless address first the requirements under

section 301.7430-1(b)(1)(ii), Proced. & Admin. Regs., for

completeness of discussion.

Whether a Written Protest Is Required

Section 601.105(d)(2)(i), Statement of Procedural Rules,

provides that a written protest or brief written statement of

disputed issues is not required to obtain an Appeals conference

in office interview cases and correspondence examination cases. 

The written requirement applies only in field examination cases. 

See sec. 601.105(d)(2), Statement of Procedural Rules; see also

Images in Motion, Inc. v. Commissioner, T.C. Memo. 2006-19. 
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For office interview cases and correspondence examination

cases, an oral request is sufficient. Sec.

601.106(a)(1)(iii)(a), Statement of Procedural Rules. Since this

was an office interview case, petitioners were not required to

file a written request or a brief written statement of disputed

facts.

Whether Petitioners Orally Requested

an Appeals Office Conference

Petitioners contend that prior to the issuance of the

statutory notice, they orally requested an Appeals Office

conference, but TCO Harris never returned their calls. TCO

Harris, in turn, stated in his affidavit to the Court that, as of

October 20, 2004, the only contact that he received from

petitioners was a voice mail message on August 30, 2004. TCO

Harris also stated that he called petitioners and left them a

message requesting that they return his call, but petitioners did

not do so.

 It is difficult to conclude that petitioners’ voice mail

message in August was an oral request for an Appeals Office

conference, because petitioners were not offered an opportunity

for administrative review with the Appeals Office until September

14, 2004, the date of the 30-day letter. 

The burden is on petitioners to prove that they have

exhausted their available administrative remedies within the IRS. 

Rule 232(e). Petitioners have not presented any evidence to show
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that they made an oral request for an Appeals Office conference

prior to the issuance of the notice of deficiency. 

Whether an Exception Applies

Section 301.7430-1(f), Proced. & Admin. Regs., provides

certain limited exceptions to the requirement that taxpayers

participate in an Appeals Office conference in order to be

treated as having exhausted available administrative remedies. 

Haas & Associates Accountancy Corp. v. Commissioner, supra at 58. 

Section 301.7430-1(f)(2), Proced. & Admin. Regs, applies only

where the taxpayers did not receive a 30-day letter prior to the

issuance of the statutory notice.

Petitioners argue that under section 301.7430-1(f)(2),

Proced. & Admin. Regs., they are deemed to have exhausted their

available administrative remedies, because respondent failed to

make an Appeals Office conference available to them before

issuing the statutory notice.

Petitioners presented a letter dated May 12, 2005, from

respondent’s Appeals Office, in which the Appeals officer

informed petitioners that “you did not have the opportunity to

present documents, books, records, receipts, affidavits, etc to

support the deductions, credits, filing status, etc. claimed on

your return.” Petitioners urge the Court to accept that as

evidence that they were not given an opportunity to participate

in an Appeals Office conference until shortly after their

petition was filed. 
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Respondent, in turn, contends that petitioners failed to

respond to TCO Harris’s requests for information in connection

with the examination of their 2002 return. As a result, the IRS

sent to petitioners a 30-day letter dated September 14, 2004,

notifying petitioners that they should request a conference with

an Appeals officer if they did not agree with the proposed

adjustments to their return.

Petitioners also rely on Minahan v. Commissioner, 88 T.C.

492, 502-503 (1987), to argue that they fall within the purview

of the exception under section 301.7430-1(f)(2), Proced. & Admin.

Regs. In Minahan, however, the taxpayers did not receive a 30-

day letter. Minahan v. Commissioner, supra at 502. Petitioners

do not argue that they did not receive a 30-day letter from

respondent. Regardless of the letter from the Appeals Office

dated May 12, 2005, the 30-day letter clearly gave petitioners an

opportunity to seek an Appeals Office conference prior to the

issuance of the notice of deficiency. Therefore, the exception

under section 301.7430-1(f)(2), Proced. & Admin. Regs., does not

apply.

Petitioners’ meetings with an Appeals officer, upon

receiving the statutory notice and after filing a petition with

the Court, does not satisfy the exhaustion of administrative

remedies requirement. See Polyco, Inc. v. Commissioner, 91 T.C.
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1The statutory language in sec. 7430(c)(4)(E) reflecting the

settlement limitation to the qualified offer provision, in

relevant part, provides:

(ii) Exceptions.--This subparagraph shall not apply to–-

(I) any judgment issued pursuant to a settlement * * *

963, 966 (1988); sec. 301.7430-1(g), Example (11), Proced. &

Admin. Regs. 

Qualified Offer

Because the Court has found that petitioners failed to

exhaust their available administrative remedies, the Court need

not decide whether the qualified offer provision under section

7430(c)(4)(E) applies. The Court nevertheless notes that the

application of the qualified offer provision would have been

precluded by the settlement limitation under section

7430(c)(4)(E)(ii)(I).1 

Section 7430(c)(4)(E)(ii)(I) provides that the qualified

offer provision does not apply where the parties settle a tax

adjustment rather than litigate and obtain a court determination

of the adjustment. In this case, the entire tax liability was

settled by the parties before this matter was brought before the

Court. Therefore, any judgment in this case will be issued

pursuant to a settlement rather than a judicial determination.
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The Court need not and does not reach the issue of whether

respondent’s position in the proceeding was substantially

justified. 

Conclusion

Petitioners are not entitled to litigation costs because

they have not exhausted their available administrative remedies

within the IRS, as required by section 7430(b)(1). Accordingly,

petitioners’ motion for litigation costs is denied. 

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

An appropriate order and

decision will be entered.