T.C. Memo. 2007-6

UNITED STATES TAX COURT

GILBERT VASQUEZ, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 16121-03. Filed January 10, 2007.

P claimed earned income credit (EIC) as a refund

of $2,890 on his 2002 tax return. On May 16, 2003, R

sent a packet of materials to P, proposing to disallow

the EIC, stating that the claimed refund was “frozen”,

requiring P to “Return Form 4549 and your payment of

$0.00 in the enclosed envelope by 06/15/2003”,

requesting P to provide documents supporting his

claimed EIC, and warning P that a notice of deficiency

would be sent to him if the documents were not received

by June 15, 2003. P failed to respond, and, on July

18, 2003, R sent the notice of deficiency of $2,890 on

which this case is based. P secured counsel and filed

a petition. R filed an answer embodying the position R

took in the notice of deficiency. Six weeks after the

answer R notified P that P’s case was in R’s Appeals

Office. Three months after the notification (4-1/2

months after the answer) P filed a motion in limine for

an order ruling certain documents are not inadmissible

hearsay. Based on those documents, R eventually

conceded the EIC, and eventually the parties submitted
- 2 -

1 Unless indicated otherwise, all references to secs. 7430

and 7453 are to those sections of the Internal Revenue Code of

1986 as in effect for proceedings commenced at the time the

petition in the instant case was filed; all other section

references are to sections of the Internal Revenue Code of 1986

as in effect for 2002, the year in issue.

2 Unless indicated otherwise, all Rule references are to the

Tax Court Rules of Practice and Procedure.

a proposed decision that P had an overpayment of

$2,890. We entered the decision. P then moved for

litigation costs of $19,100 ($27,000 at “market rate”);

on opening legal memorandum, P contends that awardable

costs on this $2,890 case have risen to $45,225

($75,000 at “market rate”). We vacated the entry of

decision and filed the litigation costs motion.

Held: P’s motion for litigation costs denied; R

established that R’s position in this case was

substantially justified. Sec. 7430(c)(4)(B)(i), I.R.C.

1986. Other contentions evaluated.

Jeffrey D. Moffatt, for petitioner.

Lorraine Y. Wu, for respondent.

MEMORANDUM OPINION

CHABOT, Judge: This matter is before us on petitioner’s

motion for an award of reasonable litigation costs pursuant to

section 74301 and Rule 231.2

Respondent determined a deficiency in individual income tax

against petitioner in the amount of $2,890 for 2002. The

determined deficiency arose from petitioner’s claim of a

refundable earned income credit in that amount under section 32. 
- 3 -

3 Petitioner has requested only litigation costs in the

instant case, so we do not consider the statutory or regulatory

provisions that apply only to administrative costs.

4 These amounts are stated in petitioner’s opening legal

memorandum on the litigation costs motion. Petitioner’s

answering legal memorandum on this motion asserts that, “H. 

Preparing this Brief has taken another 30 hours of time, which

Petitioner’s counsel requests to be compensated for.” 

Petitioner’s motion for litigation costs, received 16 days after

the Court had entered the parties’ stipulated decision, included

an estimate that litigation costs up to that point would amount

to $19,100 (based on statutory rates for legal fees) or $27,000

(based on “market rate” for legal fees).

The parties settled the disputed deficiency by stipulating that

there is an overpayment of $2,890 for 2002.

Petitioner asks us to award reasonable litigation costs3 of

$45,225 (based on statutory rates for legal fees) or $75,000

(based on “market rate” for legal fees).4

The issues for decision are: 

(1) Whether petitioner is entitled to an award of reasonable

litigation costs; and 

(2) if the answer to the first issue is “yes”, then what is

the amount of the awardable costs.

Neither petitioner’s motion for award of litigation costs

nor respondent’s response to the motion requested a hearing on

the motion. Rules 231(b)(8) and 232(b) (final flush language).

In his memoranda of law petitioner states that he has been

handicapped by the Court’s indication that it would not authorize

depositions of certain of respondent’s employees. We have
- 4 -

5 Neither the stipulated copy of petitioner’s electronically

filed 2002 tax return nor the stipulation indicates when the tax

return was filed. We assume the tax return was filed timely.

6 We refer to the minor children by their initials only.

examined the parties’ stipulations and memoranda of law, as well

as petitioner’s supplement to the motion and the documents

attached thereto, and conclude that the litigation costs motion

may properly be resolved with neither (1) an evidentiary hearing

nor (2) the authorization of contested depositions. See Rules

232(a)(2) (last sentence), 75(b) (first sentence).

The parties have presented admissibility disputes in certain

of their stipulations. We rule on these evidentiary disputes

infra, as the first items under Discussion.

Background

When the petition was filed in the instant case, petitioner

resided in Lancaster, California.

On his 2002 income tax return (Form 1040A, U.S. Individual

Income Tax Return),5 petitioner showed his filing status as

single, and claimed five dependents--VV, SV, AH, EH, and JH.6

Petitioner reported wage compensation income of $7,200 and

adjusted gross income of $7,200. He claimed the standard

deduction of $4,700, a personal exemptions deduction of $18,000,

and an earned income credit of $2,890. He did not show a section

1 tax liability; he claimed the entire $2,890 as an overpayment

and asked that all of it be refunded by direct deposit into an
- 5 -

7 The letter also showed that a copy of Publication 3498,

The Examination Process, was enclosed, but the stipulated exhibit

does not include the Publication 3498.

indicated checking account. To his Form 1040A, petitioner

attached a Form 8862 (Information To Claim Earned Income Credit

After Disallowance) and a Schedule EIC (Earned Income Credit

Qualifying Child Information) with appropriate information as to

VV and SV.

On his tax return, including the Form 8862 and the Schedule

EIC, petitioner stated (1) that VV and SV were his sons, (2) that

VV was born in 1998, and that SV was born in 1997, and (3) that

VV and SV each lived with petitioner in the United States for 12

months.

On May 16, 2003, respondent sent to petitioner a two-page

letter (Letter 566 B-EZ (SC)), to which was attached the

following: A two-page document relating to the earned income

credit (Form 886-H-EIC), a one-page document relating to support

documents for dependency exemptions (Form 886-H-DEP), a two-page

document relating to income tax examination changes (Form 4549),

and a one-page document relating to explanation items (Form 886-

A).7 This letter and the attached documents are hereinafter

sometimes collectively described as the May 16, 2003, letter.

The May 16, 2003, letter informed petitioner that respondent

was examining petitioner’s 2002 income tax return and proposed to 
- 6 -

disallow “Exemption(s) Earned Income Credit”; it instructed

petitioner as follows:

If you agree with all the changes listed on the

enclosed Form 4549:

• Please sign and date Form 4549, and

• Return Form 4549 and your payment of $ 0.00

 in the enclosed envelope by 06/15/2003. Make

 your check or money order payable to United

 States Treasury. We may charge interest for

 payments received after 06/15/2003. If you

 can’t pay the total amount, please return

 Form 4549 and contact us at 800-477-1291 to

 discuss payment arrangements.

The May 16, 2003, letter then instructed petitioner as follows:

If You Do Not Agree

If you do not agree with all the changes listed on Form

4549, please send us the following information by

06/15/2003

• A letter telling us what item(s) you disagree

 with and why, and

• Clear photocopies of the records, information,

 and/or supporting documents, listed on the

 enclosed Form(s) 886H-DEP, 886H-EIC to

 support the items listed above. It is not

 necessary to include more than one copy of any

 document.

If You Do Not Reply

If we do not receive your supporting documents by

06/15/2003, we will send you a Notice of Deficiency. 

This is a legal document explaining the proposed

changes and the amount of the proposed tax increase.

Important Notes If You Do Not Agree

It’s important that we receive your written response by

06/15/2003.
- 7 -

• Please read the enclosed Form(s) 886H-DEP,

 886H-EIC , which lists the types of

 documents needed to support your claim and

 includes helpful information on the Earned

 Income Credit, Dependency Exemptions, and

 Head of Household Filing Status.

• To speed up your service, please use the

 enclosed envelope or address your reply to:

 Internal Revenue Service

 FIELD COMPLIANCE SERVICES

 FRESNO, CA 93888-2222

• Include a copy of this letter with your

 response.

• Include a telephone number with the area code

 and the best time for us to call you in case

 we need more information.

 Telephone Number: ( ) Best time to call: 

 G Home G Work G Cell Phone

After we review what you’ve sent us, we will contact

you with the results. If you still disagree with our

findings, you have the right to file an administrative

appeal as explained in the enclosed Publication 3498,

The Examination Process.

Questions

If you have any questions about this letter, please

call 800-477-1291 for assistance. You can also visit

our web site at www.irs.gov for additional information.

The enclosed Form 886-H-EIC (Supporting Documents for

Taxpayers Claiming EIC on the Basis of a Qualifying Child(ren))

instructed as follows, as relevant to petitioner’s claim:

(1) If the qualifying children are the taxpayer’s

sons or daughters, then the taxpayer is not required to

document the relationship;
- 8 -

(2) If the qualifying children are less than 19

years old, then the taxpayer is not required to

document the age; and

(3) The following must be sent to support the

residency test:

To show that the child lived with you for

more than half of 2002 send:

One of the following: school records, medical

records, daycare records, or Social Services

records that show names, common address and

dates

or

One letter on official letterhead from: the

school, your medical provider, your clergy or

other similar organizations that show names,

common address and dates

** If you send a letter from a relative who

provides your daycare, you MUST send at least

one additional letter from the list above.

** You can send more than one document to

show that the child lived with you for more

than half the year

The enclosed Form 886-H-DEP (Supporting Documents for

Dependency Exemptions) instructed petitioner to provide

information as to the claimed dependents’ support.

The enclosed Form 4549 (Income Tax Examination Changes)

showed that respondent proposed to disallow all five of the

claimed dependency exemptions, as well as the earned income

credit, as a result of which there would be neither a balance due

nor an overpayment of petitioner’s income tax.
- 9 -

The enclosed Form 886-A (Explanation of Items) stated that

the claimed refund was “Frozen”.

Petitioner failed to respond to the May 16, 2003, letter.

On July 18, 2003, respondent issued the notice of deficiency

on which the instant case is based. The notice of deficiency

explanations are as follows:

Earned Income Credit

 Per Return: $2890.00

 Per Exam: $0.00

 Per Adjustment: ($2,890.00)

Since you did not establish that you were entitled to

the earned income credit, we disallowed it.

Exemptions

 Per Return: 6

 Per Exam: 1

 Per Adjustment: 5

Since you did not establish that you are entitled to

the exemptions(s), it/they is/are being disallowed.

Petitioner first consulted with Jeffrey D. Moffatt

(hereinafter sometimes referred to as Moffatt), petitioner’s

counsel in the instant case, on July 26, 2003. Petitioner

retained Moffatt on July 27, 2003.

On September 22, 2003, Moffatt filed a timely petition on

petitioner’s behalf. Paragraph 4 of this petition is as follows:

4. The determination of the tax set forth in the

said notice of deficiency (or liability) is based upon

the following errors:
- 10 -

8 The denial of the claimed dependency exemption deductions

does not affect petitioner’s income tax liability. Accordingly,

we treat the earned income credit as the only relevant tax issue

in the instant case.

A. Petitioner was improperly denied his requested

Earned Income Credit, hereinafter referred to as EIC.[8]

B. Petitioner provided the requested

documentation to the Internal Revenue Service to

support his claim of the Earned Income Credit.

C. Petitioner responded to requests for

information within the time deadlines requested by the

Internal Revenue Service?

D. Did Petitioner comply to the amount necessary,

and in the time frame necessary to allow a claim for

legal fees for this present Litigation?

E. Has Petitioner proved his position by a

preponderance of the evidence, which will then allow

for legal fees to be covered by Respondent? 

[Reproduced literally.]

The answer was filed on November 20, 2003, by Debra A. Bowe

(hereinafter sometimes referred to as Bowe), Associate Area

Counsel (Small Business/Self-Employed). Paragraph 4 of this

answer is as follows:

4. A., B., C., Denies. D. and E., Alleges these are

not assignments of error susceptible to an admission or

denial by respondent.

The answer denies “for lack of present information” substantially

all of the petition’s fact allegations.
- 11 -

9 Respondent’s answer was filed on Nov. 20, 2003, when the

Court received it. However, respondent had mailed the answer to

the Court, and had served it on petitioner, on Nov. 19, 2003, the

date of the referral to the Appeals Office. See Rule 21(b)(1). 

Moffatt’s records show that he received the answer on Nov. 19,

2003.

10 See Rev. Proc. 87-24, 1987-1 C.B. 720, for respondent’s

procedures, and the division of authority, as to the Appeals

Office and respondent’s counsel before this Court. See also sec.

7452.

11 As we have found, Moffatt filed the petition, thereby

having entered his appearance for petitioner. Rule 24(a)(2). 

Respondent’s answer included Bowe’s certificate of service of the

answer on Moffatt. Rule 21(b)(2). The record does not include

an explanation of why the Appeals Office notified petitioner

directly and apparently did not notify Moffatt.

On November 19, 2003,9 respondent’s counsel’s office sent

documents in petitioner’s case (copies of the petition and the

answer, with a note that the administrative file was available)

to the Appeals Office for consideration.10

On January 2, 2004, the Appeals Office sent a letter to

petitioner11 (1) advising him that his case had been received for

consideration in the Appeals Office, (2) explaining what the

Appeals Office does, (3) suggesting that petitioner “Contact the

‘Person to Contact’ listed above with any questions about the

appeals process or how you can prepare for your hearing,” and (4)

showing Cynthia Ace (hereinafter sometimes referred to as Ace) as

the “Person to Contact”.

The case was assigned to Ace on January 2, 2004.
- 12 -

On January 21, 2004, petitioner brought to Moffatt the

January 2, 2004, Appeals Office letter.

On April 5, 2004, petitioner filed a motion in limine for an

order “allowing for the following documents to come in as Hearsay

exceptions and/or Hearsay Exclusions, and/or do not constitute

Hearsay at all.” The documents included birth certificates for

VV and SV, and various school and State court documents relating

to one or more of the claimed dependents. See supra note 6. 

Attached to the motion was Moffatt’s certificate of service on

Bowe. See Rule 21(b)(1). The motion did not include any

statement that prior notice had been given to Bowe, or any other

of respondent’s counsel, nor did the motion state whether

respondent objected to the motion. See Rule 50(a). On April 6,

2004, the Court calendared the instant case for hearing on

petitioner’s motion in limine at the Court’s May 17, 2004, Los

Angeles trial session.

On April 9, 2004, respondent’s counsel’s office mailed to

Ace a copy of petitioner’s motion in limine “for consideration of

petitioner’s documentation.”

On April 22, 2004, Moffatt called Ace and asked about the

status of the case. Ace explained to Moffatt that she had not

yet looked at the case because the case was not yet scheduled for

trial. Moffatt wanted to know who was respondent’s counsel on

the case. Ace called Area Counsel and learned that no attorney
- 13 -

had yet been assigned to the case. Ace transmitted this

information to Moffatt. Moffatt asked Ace if he could get

litigation costs if he settled with the Appeals Office. Ace told

him that she did not think so, but that she would find out.

On May 14, 2004, Ace, having evaluated the materials,

concluded that respondent should concede the earned income credit

issue.

On May 17, 2004, the case was called at the calendar call

for the Court’s trial session to deal with petitioner’s motion in

limine. Respondent was represented by Nguyen Hoang (hereinafter

sometimes referred to as Hoang), and petitioner was represented

by Moffatt. Hoang stated that the purpose of petitioner’s motion

in limine could best be achieved during the stipulation process,

which would follow the appeals process. Moffatt stated that he

had subpoenaed 10 government employees to come to the hearing on

the motion, in order to authenticate the documents and support

the documents’ admissibility. Moffatt stated that “if the motion

is heard, and the witnesses are allowed to testify, I think the

case will not need to go further in trial. I think it will be

settled by summary judgment.” The Court directed counsel to

meet, discuss the documents, and report back.

About 1-1/2 hours later, the case was recalled. Hoang

agreed to stipulate all the documents in petitioner’s motion in

limine, as follows:
- 14 -

MS. HOANG: Your Honor, Dan O’Neill, a paralegal

for the Respondent, has looked at the documents. He

has indicated that Respondent will stipulate to all of

the documents, so the next step will be that Mr.

O’Neill will prepare a draft stipulation of facts, and

hopefully, get it out with all due deliberate speed. 

We’re shooting for possibly July 1st, and from then on

we will continue the process.

Moffatt presented several additional documents. After a

brief discussion, Hoang agreed to stipulate these documents as

well.

The Court then advised and prompted as follows:

THE COURT: Okay. So based on that presentation,

there should be no difficulty here in the stipulation. 

Mr. Moffatt, I encourage you, pursuant to the Tax Court

rules, to proceed informally now there is counsel in

the case, --

MR. MOFFATT: Yes, sir.

THE COURT: -- and if you want other matters

agreed to or stipulated, to present those documents,

have discussion about them rather than file motions

with the Court because I don’t think you really need

them here.

MR. MOFFATT: I wouldn’t have thought it was

necessary either today, Your Honor.

THE COURT: Okay.

MR. MOFFATT: Thank you very much.

THE COURT: On that basis, Mr. Moffatt, do you

want to withdraw your motion?

MR. MOFFATT: I will do so.

THE COURT: Okay. Well, you can do that orally

right now.

MR. MOFFATT: I’ll do that orally.

THE COURT: As soon as you ask for leave to

withdraw your motion in limine, the Court will permit

the motion to be withdrawn.

MR. MOFFATT: I ask for leave to withdraw the

motion.

THE COURT: Okay. Very good. So it’s withdrawn. 

Thank you.
- 15 -

12 So stipulated. The record does not clarify whether it

was intended that there be a linkage between the earned income

credit issue and the litigation costs issue. Note that two of

the five assignments of error (supra text at note 8) in the

petition relate to petitioner’s claim for an award of reasonable

litigation costs, notwithstanding Rule 233 and the Rules referred

to therein. Note also petitioner’s statements set forth infra in

D. Qualified Offer.

The transcript of these May 17, 2004, proceedings does not

indicate that, 3 days earlier, Ace had recommended that

respondent concede the earned income credit issue.

On May 24, 2004, Ace asked respondent’s counsel’s office to

prepare decision documents and stipulation documents to resolve

the case.

Also on May 24, 2004, Ace returned Moffatt’s telephone call

of Friday, May 21. On May 25, 2004, Ace told Moffatt that

respondent’s paralegal was preparing the decision documents and

stipulation documents; at Moffatt’s request, Ace said she would

provide to Moffatt an estimate of the interest on petitioner’s

overpayment.

On June 16, 2004, respondent’s counsel’s office told Ace

that “she needed to consider the issue of petitioner’s request

for attorney’s fees before the case could be completely

resolved.”12

On June 21, 2004, Ace concluded that petitioner was not

entitled to litigation costs because “The Counsel for the

Petitioner does not wish to participate in an Appeals conference. 
- 16 -

He wants to go directly to Tax Court.” On June 22, 2004, Ace

recommended that, because Moffatt “will not sign the decision

documents unless he is awarded attorney fees”, the case be

forwarded to respondent’s counsel’s office for trial preparation.

The Court, having not received any filing from the parties

after the May 17, 2004, hearing described supra, on July 9, 2004, 

calendared the case for trial at the December 13, 2004, session

in Los Angeles.

On August 16, 2004, petitioner filed a motion in limine

similar to the one filed on April 5, 2004, described supra. On

August 19, 2004, the Court conducted a telephone conference with

the parties to discuss this motion. The Court’s order dated

August 23, 2004, states that as a result of the conference, the

Court understood respondent intended “to stipulate without

reservation to certain documents that are the subject of the

motion and that are described in the transcript of a hearing in

this case held on May 17, 2004.” The Court concluded that the

stipulation procedure will better serve petitioner’s aims than

the motion, and so denied the motion in limine.

On August 27, 2004, Lorraine Y. Wu (hereinafter sometimes

referred to as Wu) sent to Moffatt a stipulation of facts. In

her cover letter, Wu noted that she would prepare a stipulation

of settled issues, which she would shortly send to Moffatt. 

Moffatt responded on August 30, 2004. Moffatt agreed that the
- 17 -

13 In connection with the instant motion, the parties have

stipulated Ace’s case activity record.

proposed stipulation of facts “seems to mimic my past Motions In

Limine”. However, he brought up the following items: (1) He

wanted respondent to agree to stipulate without reserved

relevance objection (a) Ace’s case activity record13 and (b) a

June 21, 2004, response to a FOIA (Freedom of Information Act)

request he had made; (2) he wanted to take Ace’s deposition; (3)

he was “looking at filing a motion to transfer this case to the

U.S. Federal Court of Claims, [sic] given that the case is

essentially a refund case”; and (4) he wanted to meet with Wu and

her supervisor “to discuss these issues at my office, thereby

satisfying the Branerton requirements in Branerton Corp. v.

Commissioner, 761 [sic] T.C. 691 (1974).”

On September 8, 2004, Wu sent to Moffatt a proposed

stipulation of settled issues, agreeing that petitioner is

entitled to the claimed earned income credit and that petitioner

has made an overpayment of $2,890. On September 9, 2004, Moffatt

sent to Wu a signed stipulation of facts. In his cover letter,

Moffatt repeated most of the points raised in his August 30,

2004, letter to Wu.

On October 28, 2004, Wu received petitioner’s trial

memorandum. On November 26, 2004, Wu served respondent’s trial

memorandum on Moffatt. (The relevant Standing Pretrial Order
- 18 -

required the trial memoranda to be exchanged “not less than 14

days before the first day of the trial session.”) On December

13, 2004, at the calendar call the parties reported a basis of

settlement; they were ordered to submit decision documents by

January 12, 2005. The Court received the decision documents and

on January 12, 2005, entered decision for petitioner that there

was a $2,890 overpayment for 2002.

Petitioner’s litigation costs motion was received after the

Court entered the parties’ stipulated decision. In the exercise

of its discretion, the Court sua sponte vacated the entry of

decision so that petitioner’s motion could be considered and

disposed of in the Court’s decision of the instant case (see Rule

232(f)), and directed that petitioner’s motion then be filed. 

See, e.g., Swanson v. Commissioner, 106 T.C. 76, 85 (1996).

 

When the answer was filed in the instant case, respondent

did not have any documentation supporting petitioner’s claimed

earned income credit.

Respondent first received such documentation as attachments

to petitioner’s first motion in limine, about 4-1/2 months after

the answer was filed.

Respondent’s position in the instant case was substantially

justified.
- 19 -

Discussion

We consider first respondent’s objections to receipt of

certain exhibits, then the general considerations regarding

motions for litigation costs, then whether respondent established

that “the position of the United States in the [instant]

proceeding was substantially justified”, and then several of the 

other issues that the parties presented.

A. Evidence

 1. National Taxpayer Advocate Report

Exhibit 22-P is Publication 2104B, National Taxpayer

Advocate 2004 Annual Report to Congress, Volume 2, Earned Income

Tax Credit (EITC) Audit Reconsideration Study, dated December 31,

2004. Exhibit 22-P is hereinafter sometimes referred to as the

Report. Respondent objects to receipt of the Report on the

ground of relevance. Petitioner’s position is that this report

“covers errors related to Earned Income Tax Credit this

documented error rate tends to prove errors occurred in

petitioner’s case, therefore relevancy is satisfied.” (Reproduced

literally.) Petitioner cites the Report at numerous points in

his legal memoranda to show that “the IRS regularly makes errors

as to EIC issues.”

Rule 402 of the Federal Rules of Evidence (see sec. 7453)

provides the general rule that all relevant evidence is

admissible, while evidence which is not relevant is not
- 20 -

14 Fed. R. Evid. 401. Definition of “Relevant Evidence”:

“Relevant evidence” means evidence having any tendency to

make the existence of any fact that is of consequence to the

determination of the action more probable or less probable than

it would be without the evidence. 

admissible. Rule 401 of the Federal Rules of Evidence14 provides

that evidence is relevant if it has “any tendency” to make “any

fact” of consequence more likely or less likely than it would be

without the evidence.

In determining whether respondent’s position is

substantially justified, we come to a conclusion as to whether

petitioner provided materials to respondent before November 20,

2003, the date respondent’s answer was filed. The accuracy of

respondent’s records could affect our conclusion as to the

existence of the fact of such providing, especially in light of

petitioner’s declaration on this point, discussed infra (C.

Substantially Justified, 3. What Respondent Knew). This is

clearly a “fact that is of consequence to the determination of

the action”, within the meaning of rule 401 of the Federal Rules

of Evidence. Under these circumstances (although we disagree

with many of petitioner’s characterizations of what the Report

shows), we conclude that the Report is relevant.

We overrule respondent’s relevance objection and receive

Exhibit 22-P into evidence.
- 21 -

2. Senatorial Office Press Release

Exhibit 23-P is a February 27, 2002, press release from the

office of Senator Charles E. Schumer of New York, which asserts

that in 2001 respondent lost tax returns and other documents from

about 71,000 people from “upstate” New York and New England. The

press release states that employees at a Pittsburgh,

Pennsylvania, bank “reportedly destroyed or hid thousands of tax

documents * * * because they felt they could not meet the IRS’

processing deadlines.” Respondent objects on the grounds of

hearsay and relevance. Petitioner’s position is:

the document covers error related to lost documents

similar in time to the documents petitioner claimed

were lost by the IRS. As such, this tends to prove the

IRS looses [sic] documents on occasion, which satisfies

the relevancy requirement.

As to the hearsay objection, petitioner directs our attention to

all or part of rules 801, 802, 803, 807, 901(b), 902, 1001, and

1005 of the Federal Rules of Evidence.

The statements as to matters of fact asserted in Exhibit 23-

P relate to documents lost 2 years before the events we deal with

in the instant case, by an office some 2,000 miles from

respondent’s offices in the instant case, and lost because a

private contractor’s employees were concerned about deadlines

imposed on them by respondent. The matter dealt with in Exhibit

23-P is so remote from “any fact that is of consequence to the

determination of the action” before us that we conclude Exhibit
- 22 -

15 Sec. 7430 provides, in pertinent part, as follows:

SEC. 7430. AWARDING OF COSTS AND CERTAIN FEES.

(a) In General.--In any administrative or court

proceeding which is brought by or against the United

States in connection with the determination,

collection, or refund of any tax, interest, or penalty

under this title, the prevailing party may be awarded a

judgment or a settlement for--

* * * * * * *

(2) reasonable litigation costs incurred

in connection with such court proceeding.

(b) Limitations.--

(1) Requirement that administrative

remedies be exhausted.--A judgment for

reasonable litigation costs shall not be

awarded under subsection (a) in any court

proceeding unless the court determines that

the prevailing party has exhausted the

administrative remedies available to such

party within the Internal Revenue Service. *

* *

* * * * * * *

(c) Definitions.--For purposes of this section--

(continued...)

23-P fails even the broadly permissive test of rule 401 of the

Federal Rules of Evidence. See also Fed. R. Evid. 403.

We sustain respondent’s relevance objection to Exhibit 23-P,

and so need not deal with respondent’s hearsay objection.

B. In General

The Congress has provided for the awarding of litigation

costs to a taxpayer who satisfies a series of requirements. Sec.

7430.15
- 23 -

15(...continued)

* * * * * * *

(4) Prevailing party.--

(A) In general.--The term “prevailing party”

means any party in any proceeding to which 

subsection (a) applies * * *--

(i) which--

(I) has substantially prevailed

with respect to the amount in

controversy, or

(II) has substantially prevailed

with respect to the most significant

issue or set of issues presented, and

(ii) which meets the requirements of

 the 1st sentence of section 2412(d)(1)(B)

 of title 28, United States Code * * *

(B) Exception if United States establishes

that its position was substantially justified.--

(i) General rule.--A party shall not be

treated as the prevailing party in a 

proceeding to which subsection (a) applies if

the United States establishes that the

position of the United States in the

proceeding was substantially justified.

* * * * * * *

(C) Determination as to prevailing party.--

Any determination under this paragraph as to

whether a party is a prevailing party shall be

made by agreement of the parties or--

* * * * * * *

(ii) in the case where such final

determination is made by a court, the court.

* * * * * * *

(continued...)
- 24 -

15(...continued)

(6) Court proceedings.--The term “court

proceeding” means any civil action brought in

a court of the United States (including the

Tax Court * * *).

(7) Position of United States.–-The term

“position of the United States” means--

(A) the position taken by the United

States in a judicial proceeding to which

subsection (a) applies, and

(B) the position taken in an administrative

proceeding to which subsection (a) applies as of

the earlier of--

(i) the date of the receipt by the

taxpayer of the notice of the decision of

the Internal Revenue Service Office of

Appeals, or

(ii) the date of the notice of

deficiency.

In general, the requirements of section 7430 are in the

conjunctive; i.e., the taxpayer must satisfy each of them in

order to succeed. See Goettee v. Commissioner, 124 T.C. 286, 289

(2005), affd. without published opinion 192 Fed. Appx. 212 (4th

Cir. 2006); Corson v. Commissioner, 123 T.C. 202, 205-206 (2004).

Respondent concedes that petitioner (1) substantially

prevailed (sec. 7430(c)(4)(A)(i)) and (2) met the net worth

requirements (sec. 7430(c)(4)(A)(ii)). Respondent contends (1)

petitioner should “not be treated as the prevailing party”

because respondent’s position “was substantially justified” (sec.

7430(c)(4)(B)(i)); (2) petitioner failed to exhaust available

administrative remedies (sec. 7430(b)(1)); (3) petitioner
- 25 -

unreasonably protracted proceedings (sec. 7430(b)(3)); and (4)

the amount of costs petitioner claims is not reasonable, and

petitioner neither paid nor incurred the claimed costs (subsecs.

(a)(2) and (c)(1) of sec. 7430).

We consider first whether respondent’s position was

substantially justified.

C. Substantially Justified

To recover costs from respondent, petitioner must establish

he is the “prevailing party” within the meaning of section

7430(c)(4). Petitioner has satisfied the requirements of section

7430(c)(4)(A) (“substantially prevailed” and net worth). 

However, under section 7430(c)(4)(B)(i), petitioner shall not be

treated as having satisfied the prevailing party requirement if

respondent “establishes that the position of the United States in

the proceeding was substantially justified.” Although the

overall burden of proof as to “prevailing party” is on

petitioner, the statute itself places on respondent the burden of

proof on the “substantially justified” element. See discussion

in Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 79

(2004), affd. 404 F.3d 1291 (11th Cir. 2005).

Respondent contends that (1) petitioner did not respond to

the May 16, 2003, letter; (2) petitioner did not provide any

supporting documentation in response to the notice of deficiency

before respondent’s answer was filed; and (3) this Court should
- 26 -

not believe petitioner’s declaration that in May 2003 petitioner

sent appropriate documentation to respondent.

Accordingly, respondent concludes, when respondent took a

position in the proceeding respondent’s position was

substantially justified based on what respondent knew at that

time.

In his opening legal memorandum petitioner states as

follows:

 B. The position advanced by the Respondent was

substantially unjustified by the facts that

five children were dependants of Petitioner. 

To deny the two EIC Deductions when five

children were involved Petitioner believes

was both unjustified, and based on red lining

the area in which Petitioner lives.

1. Respondent, Petitioner contends, was on

notice of the error when Petitioner called

Respondent’s service center on more than

one occasion.

2. Respondent, in documents already in front

of this Court, indicated a recommendation

for qualification of EIC as to Petitioner,

as of 11-19-03.

3. Petitioner also submitted an affidavit

claiming documents were supplied to Fresno

service center.

4. Only recently has Petitioner discovered an

audit, as to Fresno showing 75% of

reviewed cases of disallowed EIC credits

had documents in them supporting EIC

allowance. This same report< Exhibit P22,

showed Fresno service center as having the

highest error rate, with over 54% error

rate, compared to other service centers

processing EIC.

5. Petitioner has obtained a document,

supplied by Respondent, showing the word

Document on it, although mis-spelled, at 

or near the time Petitioner claims
- 27 -

documents were supplied to the Fresno

service center.

6. Petitioner requested depositions to be

authorized by this Court to examine the

word document, and or the absence of it

and the use and recollection of statements

made by IRS reps to Petitioner’s Counsel. 

This request was denied. Petitioner

instead was forced on relying on

Respondent obtaining statements regarding

this mis-spelled word in Petitioner’s

transcript.

7. Not surprisingly Respondent’s examination

of supposed witnesses produced no smoking

gun or even a recollection of comments

regarding Petitioner’s case, which took

place prior to Petitioner discovering the

P22 showing error rates that are so

staggering, that if those same error rates

were done in private industry, and an

individual was forced to suffer because of

the error rate, civil and criminal charges

would have flown from the egregious 54%

error rate, and 75% of viewed cases having

documentation supporting EIC 

qualification. [Reproduced literally.]

In his answering legal memorandum petitioner states as

follows:

PETITIONER HAS ALLEGED THE GOVERNMENT’S POSITION WAS

NOT SUBSTANTIALLY JUSTIFIED.

All agree that §2412(d)(1)(B) requires a fee applicant

to allege that the Government’s position “was not

substantially justified. Scarborough v. Principi, 541

U.S. 401. It is not Petitioner’s responsibility to

prove it was in fact substantially justified, only to

allege that Respondent was not substantially justified.

In this case, the claim Respondent was not

substantially justified has already been made, which is

described in the below paragraphs.

Petitioner’s Motion for Legal Costs, dated 1-21-06,

stated in 1. of the brief, that the dynamics of the 

Committee report versus the statute. In this

recitation, Petitioner covered the magic words of

substantially unjustified.
- 28 -

16 Although the dispute in Pierce v. Underwood, 487 U.S. 552

(1988), arose under the provisions of the Equal Access to Justice

Act (EAJA), 28 U.S.C. sec. 2412(d), the relevant provisions of

this part of the EAJA are almost identical to the language of

this part of sec. 7430. Cozean v. Commissioner, 109 T.C. 227,

(continued...)

1. Petitioners have been apprised that

RESPONDENT has conceded the case. And a judgment

was issued in favor of Petitioner. As such

Petitioner’s have substantially prevailed on the

issue. This satisfies the litigation element of

Code Section 7430, and the prevailing element. 

Under the Congressional Committee Report on P.L.

100-647, the Committee Reports seem to reflect an

intent that one be permitted to recover fees and

costs any time the IRS has issued a 30-day letter. 

This however differs from Statute, which states that

the “substantially unjustified position” of the

United States must be asserted as of “the date of

the receipt by the taxpayer of the notice of the

decision of the IRS Appeals Office, or, the date of

the notice of deficiency.” IRS Code 7430(c)(7).

In item 2, of Petitioner’s Motion for Legal Costs,

dated 1-21-06, Petitioner alleged Respondent was

substantial unjustified.

2. “The position advanced by the United States was

substantially unjustified by the facts that 5

children were involved. To deny the two Earned

Income Deductions when this many children were

involved Petitioner believes was both unjustified,

and based on red lining the area in which Petitioner

lives.” [Reproduced literally.]

We agree with respondent that his position in this

litigation was substantially justified.

“Substantially justified” is defined as “justified to a

degree that could satisfy a reasonable person” and having a

“reasonable basis both in law and fact.” Pierce v. Underwood,

487 U.S. 552, 565 (1988) (internal quotation marks omitted);16
- 29 -

16(...continued)

232 n.9 (1997). Accordingly, we consider the holding in Pierce

v. Underwood, supra, to be applicable to the case before us.

Also, the “substantially justified” standard is not a

departure from the reasonableness standard of pre-1986 law. 

Huffman v. Commissioner, 978 F.2d 1139, 1147-1148 (9th Cir.

1992), affg. in part, revg. in part, and remanding T.C. Memo.

1991-144. Accordingly, we consider the holdings of pre-1986 law

on reasonableness to be applicable to the case before us, except

as to the question of which party has the burden of proof.

Huffman v. Commissioner, 978 F.2d 1139, 1147 n.8 (9th Cir. 1992),

affg. in part, revg. in part, and remanding T.C. Memo. 1991-144. 

Respondent’s position may be incorrect and yet be substantially

justified “if a reasonable person could think it correct”. 

Pierce v. Underwood, 487 U.S. at 566 n.2.

Whether respondent acted reasonably in the instant case

ultimately turns on the available information which formed the

basis for respondent’s position, as well as on the law relevant

to the instant case. Coastal Petroleum Refiners v. Commissioner,

94 T.C. 685, 688-690 (1990).

The fact that respondent eventually loses or concedes a case

does not by itself establish that respondent’s position is

unreasonable. Maggie Management Co. v. Commissioner, 108 T.C.

430, 443 (1997). However, it is a factor that may be considered. 

Idem.

In determining whether respondent’s position was 

substantially justified, the question is whether respondent knew

or should have known that the Government’s position was invalid
- 30 -

at the time that respondent took the position in the litigation. 

Coastal Petroleum Refiners v. Commissioner, 94 T.C. at 689.

Ordinarily, we identify the point at which the United States

is first considered to have taken a position, determine what that

position was, and then decide whether that position, taken from

that point forward, was or was not substantially justified. 

Maggie Management Co. v. Commissioner, 108 T.C. at 442. 

Ordinarily, the position of the United States in the proceeding

in this Court is the position respondent sets forth in the

answer. Huffman v. Commissioner, 978 F.2d at 1147-1148; Maggie

Management Co. v. Commissioner, 108 T.C. at 442.

1. Summary and Conclusions

For purposes of section 7430, the position of the United

States in the proceeding in this Court is the position respondent

took in the answer–-that is, (1) petitioner was not entitled to

the earned income credit; (2) petitioner had not provided the

requested documentation to support his claimed earned income

credit; and (3) respondent did not have information as to the

truth of petitioner’s factual assertions as to petitioner’s

eligibility for the earned income credit.

By the time respondent filed the answer, respondent did not

have any documentation supporting petitioner’s claimed earned

income credit. We do not believe petitioner himself provided

such documentation; we do not believe petitioner provided such
- 31 -

17 Petitioner contends that the position of the United

States in the instant case is the position taken in the notice of

deficiency. In the instant case, as shown infra, the answer in

effect embraced the notice of deficiency. It is not clear to us

why petitioner appears to reject the Maggie Management approach. 

On the record in the instant case, neither our analysis nor our

conclusion would be different if we were to adopt petitioner’s

approach. See Maggie Management Co. v. Commissioner, 108 T.C.

430, 442-443 (1997).

documentation through Moffatt until the first motion in limine,

about 4-1/2 months after the answer was filed.

We conclude respondent’s position was substantially

justified at the time the answer was filed, and respondent timely

conceded the case after receiving the documentation attached to

petitioner’s motion in limine. As a result, we conclude

respondent’s position in the litigation was substantially

justified within the meaning of section 7430(c)(4)(B)(i).

We consider first what was the “position of the United

States” that respondent has the burden of proving was

“substantially justified”. Then we consider what respondent knew

when respondent took that position. Then we consider whether

that position was substantially justified.

2. Respondent’s Position

In light of the foregoing, the position of the United States

in the instant case is the position respondent took in the

answer, filed on November 20, 2003.17

In the notice of deficiency, respondent’s explanation for

the earned income credit disallowance is “Since you did not
- 32 -

establish that you were entitled to the earned income credit, we

disallowed it.”

The petition’s assignments of error include the following:

B. Petitioner provided the requested documentation to

the Internal Revenue Service to support his claim of

the Earned Income Credit.

C. Petitioner responded to requests for information

within the time deadlines requested by the Internal

Revenue Service? [Sic]

In the answer, respondent denied these assignments of error;

respondent also denied “for lack of present information”

petitioner’s numerous assertions of fact as to the basis for his

claimed earned income credit.

Thus, respondent’s position at the time of the answer was: 

(1) Petitioner was not entitled to the earned income credit; (2)

petitioner had not provided the requested documentation to

support his claimed earned income credit; and (3) respondent did

not have information as to the truth of the petition’s factual

assertions as to petitioner’s eligibility for the earned income

credit.

Ultimately, respondent conceded error on the first part of

this position; i.e., respondent conceded that petitioner was

entitled to the earned income credit, and in the full amount

petitioner had claimed on his tax return. This concession came

about after petitioner provided documentation to support his 
- 33 -

claim. We proceed to consider what respondent knew as to the

earned income credit issue by November 20, 2003.

3. What Respondent Knew

On May 16, 2003, shortly after petitioner’s 2002 tax return

was filed (supra note 5), respondent notified petitioner that his

tax return was being examined. The May 16, 2003, letter asked

for certain information and documentation. Petitioner does not

contend that respondent already had the information and

documentation at the time of the May 16, 2003, letter.

The parties have stipulated that petitioner failed to

respond to the May 16, 2003, letter. Respondent issued the

notice of deficiency on July 18, 2003. Petitioner first

consulted with Moffatt on July 26, 2003, and retained Moffatt on

July 27, 2003. The petition was filed on September 22, 2003. 

The answer was filed on November 20, 2003. 

Respondent referred the case to the Appeals Office on

November 19, 2003. Supra note 9. More than 5 weeks later, the

Appeals Office notified petitioner that the office had his case,

and suggested petitioner contact Ace. On January 21, 2004,

petitioner brought the Appeals Office letter to Moffatt. Supra

note 11. On February 10, 2004, Moffatt called someone from

respondent.
- 34 -

18 Although the declaration is marked Exhibit 21-R; the

stipulation designates it as Exhibit 21-P. The 21-R marking is

obviously a typographic error that has no effect on our

considerations.

On April 5, 2004, petitioner filed a motion in limine that

included documentation which resulted in Ace’s recommending on

May 14, 2004, that respondent should concede the earned income

credit issue.

We conclude, and we have found, that (1) when the answer was

filed respondent did not have any documentation supporting

petitioner’s claimed earned income credit, and (2) respondent

first received such documentation as attachments to petitioner’s

first motion in limine, about 4-1/2 months after the answer was

filed.

In arriving at this conclusion, we have taken into account

the stipulated declaration18 by petitioner “under penalty of

perjury under the laws of the State of California”, as follows:

IV. On or about May 2003, I sent by United

States mail to the Internal Revenue Service,

located in Fresno, California, the following

document at the request of Internal Revenue

Service: All five (5) of my children’s birth

certifications; All five (5) of my children’s

school records; Lease Agreement on the

property that I was renting my fiancée and 

our five (5) children; and utility bills,

which included: Electricity, Home Gas bills

and cable. [Reproduced literally.]

Firstly, the May 16, 2003, letter was, indeed, a “request of

the Internal Revenue Service” for relevant documents, but the

parties have stipulated that “3. Petitioner failed to respond to
- 35 -

19 Moffatt’s hourly itemization shows that his first contact

with respondent (apart from a Freedom of Information Act request)

was a relatively brief telephone call “to IRS” on Feb. 10, 2004.

the May 16, 2003, letter.” The May 16, 2003, letter stated in

several places that petitioner should respond by “06/15/2003”. 

The notice of deficiency was issued on July 18, 2003, and

petitioner proceeded promptly thereafter to consult and then

retain Moffatt to represent him in this matter. Petitioner has

not identified any other “request of the Internal Revenue

Service” to which he might have been responding “On or about May

2003”.

Secondly, in order to believe that petitioner provided the

documents to respondent as stated in his declaration, it appears

that we also have to believe that petitioner had the documents in

late July 2003, when he retained Moffatt and either (a)

petitioner did not then give the documents to Moffatt or (b)

petitioner did then give the documents to Moffatt but Moffatt

chose to “sit on” the documents for many months until early April

2004, when the first motion in limine was filed.19

Petitioner’s statement in his declaration that he mailed the

indicated documents to respondent on or about May 2003 does not

ring true. See, e.g., Burrill v. Commissioner, 93 T.C. 643, 662

n.24 (1989).

We have also attempted to take into account petitioner’s

contention in his opening legal memorandum as follows:
- 36 -

5. Petitioner has obtained a document, supplied

by Respondent showing the word Document on

it, although mis-spelled, at or near the time

Petitioner claims documents were supplied to

the Fresno service center.

6. Petitioner requested depositions to be

authorized by this Court to examine the word

document, and or the absence of it and the

use and recollection of statements made by

IRS reps to Petitioner’s Counsel. This

request was denied. Petitioner instead was

forced on relying on Respondent obtaining

statements regarding this mis-spelled word in

Petitioner’s transcript. [Reproduced

literally.]

We have searched in vain for “a document, supplied by

Respondent showing the word Document on it, although misspelled”. Based on notes of telephone conferences the Court held

with counsel for the parties, we surmise that petitioner intends

to refer to stipulated Exhibit 3-J, “a transcript of petitioner’s

2002 tax account, entitled ‘IMF MCC Transcript - Specific’.”

Based on these notes, we further surmise that the item petitioner

intends to refer to is the following:

290 07282003 0.00 200329 93254-999-05099-3

 HC3 ARC-002-071 INTD PC

 CORRESPONDDT- CREDIT DT-

 REFUND STATUTE CONTROL DT-

 AMD CLMS DT- CIS MF IND-O

 CSEDIn his answering legal memorandum petitioner asserts as

follows:

Petitioner has submitted documentation indicating he

has submitted proof orally as well as in writing. 

Respondent has claimed that the misspelled word

document on Petitioner’s file has no basis, to the fact

Petitioner submitted documents, while not showing
- 37 -

20 As noted, supra, the stipulated declaration by petitioner

is that he sent the documents to respondent “On or about May

2003”.

credibly, through deposed witnesses, how the word could

have arrived on Petitioner’s file. Petitioner was

denied subpoena power of representatives at the IRS

whom had previously conveyed to Petitioner’s counsel

that this record could only be accomplished by and a

direct result of receiving correspondence from

Petitioner, as a direct result of Petitioner attempting

to satisfy substantiation that he in fact had five

children. [Reproduced literally.]

Firstly, July 28, 2003, the date of the item we understand

petitioner to be directing our attention to, is 10 days after

respondent issued the notice of deficiency, 2 days after

petitioner first consulted Moffatt, and 1 day after petitioner

retained Moffatt. Moffatt did not provide the documents to

respondent by July 28, 2003 (supra note 19). In order to believe

that this item shows that, on July 28, 2003, respondent received

the documents from petitioner, it appears that we also would have

to believe that either (a) petitioner did not tell Moffatt that

he had just sent the documents to respondent or (b) petitioner

did tell this to Moffatt but Moffatt did not then memorialize

this information in a declaration by petitioner20 but instead let

the supposed communication slip until Moffatt noticed the item on

the stipulated exhibit that respondent provided to Moffatt later

during the course of preparing the stipulations and exhibits in

connection with the instant litigation costs motion.
- 38 -

Secondly, petitioner asserts that two of respondent’s

employees “had previously conveyed to Petitioner’s counsel that

this record [presumably the July 28, 2003, entry] could only be

accomplished by and a direct result of receiving correspondence

from Petitioner,” and that petitioner could have shown this if he

had been allowed to depose these employees. The parties have

stipulated declarations by these two employees under penalties of

perjury, pursuant to 28 U.S.C. section 1746. One employee,

Gerald R. Franco, declares that (1) (a) the indicated Document

Locator Number and Transaction Code show that “a notice was

generated by the Internal Revenue Service to the taxpayer”, (b)

they do not show that correspondence was received by the Internal

Revenue Service from the taxpayer, and (2) he cannot explain the

term “CORRESPONDDT-”, but he can state that this notation “does

not indicate the receipt of correspondence from a taxpayer.” The

other employee, Barbara M. DeLeo, declares that (1) she is a

customer service representative, (2) her records show that she

spoke on the telephone with someone about petitioner’s case, but

that she has no recollection of having had this telephone

conversation or of what was said, (3) that she is not familiar

with the type of document (the IMF MCC Transcript - Specific) and

does not know the meaning of the term “CORRESPONDDT-”, and (4) 
- 39 -

“My statement [in a teleconference with Moffatt and Wu] that it

could indicate correspondence sent in to the Internal Revenue

Service was only intended as a possibility.”

We noted in a telephone conference with counsel for the

parties that (1) neither petitioner nor Moffatt stated that

either of them had sent anything to respondent at such a time

that respondent would have received it on or about July 28, 2003,

(2) in light of the timing (the notice of deficiency and the

absence of any notation in Moffatt’s hourly itemization showing a

communication to respondent around this time) it seemed highly

unlikely that respondent received documents from petitioner on

July 28, 2003, and (3) deposition of these two employees of

respondent would most probably be merely an unproductive fishing

expedition adding to an already extraordinary cost of this $2,890

case--a cost of litigating the motion for costs and not of

litigating the case. We commented that, if a request for

depositions were to be made and opposed, then we would most

likely not order the depositions. Presumably in reliance on that

expression by the Court, petitioner did not formally institute

further discovery by depositions on this point. 

We also have taken into account petitioner’s contention in

his opening legal memorandum:

1. Respondent, Petitioner contends, was on

notice of the error when Petitioner called

Respondent’s service center on more than one

occasion.
- 40 -

However, petitioner does not enlighten us as to (1) where in the

record there is support for the statement that petitioner called

respondent’s service center, (2) when those calls, or any of

them, were made, or even (3) what information or documentation

was provided by petitioner to respondent during or as a result of

those calls.

From the foregoing, we conclude that by November 20, 2003,

when the answer was filed, respondent had no more information

than what was on petitioner’s tax return and had none of the

requested documentation or any other documentation that might

have enabled respondent to conclude that petitioner was entitled

to the claimed earned income credit.

As best we can tell from the record before us, it was not

until petitioner filed the first motion in limine, on April 5,

2004, that respondent received the appropriate documentation. 

4. Substantially Justified

Ordinarily, taxpayers who claim credits are obligated (when

challenged) to show that they are entitled to the credits that

they claim. Petitioner failed to respond to respondent’s request

for documents to show his entitlement to the claimed earned

income credit. Under these circumstances, respondent was

justified in taking the position that petitioner was not entitled

to this credit. Cf. Welch v. Helvering, 290 U.S. 111, 115

(1933); Rule 142(a).
- 41 -

On April 5, 2004, petitioner finally provided documentation

by the unorthodox (in this Court) device of a motion in limine. 

Although the road thereafter was bumpy, on September 8, 2004, Wu

sent to Moffatt a proposed stipulation of settled issues,

agreeing that petitioner is entitled to the claimed earned income

credit and that petitioner had made an overpayment of $2,890; in

essence, respondent conceded the case.

Respondent’s position--that petitioner was not entitled to

the claimed earned income credit unless petitioner could show he

was so entitled--was substantially justified. When petitioner

finally did provide the requested documentation--more than 10

months after respondent first asked for it and more than 4 months

after respondent filed the answer in the instant case--respondent

conceded the case 5 months later. It is evident that this delay

is attributable in significant part to the aggressive postures

presented by those who spoke for both parties. Nevertheless, the

delay was not unreasonably long. See, e.g., cases collected at

Sokol v. Commissioner, 92 T.C. 760, 765 (1989).

We conclude, and we have found, that respondent has

successfully carried the burden of establishing that the position

of the United States in the instant judicial proceeding was

substantially justified.

On answering legal memorandum, petitioner argues as follows:

The burden of establishing that the position of the

United States was substantially justified, 
- 42 -

§2412(d)(1)(A) indicates and courts uniformly have

recognized, must be shouldered by the government. 

Respondent has not shown how in light of 75% lost

documents in Fresno related to EIC cases, as well as

the worst error rate in the country, over 54% wrong EIC

assessments, Respondent has at the mere threshold

indicated how its position was substantially justified. 

[Reproduced literally.]

Petitioner’s reference is to the Report. (Supra A. 

Evidence, 1. National Taxpayer Advocate Report.) Apart from our

unwillingness to accept petitioner’s characterization of what the

Report concludes, we hold it is not unreasonable for respondent

to maintain respondent’s position as to a specific taxpayer, and

not concede the case until that taxpayer has presented the

documentation to show that that taxpayer is entitled to the

credit that that taxpayer has claimed on that taxpayer’s tax

return. In the instant case, respondent was justified in

maintaining the position that petitioner was not entitled to the

claimed earned income credit until petitioner provided

documentation showing that he was entitled to that credit.

It follows that petitioner, although he “substantially

prevailed” (section 7430(c)(4)(A)), is not “the prevailing party”

(section 7430(c)(4)(B)), and so petitioner is not entitled to an

award of reasonable litigation costs under section 7430(a)(2).

We so hold.

D. Qualified Offer

Notwithstanding the foregoing conclusory statement, a

taxpayer may nevertheless be treated as the prevailing party if
- 43 -

21 Compare, e.g., Johnston v. Commissioner, 122 T.C. 124,

126 (2004), affd. 461 F.3d 1162 (9th Cir. 2006), with Downing v.

Commissioner T.C. Memo. 2005-73, Item E, regarding the

requirement of sec. 7430(g)(1)(C) that the document he

“designated at the time it is made as a qualified offer for

purposes of this section”. The petition did not include such a

designation. Also, Rule 34(b)(8) provides that a claim for

litigation costs “shall not be included in the petition in a

deficiency or liability action”, so that the petition filing

could not constitute a qualified offer. Finally, sec.

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

alternative is not available to “any judgment issued pursuant to

a settlement”; the instant case has been settled. 

the taxpayer satisfies the qualified offer provisions of

subsections (c)(4)(E) and (g) of section 7430.

In his motion for an award of reasonable litigation costs

petitioner contended as follows:

4. Petitioner’s filing of their Petition stating that

an EIC was available satisfies the Qualified Offer

Requirements if any needed to obtain Litigation Costs. 

The Petition itself satisfies notice to the Director of

the IRS that the Petition was requesting Litigation

costs. The fact that the Appeals office made an

internal ruling that Petitioner’s deserved the EIC

credit, and yet RESPONDENT’s counsel failed to follow

that position satisfies the point that Petitioners

availed themselves of the Appeal process satisfies the

Appeal element with respect to requesting Legal fees

and Costs. [Reproduced literally.]

In a telephone conference, petitioner’s counsel informally

indicated that his contentions as to the qualified offer

provisions were in error and that claim was no longer part of the

dispute in the instant case.21

In his opening legal memorandum, petitioner revisits the

issue, stating as follows:
- 44 -

Respondent contends that Petitioner failed to satisfy

the qualified offer requirement. Amazingly, if

Petitioner goes down that path of qualified offer,

according to IRS Bulletin: 2004-5, Feb 2, 2004 T.D.

9106, Awards of Attorney Feeds and other costs based

upon qualified offers. If a qualified offer had been

made and accepted attorney fees would not be awarded. 

As such, why would anyone ever want to submit a

qualified offer, when the position of Respondent is not

to pay legal fees upon such a request, even though Case

law provides for such an award. [Reproduced

literally.]

Substantially the same statement appears in petitioner’s

answering legal memorandum. 

The qualified offer provision allows a taxpayer that is not

a “prevailing party under any other provision of this paragraph”

(sec. 7430(c)(4)(E)(iv)) to nevertheless be treated as a

prevailing party to some extent, if the taxpayer has made a

qualified offer, the case was not settled, and the taxpayer’s

liability ends up as less than or equal to the liability under

the qualified offer. Accordingly, the qualified offer provision

does not remove benefits that a taxpayer would otherwise be

entitled to; the provision, rather, adds a possibility of a

benefit where the taxpayer would otherwise not be entitled to any

award. Also, the provision appears to be designed to encourage

the Commissioner to take seriously any taxpayer settlement offer. 

See discussion in Haas & Associates Accountancy Corp. v.

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

(9th Cir. 2003).
- 45 -

In the instant case the qualified offer provisions do not

provide an alternate route to “prevailing party” status. See

supra note 21. Also, petitioner’s efforts to raise the qualified

offer provision were so clearly inappropriate and poorly

conceived, and petitioner’s determination to further discuss the

issue in both legal memoranda was so wasteful, that, if we had

otherwise determined to award litigation costs, then we would (1)

determine how much of Moffatt’s charged time was allocable to

this diversion and (2) disallow the charges for that time.

E. Other Matters

The foregoing resolves the litigation costs dispute and

requires denial of petitioner’s motion. But the parties have

presented numerous additional matters that may usefully be

commented on.

1. Failure To Exhaust Available Administrative Remedies

Respondent contends that petitioner failed to exhaust

available administrative remedies in that (a) petitioner failed

to respond to the May 16, 2003, letter or otherwise act (file a

protest or ask for an Appeals conference) before the notice of

deficiency was issued, and (b) “after the case was docketed,

petitioner refused to participate in an Appeals conference”. 

Petitioner contends:

Section 7430(b)(1) provides that in order to recover

litigation costs, a taxpayer must have taken advantage

of available administrative remedies. The regulations

to this section include within this requirement
- 46 -

22 We assume petitioner refers to the Internal Revenue

Service Restructuring and Reform Act of 1998, Pub. L. 105-206,

112 Stat. 685. Sec. 3101 of that Act (112 Stat. at 727) makes

numerous amendments to different parts of sec. 7430(c), but we

have not found any amendments made by that Act to sec.

7430(b)(1), relating to the requirement of exhaustion of

administrative remedies, and petitioner has not directed our

attention to any such amendments. Nor has petitioner directed

our attention to any specific provision of that Act (which

extends for 183 pages in the Statutes at Large) that bears on our

consideration of the requirement of exhaustion of administrative

remedies, even though his reference to “RRA 98” appears in the

portion of his answering legal memorandum headed “PETITIONER

EXHAUSTED ADMINISTRATIVE REMEDIES”.

participation in an Appeals office conference. See 26

C.F.R. Section 301.7430-1(b)(1)(i). It is undisputed

that, upon receiving the results of the IRS audit,

Petitioner’s Counsel had a conference with the Appeals

division, Cynthia Ace.

Petitioner also contends (a) “a request for legal fees is valid

at the administrative level”, (b) respondent refused to settle

the case unless petitioner waived litigation costs, (c)

“Respondent was arguably also in violation of RRA 98[22] as it

relates to a lack of fairness to Petitioner”, and (d) “The Tax

Court should correctly determine that Petitioner did in fact

exhaust the administrative remedies available to him. Haas &

Associates Accountancy Corp. v. Commissioner, 55 Fed. Appx. 476.”

We agree with petitioner’s conclusion even though we

disagree with petitioner’s analysis.

Section 7430(b)(1) (supra note 15) prohibits the awarding of

litigation costs under subsection (a) in the instant case unless

the Court determines that petitioner exhausted the administrative

remedies available to him within the Internal Revenue Service. 
- 47 -

Petitioner has the burden of proof on this issue.

In his second legal memorandum, petitioner points to the

requirements of section 301.7430-1(b)(1)(i), Proced. & Admin.

Regs., and states that Moffatt had a conference with Ace and this

constituted compliance with the requirements of that regulation. 

The cited regulation provides as follows:

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

Tax Court or a civil action for refund in a court of

the United States (including the Court of Federal

Claims), participates, either in person or through a

qualified representative described in §601.502 of this

chapter, in an Appeals office conference; * * *

The first communication between Moffatt and Ace was on May 24,

2004, 8 months after September 22, 2003, when the petition was

filed. Plainly, petitioner did not participate in an Appeals

Office conference, either in person or through Moffatt, “prior to

filing a petition in the Tax Court”, and so petitioner has not

complied with the requirements of section 301.7430-1(b)(1)(i),

Proced. & Admin. Regs.

As to petitioner’s additional contentions, items (a) and (b)

seem to relate to the charge that respondent refused to settle

the tax case unless petitioner waived any litigation cost claim. 

Although petitioner makes the charge, petitioner does not direct

our attention to any affidavit or other evidence in the record

supporting the charge. Ace’s case activity record, Exhibit 8-J,

indicates that Moffatt told her that he would not agree to a

settlement unless respondent conceded an award of litigation
- 48 -

costs. On this state of the record, we do not conclude that

petitioner’s contentions (a) and (b) justify ruling for

petitioner on the exhaustion of administrative remedies issue.

As we have noted (supra note 22) petitioner’s contention

(c), relating to the Internal Revenue Service Restructuring and

Reform Act of 1998, does not add anything to the force of his

argument.

Finally, we are mystified by petitioner’s citation of the

Haas & Associates opinion, in which the Court of Appeals for the

Ninth Circuit affirmed our holding that the taxpayer therein was

not entitled to an award of litigation costs.

Notwithstanding our rejection of all of petitioner’s

contentions, we conclude that petitioner does qualify under

section 301.7430-1(f)(2), Proced. & Admin. Regs., which provides

as follows:

(f) Exception to requirement that party pursue

administrative remedies. If the conditions set forth

in paragraphs (f)(1), (f)(2), (f)(3), or (f)(4) of this

section are satisfied, a party’s administrative

remedies within the Internal Revenue Service shall be

deemed to have been exhausted for purposes of section

7430.

* * * * * * *

(2) In the case of a petition in the Tax Court--

(i) The party did not receive a notice of proposed

deficiency (30-day letter) prior to the issuance of the

statutory notice and the failure to receive such notice

was not due to actions of the party (such as a failure 
- 49 -

to supply requested information or a current mailing

address to the district director or service center

having jurisdiction over the tax matter); and 

(ii) The party does not refuse to participate in

an Appeals office conference while the case is in

docketed status.

As respondent concedes, petitioner did not receive a “30-day

letter”. Respondent contends this failure was “because he

[petitioner] failed to supply the supporting information

requested in the May 16, 2003 letter”.

As we have detailed in our findings (supra text at note 7)

the May 16, 2003, letter amounted to eight pages of detailed

directions on four different forms, plus a copy of Publication

3498. The 3-year limitations period would not expire for almost

35 months. We conclude that, applying section 301.7430-

1(f)(2)(i), Proced. & Admin. Regs., to the facts of the instant

case, petitioner’s failure to receive the 30-day letter was not

due to petitioner’s actions but to respondent’s determination to

shortcut the process; it would not be appropriate to allow

respondent to cut off petitioner’s possible entitlement to

benefits by (a) requiring a 30-day letter and (b) refusing to

issue a 30-day letter when there was ample time (almost 35

months) to do so.

We next consider section 301.7430-1(f)(2)(ii), Proced. &

Admin. Regs. In applying this provision to the instant case we 
- 50 -

take into account the definitions that appear in section

301.7430-1(b)(2) and (3), Proced. & Admin. Regs., as follows:

(2) Participates. For purposes of this section, a

party or qualified representative of the party

described in §601.502 of this chapter participates in

an Appeals office conference if the party or qualified

representative discloses to the Appeals office all

relevant information regarding the party’s tax matter

to the extent such information and its relevance were

known or should have been known to the party or

qualified representative at the time of such

conference.

(3) Tax matter. For purposes of this section,

“tax matter” means a matter in connection with the

determination, collection or refund of any tax,

interest, penalty, addition to tax or additional amount

under the Internal Revenue Code.

These definitions apply, by their terms, to the entire section,

and so apply to section 301.7430-1(f)(2)(ii), Proced. & Admin.

Regs. In the instant case, Ace had received “all relevant

information regarding the party’s [petitioner’s] tax matter” by

the time of her May 24, 2004, telephone call with Moffatt. 

Although there were disputes regarding dependency deductions and

litigation costs, “the determination * * * of [petitioner’s] tax

* * * under the Internal Revenue Code” could be--and, indeed,

was--resolved by the information and documents that Ace had

already received (albeit indirectly) from petitioner. 

From the foregoing, we conclude that petitioner has carried

the burden of proving that he satisfied the requirements of the 
- 51 -

23 Swanson v. Commissioner, 106 T.C. 76, 98 (1996),

interprets sec. 301.7430-1(e), Proced. & Admin. Regs. That

paragraph (e) was redesignated “paragraph (f)” by T.D. 9050, par.

3, 2003-1 C.B. 693, 696. Accordingly, the Swanson analysis

applies now to paragraph (f) of that regulation.

24 Not all fee-shifting statutes are so limited. See

discussion in Frisch v. Commissioner, 87 T.C. 838, 843-844

(1986); see also Corrigan v. United States, 27 F.3d 436, 438 (9th

Cir. 1994).

regulation as to exhaustion of administrative remedies. See

Corson v Commissioner, 123 T.C. at 211-212; Swanson v.

Commissioner, 106 T.C. at 97-100.23

2. Paid or Incurred

Awards of costs and fees under section 7430(a) are limited

to reasonable litigation costs “incurred”. The attorney fee

component is specifically limited to “fees paid or incurred”. 

Sec. 7430(c)(1)(B)(iii).24 Petitioner does not contend that

section 7430(c)(3)(B)’s exception for pro bono services applies

to the instant case.

Respondent contends that “petitioner has not established

that he has actually paid his attorney or is otherwise liable to

his attorney for payment of the litigation costs claimed.” 

Petitioner responds by citing provisions of the Equal Access to

Justice Act, and asserts that “Here, the actual time and rate at

which time and expenses were owed was provided. As such the

request for legal fees is valid.” Petitioner does not assert

that he paid to Moffatt any of the costs claimed in the motion 
- 52 -

before us. The instant dispute, then, is whether petitioner

incurred any of the costs.

In order for petitioner to incur a litigation cost, within

the meaning of section 7430, he has to have a legal obligation to

pay that cost. Grigoraci v. Commissioner, 122 T.C. 272, 277-278

(2004); Swanson v. Commissioner, 106 T.C. at 101-102. The

corresponding language of EAJA has also been interpreted to

include that requirement. SEC v. Comserv Corp., 908 F.2d 1407,

1414 (8th Cir. 1990).

Petitioner does not direct our attention to, and we have not

found, anything in the record that shows that petitioner is

legally obligated to pay to Moffatt the claimed substantial

amounts. The mere fact that a taxpayer retained counsel who in

fact represented the taxpayer in a proceeding in this Court is

not sufficient to meet this “incurred” requirement of section

7430. See Grigoraci v. Commissioner, 122 T.C. at 278-279 (and

cases there cited).

We have not been favored with any evidence as to the

agreement between petitioner and Moffatt. We are not willing to

assume that petitioner and Moffatt entered into an enforceable

agreement which obligates petitioner to pay to Moffatt the

claimed substantial amounts in order to prosecute a $2,890 case. 

We conclude that petitioner has failed to carry his burden of

proving that he incurred the claimed Moffatt attorney fees,
- 53 -

within the meaning of section 7430. The Congress has not created

a roving commission to “do justly”. Rather, the Congress enacted

a statute that provides for the awarding of costs if, but only

if, it has been shown that the requirements of the statute are

met. Compare, e.g., Fla. Country Clubs, Inc. v. Commissioner,

122 T.C. at 74-75, 80-81, with Downing v. Commissioner, T.C.

Memo. 2005-73.

Accordingly, even if we had determined that petitioner were

the prevailing party, there would not be a basis in the record

for the allowance of any amount of litigation costs.

The parties have locked horns on numerous other matters in

connection with petitioner’s motion. We have examined their

contentions and concluded that, no matter how we resolved any

specific contention, none of them would affect the “bottom line”

as to petitioner’s motion.

An appropriate order and

decision will be entered,

denying petitioner’s motion

for litigation costs, as

supplemented, and deciding

that there is no deficiency

and there is an overpayment in

the amount claimed on

petitioner’s tax return.