T.C. Summary Opinion 2005-136

UNITED STATES TAX COURT

RONALD A. HORTON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 17058-04S. Filed September 15, 2005.

Robert L. Stephens, Jr., for petitioner.

Robert V. Boeshaar, for respondent.

NIMS, Judge: This case was heard pursuant to section 7463 

of the Internal Revenue Code in effect at the time the petition

was filed. The decision to be entered is not reviewable by any

other court, and this opinion may not be cited as authority. 

Unless otherwise indicated, all other section references are to 
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the Internal Revenue Code in effect for the year in issue, and

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

Procedure.

This matter is before the Court on petitioner’s motion for

award of costs and attorney’s fees pursuant to section 7430. The

issue for consideration is whether petitioner is entitled to

reasonable costs for expenses incurred in proceedings with the

Internal Revenue Service regarding his 2003 Federal income tax

liability.

Background

Petitioner claimed head-of-household filing status, the

earned income credit, and a dependency exemption deduction on his

2002 and 2003 Federal income tax returns.

Respondent determined that petitioner’s daughter did not

qualify as a dependent and that petitioner was not entitled to

the claimed filing status, credit, and deduction for the 2002 and

2003 taxable years.

Respondent issued a notice of deficiency with respect to

petitioner’s 2002 taxable year on August 22, 2003. Petitioner

filed a petition in connection with the 2002 taxable year on

November 25, 2003. Petitioner’s case was assigned to Appeals

Officer Pat Fu (Ms. Fu). Petitioner provided respondent with

various documentation, including a modified divorce decree and

parenting plan signed by petitioner’s former wife. These
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documents supported petitioner’s position that his daughter

resided with him in 2002 and that he provided over half of her

total support for the year. The parties reached a settlement

regarding the 2002 taxable year on September 30, 2004. The

parties agreed that petitioner was entitled to the claimed filing

status, credit, and deduction for the 2002 taxable year.

 On April 5, 2004, petitioner received a proposed notice of

deficiency from respondent’s examiner, Jan Sinclair (Ms.

Sinclair), regarding the 2003 taxable year. Respondent proposed

to disallow, for 2003, the same items as those at issue for the

2002 taxable year. On May 3, 2004, petitioner sent a letter to

Ms. Sinclair asking her to use petitioner’s submissions for the

2002 taxable year to settle the 2003 taxable year. Petitioner

asserted that once respondent had agreed to petitioner’s status

as head-of-household in 2002, the 2003 examination would be

“unnecessary”.

On June 14, 2004, respondent issued a notice of deficiency

to petitioner with respect to the 2003 taxable year. On

September 7, 2004, shortly before the parties reached a final

settlement regarding the 2002 taxable year, petitioner sent a

letter to Ms. Fu that stated in part:

I don’t know if you can help us or not, but I am

enclosing a copy of the very same type of notice for Mr.

Horton’s tax year 2003. This was brought about, of course,

by the very same problem that we have finally brought to

resolution for 2002 now in 2004.
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I am also enclosing a copy of our letter to Ms.

Sinclair, written in May of 2004, informing her of the ongoing petition for 2002.

Is there any way you can help us avoid having to go

through this entire process again for another two years? 

Whatever you could do would certainly be greatly

appreciated.

On September 10, 2004, petitioner sent Ms. Sinclair another

letter, informing her of the imminent settlement regarding the

2002 taxable year and attaching a copy of the letter sent on May

3, 2004. Petitioner filed a petition with respect to the 2003

taxable year on September 14, 2004. At the time the petition was

filed, petitioner resided in Billings, Montana.

On November 29, 2004, petitioner filed a motion for summary

judgment pursuant to Rule 121. On December 9, 2004, petitioner

faxed copies of his daughter’s birth certificate, Social Security

card, and school record to respondent. On January 13, 2005, the

parties filed a stipulation of settled issues, which resolved all

issues in petitioner’s favor.

On January 24, 2005, petitioner filed a motion for award of

costs and attorney’s fees. Petitioner seeks an award of

$3,921.88. Respondent contends that petitioner is not the

prevailing party within the meaning of section 7430(c)(4) because

respondent’s position was substantially justified until December

9, 2004, when petitioner provided relevant information regarding

the 2003 taxable year. Furthermore, respondent argues that 
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petitioner failed to exhaust his administrative remedies,

unreasonably protracted the proceedings, and claimed unreasonable

costs.

Neither party has requested a hearing, and we conclude that

a hearing is not necessary for the proper disposition of

petitioner’s motion. Rule 232(a)(2). Therefore, we decide

petitioner’s motion on the basis of the parties’ submissions and

the record developed to date. For the reasons described below,

we deny petitioner’s claim for costs and attorney’s fees.

Discussion

Section 7430 provides for the award of litigation costs in

any 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 pursuant to the Internal

Revenue Code. An award of litigation costs may be made where the

taxpayer is the “prevailing party”, has exhausted the

administrative remedies with the Internal Revenue Service, and

did not unreasonably protract the administrative or court

proceeding. See sec. 7430(b)(1), (3).

To be a prevailing party, the taxpayer must substantially

prevail with respect to either the amount in controversy or with

respect to the most significant issue or set of issues presented,

and, at the time the petition is filed, satisfy a net worth

requirement. Sec. 7430(c)(4)(A). Respondent has conceded that
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petitioner meets the net worth requirement. Section

7430(c)(4)(B), however, provides that a taxpayer shall not be

treated as the prevailing party if the United States establishes

that the position of the United States in the proceeding was

substantially justified.

Respondent contends that petitioner is not the prevailing

party within the meaning of section 7430(c)(4) because

respondent’s position was substantially justified prior to

December 9, 2004, on which date petitioner faxed to respondent

copies of documents sufficient to establish petitioner’s

position. Within a little over a month thereafter, the parties

filed a stipulation that resolved all issues in petitioner’s

favor. Respondent’s position was substantially justified if,

based on all the facts and circumstances and legal precedents

related to the case, respondent acted reasonably. Pierce v.

Underwood, 487 U.S. 552 (1988); Sher v. Commissioner, 89 T.C. 79,

84 (1987), affd. 861 F.2d 131 (5th Cir. 1988). We must examine

whether respondent’ position was reasonable given the available

facts and circumstances at the time respondent took his position. 

Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997).

A significant factor in determining whether the position of

the Internal Revenue Service was substantially justified as of a

given date is whether, on or before that date, the taxpayer

presented all relevant information under the taxpayer’s control
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and relevant legal arguments supporting the taxpayer’s position

to the appropriate Internal Revenue Service personnel. Sec.

301.7430-5(c), Proced. & Admin. Regs. The fact that the

Commissioner eventually conceded a case does not alone establish

that his position was unreasonable. Estate of Perry v.

Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991); Sokol v.

Commissioner, 92 T.C. 760, 767 (1989).

Here, petitioner failed to specify whether he seeks

litigation or administrative costs. The position of the United

States with respect to recovery of litigation costs is the

position taken by the Commissioner in the answer to the petition. 

Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988),

affg. 89 T.C. 79 (1987). For purposes of recovery of

administrative costs, the Commissioner’s position is determined

as of the earlier of the date of the receipt by the taxpayer of

the notice of the decision of the Appeals Office or the date of

the notice of deficiency, which in this case was June 14, 2004. 

Sec. 7430(c)(7)(B).

Under section 7430(c)(4), our application of the

substantially justified standard in a litigated case is limited

to the period beginning with the point at which the

Commissioner’s counsel has become involved. Sher v.

Commissioner, 89 T.C. at 86. This would normally take place when

the Commissioner answered the petition. Id. However, in a small
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tax case such as this, no Answer is required. See Rule 173(b). 

Accordingly, respondent’s position for the purposes of the motion

is the position maintained by respondent during the pendency of

this case. We note that respondent’s position, specifically that

petitioner was not entitled to head-of-household filing status,

the earned income credit, and the dependency exemption deduction,

was the same in both the administrative and the judicial

proceedings.

Section 151(c) allows a taxpayer to deduct an annual

exemption amount for each dependent. Section 152(a) defines a

“dependent” to include a taxpayer’s child, provided that more

than half of the child’s support was received from the taxpayer

during the calendar year. Under section 152(e)(1), if a child

receives over half of his support during the calendar year from

divorced parents, and such child is in the custody of one or both

parents for more than one-half of the calendar year, then such

child is treated for purposes of section 152(a) as receiving over

half the support from the parent having custody for a greater

portion of the calendar year, regardless of which parent actually

provided the support. 

Petitioner contends that since the May 2004 letter directed

respondent to use information previously submitted for the 2002

taxable year, respondent had a basis to “resolve” the examination

for the 2003 taxable year. We disagree. The documents submitted
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in May 2004, relating to the 2002 taxable year, were useful but

not sufficient to invalidate respondent’s position as to the 2003

taxable year. Each taxable year stands on its own and must be

separately considered. See United States v. Skelly Oil Co., 394

U.S. 678 (1969). 

Respondent’s position was substantially justified until

December 9, 2004, when petitioner provided respondent with

relevant information related to the 2003 taxable year. The

Commissioner has a reasonable period to analyze submitted

documentation and modify his position accordingly. Sokol v.

Commissioner, supra at 765-766. We note that respondent promptly

settled all issues related to the 2003 taxable year after

petitioner’s claims were substantiated. 

We conclude that respondent’s position was substantially

justified under section 7430(c)(4)(B). Respondent was unaware

that his position was invalid because he had yet to receive

sufficient information necessary to make an appropriate

determination as to petitioner’s 2003 taxable year. Moreover,

the parties did not reach a final settlement regarding

petitioner’s 2002 taxable year until more than 3 months after the

2003 notice of deficiency was issued.

We also note that in his motion petitioner has apparently

intermingled services which were rendered for both the 2002 and 
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2003 taxable years. Obviously, any services relating to 2002 are

irrelevant in this 2003 tax case. It was petitioner’s job to

sort these out, and this he has not done.

We hold that petitioner is not entitled to an award of costs

and attorney’s fees because respondent’s position was

substantially justified. As a result of our conclusion, we need

not discuss whether petitioner exhausted his administrative

remedies, unreasonably protracted the proceedings, or claimed

unreasonable costs.

We have considered all the contentions and arguments of the

parties not discussed herein, and we conclude they are without

merit, irrelevant, or moot.

To reflect the foregoing,

An appropriate order and

decision will be entered.