1Unless otherwise indicated, all section references are to

the Internal Revenue Code, as amended, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

T.C. Memo. 2009-170

UNITED STATES TAX COURT

GARY W. SWANSON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14032-06. Filed July 15, 2009.

Vivian D. Hoard, for petitioner.

Brenda M. Fitzgerald, for respondent.

MEMORANDUM OPINION

GOEKE, Judge: The instant matter is before the Court on

petitioner’s amended motion for litigation costs under section

7430.1 The issue we must decide is whether petitioner is
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entitled to litigation costs pursuant to sections 7430 and

6673(a)(2)(B). For the reasons stated herein, we find that

petitioner did not submit a qualified offer, that respondent’s

position was substantially justified in opposing petitioner’s

claim of reasonable cause, and that respondent did not

unreasonably multiply the proceedings in this case. Thus, we

hold that petitioner is not entitled to an award of litigation

costs. This Court ruled in favor of petitioner in Swanson v.

Commissioner, T.C. Memo. 2009-31, and we incorporate herein the

facts set forth in that opinion.

Background

This case involves petitioner’s 1983 tax year. Petitioner

invested in California Jojoba Ventures (California Jojoba), a

jojoba plant partnership, in 1983. Petitioner was required to

invest $19,250. Petitioner invested $5,000 of his own money and

signed a promissory note for the remaining $14,250. Shortly

thereafter California Jojoba requested additional funding from

its partners, but petitioner refused to contribute any additional

funds. Petitioner claimed a $13,017 net loss from California

Jojoba on Schedule E, Supplemental Income Schedule, attached to

his Form 1040, U.S. Individual Income Tax Return, for 1983.

On October 3, 1991, respondent sent a notice of final

partnership administrative adjustment (FPAA) for the 1983 taxable

year to the tax matters partner of California Jojoba. The FPAA
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disallowed claimed research and development costs and disallowed

$443,198 of California Jojoba’s claimed loss.

A petition on behalf of California Jojoba was filed on

December 23, 1991. On November 1, 1993, the parties in Cal.

Jojoba Investors v. Commissioner, docket No. 29993-91, filed a

stipulation to be bound setting forth their agreement that the

outcome of this case was to be determined by the result reached

in Utah Jojoba I Research v. Commissioner, docket No. 7619-90. 

On January 5, 1998, the Court issued an opinion in that case

sustaining respondent’s adjustments, and a decision was entered

on January 8, 1998. See Utah Jojoba I Research v. Commissioner,

T.C. Memo. 1998-6 (Utah Jojoba I).

On February 25, 1999, respondent filed a motion for entry of

decision or to appoint a tax matters partner in the case at

docket No. 29993-91, asserting that pursuant to the stipulation

to be bound, a decision should be entered in accord with the

Court’s holding in Utah Jojoba I or, in the alternative, that a

new tax matters partner be appointed.

On April 11, 2005, the Court’s order to show cause was

deemed absolute, and respondent’s motion for entry of decision

was granted. The Court further ordered that the partnership item

adjustments for California Jojoba’s 1983 taxable year were

correct as determined and set forth in the FPAA dated October 3,

1991.
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2On Sept. 5, 2007, petitioner filed his petition in docket

No. 20151-07 for a review of respondent’s refusal to abate

interest pursuant to sec. 6404.

Respondent examined petitioner’s 1983 tax return and

disallowed the claimed loss relating to petitioner’s investment

in California Jojoba. On April 17, 2006, respondent issued the

affected items notice of deficiency with respect to petitioner’s

1983 tax year imposing the section 6653(a)(1) and (2) additions

to tax. On July 21, 2006, petitioner timely filed a petition

with this Court alleging that respondent erred in imposing the

additions to tax.2 A trial was held on December 13, 2007, at the

Court’s trial session in Atlanta, Georgia. Petitioner, in

addition to arguing that he was not negligent in his reporting of

the California Jojoba loss on his income tax return, argued at

trial and on brief that he was not liable for section 6621 taxmotivated interest.

In Swanson v. Commissioner, supra, we held that petitioner

was not liable for the section 6653(a)(1) and (2) negligence

additions to tax, but we found that we did not have jurisdiction

to determine whether petitioner was liable for the section 6621

tax-motivated interest. On February 11, 2009, a decision was

entered implementing the findings of Swanson. 

On March 16, 2009, petitioner filed a motion for litigation

costs pursuant to Rule 230 and sections 7430 and 6673(a)(2)(B). 

On March 23, 2009, we issued an order vacating our decision.
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On April 2, 2009, petitioner filed an amended motion for

litigation costs. Petitioner’s amended motion provides that

petitioner has paid $5,351.63 in fees and expenses. Petitioner’s

amended motion requests that we: (1) Assess litigation costs

against respondent in the amount of $250 per hour plus expenses;

(2) award costs and fees to petitioner in the amount of $5,351.63

for fees already paid; and (3) award costs to petitioner’s

counsel in the amount of $46,888.33. On May 27, 2009, respondent

filed a response and objection to petitioner’s amended motion for

litigation costs. Because the parties’ pleadings provide the

facts necessary to decide this motion, no hearing is necessary.

Discussion

Section 7430(a) authorizes the award to a prevailing party

of reasonable litigation costs paid or incurred in a 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 the Internal Revenue Code. The

taxpayer must establish that he: (1) Is the prevailing party;

(2) has exhausted the available administrative remedies; (3) has

not unreasonably protracted the court proceedings; and (4) has

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

(b)(1), (3). 

The moving party bears the burden of proving that these

requirements are met. Rule 232(e). A taxpayer is generally the
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prevailing party if the taxpayer substantially prevailed with

respect to either the amount in controversy or the most

significant issue or set of issues. Sec. 7430(c)(4)(A). Under

section 7430(c)(4)(B), even if the taxpayer meets the

requirements of a prevailing party under section 7430(c)(4)(A),

the taxpayer will not be treated as a prevailing party if the

Commissioner’s position in the proceeding was substantially

justified.

Under section 7430(c)(4)(E)(i), a party shall also 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 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).” The qualified offer provision of section 7430(c)(4)(E)(i)

applies without regard to whether the Commissioner’s position in

the matter is substantially justified. See Haas & Associates

Accountancy Corp. v. Commissioner, 117 T.C. 48, 59 (2001), affd.

55 Fed. Appx. 476 (9th Cir. 2003); Estate of Lippitz v.

Commissioner, T.C. Memo. 2007-293.

A qualified offer is defined in section 7430(g)(1) as a

written offer which:

(A) is made by the taxpayer to the United States during

the qualified offer period;
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(B) specifies the offered amount of the taxpayer’s

liability (determined without regard to interest);

(C) is designated at the time it is made as a qualified

offer for purposes of this section; and 

(D) remains open during the period beginning on the

date it is made and ending on the earliest of the date the

offer is rejected, the date the trial begins, or the 90th

day after the date the offer is made.

Petitioner’s offer in effect was that he would pay the

underlying liability and the statutory interest on the deficiency

but would not have to pay the negligence additions to tax under

section 6653 and tax-motivated interest pursuant to section 6621. 

Respondent argues that petitioner’s offer was not a qualified

offer because the offer included the section 6621 tax-motivated

interest. Respondent contends that the inclusion of taxmotivated interest was incorrect because a qualified offer cannot

include interest unless the taxpayer’s liability for interest is

a contested issue in an administrative or court proceeding. 

As we found in Swanson v. Commissioner, T.C. Memo. 2009-31,

we lacked jurisdiction in this proceeding to determine whether

petitioner is liable for section 6621(c) tax-motivated interest. 

Respondent points to this finding and argues that because we

lacked jurisdiction over that interest and because a qualified

offer can include only items that are contested issues,

petitioner’s inclusion of tax-motivated interest renders his

offer invalid.

Petitioner’s offer provided that 
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[Petitioner] makes this qualified offer pursuant to

[section] 7430 to pay the underlying tax and any interest

determined at the conclusion of a separate proceeding

involving interest. Mr. Swanson does not owe negligence

penalties. For the same reason, he would not owe any taxmotivated interest either.

Section 7430(g)(1)(B) provides that an offer which is a

qualified offer specifies the offered amount of the taxpayer’s

liability determined without regard to interest. Section

301.7430-7(c)(3), Proced. & Admin. Regs., provides that the

amount of a qualified offer must be with respect to all of the

adjustments at issue in an administrative or court proceeding at

the time the offer is made and only those adjustments. 

Accordingly, section 301.7430-7(c)(3), Proced. & Admin. Regs.,

provides that an offer will not be considered a qualified offer

if it includes interest, unless interest is a contested issue. 

We lacked jurisdiction in this deficiency case to determine

whether petitioner was liable for tax-motivated interest pursuant

to section 6621. See Swanson v. Commissioner, supra. 

Petitioner’s offer did not constitute a qualified offer because

it included interest over which we lacked jurisdiction. See sec.

301.7430-7(c)(3), Proced. & Admin. Regs. Petitioner has filed

another petition with this Court challenging respondent’s

determination not to abate pursuant to section 6404(e) the

section 6621(c) tax-motivated interest. See Swanson v.

Commissioner, docket No. 20151-07. Accordingly, petitioner’s

offer was not a qualified offer.
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Further, even if we were to treat petitioner’s offer as a

qualified offer, petitioner would not be treated as the

prevailing party because petitioner’s tax liability after our

decision in Swanson v. Commissioner, T.C. Memo. 2009-31, was not

less than his qualified offer. See sec. 7430(c)(4)(E)(i). Had

respondent accepted petitioner’s qualified offer, petitioner

would not have been liable for either the section 6653 negligence

penalty or the section 6621 tax-motivated interest. As a result

of our decision in Swanson, petitioner was not liable for the

section 6653 negligence penalty, but he remains liable for the

section 6621 tax-motivated interest. Petitioner’s liability

after Swanson is thus higher than that contained in his qualified

offer, and petitioner would not be treated as the prevailing

party. See sec. 7430(c)(4)(E)(i). 

Because petitioner did not submit a qualified offer, his

request for litigation fees will fail if respondent establishes

that respondent’s position was substantially justified. See sec.

7430(c)(4)(B). Respondent argues that his position was

substantially justified. In general, the Commissioner’s position

is substantially justified if, on all of the facts and

circumstances and the legal precedents relating to the case, the

Commissioner 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). To be substantially justified, the
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Commissioner’s position must have a reasonable basis in both law

and fact. Pierce v. Underwood, supra. A position is

substantially justified if the position is “justified to a degree

that could satisfy a reasonable person.” Pierce v. Underwood,

supra at 565 (construing similar language in the Equal Access to

Justice Act). Thus, the Commissioner’s position may be incorrect

but nevertheless be substantially justified “‘if a reasonable

person could think it correct’.” Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 443 (1997) (quoting Pierce v.

Underwood, supra at 566 n.2).

The relevant inquiry is whether the Commissioner’s position

was reasonable given the known facts and circumstances at the

time that the Commissioner took his position, as well as any

applicable legal precedents. Maggie Mgmt. Co. v. Commissioner,

supra at 443; DeVenney v. Commissioner, 85 T.C. 927, 930 (1985). 

The position of the United States under consideration with

respect to the recovery of litigation costs is the position taken

by the Commissioner in the answer to the petition. Bertolino v.

Commissioner, 930 F.2d 759, 761 (9th Cir. 1991). Respondent has

maintained the same position throughout: that petitioner was

negligent in his reporting of the jojoba partnership loss. See

Maggie Mgmt. Co. v. Commissioner, supra at 442.

Respondent argues that his position was reasonable in the

light of then-existing legal precedent. Respondent further
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contends that the facts could have supported a finding that

petitioner was negligent. Respondent points to his arguments at

and after the trial that petitioner’s lack of experience and his

knowledge of potential tax benefits required him to obtain an

additional opinion on the investment. Respondent contends that

those facts could have supported a finding of negligence in view

of caselaw at the time this case was tried.

Respondent’s position was reasonable throughout the time he

took it and maintained it given the known facts and

circumstances. See Hennessey v. Commissioner, T.C. Memo. 2007-

131, affd. without published opinion 102 AFTR 2d 2008-6750, 

2008-2 USTC par. 50,623 (5th Cir. 2008); Vasquez v. Commissioner,

T.C. Memo. 2007-6, affd. 284 Fed. Appx. 381 (9th Cir. 2008). A

reasonable person could think that respondent’s position was

correct on the basis of precedent at that time. Other jojoba

partnership cases with similar but not identical facts have

resulted in the negligence additions to tax being upheld. See,

e.g., Helbig v. Commissioner, T.C. Memo. 2008-243; Heller v.

Commissioner, T.C. Memo. 2008-232; Welch v. Commissioner, T.C.

Memo. 2002-39; Christensen v. Commissioner, T.C. Memo. 2001-185;

Serfustini v. Commissioner, T.C. Memo. 2001-183; Nilsen v.

Commissioner, T.C. Memo. 2001-163; Hunt v. Commissioner, T.C.

Memo. 2001-15; Glassley v. Commissioner, T.C. Memo. 1996-206. 
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Accordingly, respondent’s position was substantially

justified, and petitioner is not entitled to litigation costs. 

See sec. 7430(c)(4)(B)(i); Hennessey v. Commissioner, supra;

Vasquez v. Commissioner, supra.

Petitioner also seeks fees pursuant to section

6673(a)(2)(B), which allows this Court to award attorney’s fees

and costs when an attorney appearing on behalf of the

Commissioner of Internal Revenue has multiplied the proceedings

in any case unreasonably and vexatiously. Respondent’s counsel

has not multiplied the proceedings in this case unreasonably, and

petitioner is not entitled to fees pursuant to section

6673(a)(2)(B). 

Based on the foregoing,

An appropriate order and

decision will be reentered.