* This order and judgment is not binding precedent, e xcept under the

doctrines of law of the case, res judicata, and col lateral estoppel. The court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions of 10th Cir. R. 36.3.

** The Honorable Carlos Murguia, United States Distr ict Judge, District of Kansas, sitting by designation. 

## F I L E D United States Court of Appeals Tenth Circuit 

### FEB 16 2001 

### PATRICK FISHER Clerk UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

JOHN L. HARMER; CAROLYN HARMER, Petitioners-Appellants,

v. No. 00-9002 COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. (T.C. No. 7673-98) (U.S. Tax Court)

ORDER AND JUDGMENT *

Before KELLY, BRISCOE, Circuit Judges, and MURGUIA , District Judge **

. Taxpayers John and Carolyn Harmer appeal a decision of the United States Tax Court denying their request for an award of lit igation costs pursuant to 26 U.S.C. § 7430. We exercise jurisdiction pursuant t o 26 U.S.C. § 7482 and affirm. Section 7430 of the Internal Revenue Code provides in pertinent part that “[i]n any . . . court proceeding which is brought b y or against the United States in2

connection with the determination, collection, or r efund of any tax, interest, or penalty under [the Internal Revenue Code], the prev ailing party may be awarded . . . reasonable litigation costs incurred in conne ction with such court proceeding.” 26 U.S.C. § 7430(a)(2). We review th e Tax Court’s denial of the Harmers’ request for litigation costs for an abuse of discretion. Barford v.
Comm’r , 194 F.3d 782, 786 (7th Cir. 1999); see also Pate v. United States , 982 F.2d 457, 459 (10th Cir. 1993) (applying same stand ard of review to district court decision applying § 7430). Generally speaking, a taxpayer will qualify as a “p revailing party” for purposes of § 7430 if two requirements are met. Fi rst, the taxpayer must have “substantially prevailed with respect to [either] t he amount in controversy” or “the most significant issue or set of issues presen ted.” 26 U.S.C. § 7430(c)(4)(A). Second, the Commissioner’s positi on must not have been “substantially justified.” 26 U.S.C. § 7430(c)(4)( B)). “The term ‘substantially justified’ in this context means ‘justified to a de gree that could satisfy a reasonable person’ or having a ‘reasonable basis bo th in law and fact.’” Pate , 982 F.2d at 459 (quoting Pierce v. Underwood , 487 U.S. 552, 563-65 (1988)). The Commissioner bears the burden of proving that his p osition was substantially justified. 26 U.S.C. § 7430(c)(4)(B)(i). The Tax Court effectively concluded that the Harmer s did not qualify as the1 On April 17, 1996, the Harmers filed for Chapter 7 bankruptcy

protection. According to the Harmers, their bankruptcy petition “provided the names and mailing addresses of the[ir] creditors an d the amounts of the personal loans.” Record Vol. I, Doc. 22 at 7. Further, the Harmers allege “[t]he Internal (continued...) 3 “prevailing party” in the action. Although it was uncontroverted that the Harmers substantially prevailed in the Tax Court with respe ct to the most significant issue presented, i.e., whether certain bank deposits were taxable income, the Tax Court effectively concluded that the Commissioner’s posit ion was substantially justified at the time the statutory notice of deficiency was filed. More specifically, the Tax Court agreed with the Commissioner that the Harmers failed to provide the IRS, prior to the filing of the statutory notice of defi ciency, with sufficient documentation to support their claims that the depo sits were loan proceeds and loan repayments. In attacking the Tax Court’s conclusion, the Harmer s do not refute (or even discuss) the fact that they were tardy in providing the IRS with documentation. Instead, the Harmers argue that the Commissioner sh ould have accepted the oral and written representations of Mr. Harmer, the Harm ers’ accountant, the Harmers’ lawyer, and Senator Robert Bennett’s (the alleged s ource of the majority of the loan proceeds) lawyer, instead of requiring the Har mers or these third persons to produce actual documentation of the loans at issue. The Harmers also assert that the government had access to the bankruptcy petitio n the Harmers filed in 1996 11 (...continued)

Revenue Service was a listed creditor of the bankrupt[cy] estate and the government significantly participated in the bankruptcy proceedings.” Id. 4 and could have used the bankruptcy petition to veri fy the existence of the alleged loans. Further, the Harmers argue that the IRS civ il auditors should have contacted the various witnesses who were ultimately contacted by the government’s trial counsel before deciding to conce de some of the issues and forego trial. Lastly, the Harmers contend that nei ther Senator Bennett nor his agents could produce the documents requested by the Commissioner (e.g., promissory notes, loan agreements, loan documents, or an accounting) because “[m]any of these demanded records did not exist in 1994, 1997, or even now in 1999.” Record Vol. I, Doc. 22 at 9. The Harmers’ arguments fly in the face of several e stablished principles. First, deposits in a taxpayer’s bank account are co nsidered prima facie evidence of income. Welch v. Comm’r , 204 F.3d 1228, 1230 (9th Cir. 2000); see also Page
v. Comm’r , 58 F.3d 1342, 1347 (8th Cir. 1995) (concluding th at the “bankdeposits-plus-cash-expenditures method is a rationa l way [for the IRS] to reconstruct income”). Second, and relatedly, a taxpayer bears the burden of showing that deposits to his bank account are not t axable income but instead were derived from a nontaxable source. Welch , 204 F.3d at 1230; Dodge v. Comm’r , 981 F.2d 350, 354 (8th Cir. 1992). Third, in asses sing whether a particular5

transaction is a “true loan,” a relevant factor is “whether the promise to repay is evidenced by a note or other instrument.” Welch , 204 F.3d at 1230; see generally Burke v. Comm’r , 929 F.2d 110, 114 (2d Cir. 1991) (rejecting taxpayer’s claim that deposit to account was a nontaxable loan repay ment because, in part, taxpayer did not offer any documentation of the loa n). In light of these principles, it was the Harmers, rather than the IRS , who should have been more active in talking to various third parties and in p roducing evidence to document the loans. Further, it is apparent from the record that the Harmers should have informed the IRS promptly that some of the loans atissue were undocumented (and thus, the Harmers should also have obtained an d produced third-party affidavits confirming the existence of the alleged loans). We conclude the Tax Court did not abuse its discret ion in determining that the Commissioner was substantially justified, at th e time the statutory notice of deficiency was filed, in treating the deposits to t he Harmers’ bank account as taxable income. See In re Yochum , 89 F.3d 661, 671-72 (9th Cir. 1996) (concluding IRS position was substantially justifie d because taxpayers failed to adequately substantiate their claims and, upon doin g so, the IRS conceded various issues). Further, we agree with the Tax Court thatthe Harmers do not qualify as a2 Because the Harmers’ remaining arguments hinge uponthe erroneous

assumption that they were the prevailing party for purposes of § 7430, we find it unnecessary to address those arguments. 6 “prevailing party” for purposes of § 7430. 2 The judgment of the Tax Court denying the Harmers’ request for an award of litigation costs pursuant to 26 U.S.C. § 7430 is AFFIRMED. Entered for the Court Mary Beck Briscoe Circuit Judge