T.C. Memo. 2011-117

UNITED STATES TAX COURT

RANDOLPH A. POLZ, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 28543-09. Filed June 1, 2011.

John J. Pembroke, for petitioner.

John Spencer Hitt, for respondent.

MEMORANDUM OPINION

ARMEN, Special Trial Judge: This matter is before the Court

on petitioner’s motion for an award of administrative and

litigation costs, filed pursuant to section 7430 and Rules 230

through 233.1 Petitioner seeks an award of $9,622 in respect of

1 All section references are to the Internal Revenue Code,

(continued...)
- 2 -

respondent’s deficiency determination of $4,500.

After concessions by respondent,2 the issues for decision

are as follows:

(1) Whether respondent’s position in the administrative and

court proceedings was substantially justified;

(2) whether petitioner exhausted the administrative remedies

available within the Internal Revenue Service (IRS);

(3) whether petitioner meets the net worth requirements; and 

(4) whether the administrative and litigation costs claimed

by petitioner are reasonable.

Neither party requested an evidentiary hearing, and the

Court concludes that such a hearing is not necessary for the

proper disposition of petitioner’s motion. See Rule 232(a)(2). 

We therefore decide the matter before us on the record that has

been developed to date.

Background

Petitioner resided in the State of Illinois at the time that

his petition was filed with the Court.

1(...continued)

as amended; however, references to sec. 7430 are to such section

in effect at the time that the petition was filed. Unless

otherwise indicated, all Rule references are to the Tax Court

Rules of Practice and Procedure.

2 Respondent concedes: (1) Petitioner substantially

prevailed, see sec. 7430(c)(4)(A)(i); and (2) petitioner did not

unreasonably protract the proceedings, see sec. 7430(b)(3).
- 3 -

On his 2007 Federal income tax return petitioner claimed a

deduction for alimony paid of $18,000. Petitioner’s 2007 return

was selected for examination.

On June 29, 2009, respondent sent petitioner a notice of

proposed changes (30-day letter), proposing to disallow the

alimony deduction of $18,000. In the letter respondent requested

specific information and documentation from petitioner to

substantiate the alimony deduction.

Petitioner did not respond to the 30-day letter.

By a notice of deficiency dated August 31, 2009, respondent

determined a deficiency in petitioner’s 2007 Federal income tax

of $4,500. The deficiency was attributable to the adjustment

proposed in respondent’s 30-day letter sent June 29, 2009;

namely, the disallowance of the alimony deduction of $18,000.

On December 1, 2009, petitioner through counsel timely filed

a petition for redetermination with this Court. See sec.

6213(a). Petitioner placed the entire amount of the deficiency

in dispute, assigning error to the adjustment made by respondent

in the notice of deficiency. Petitioner alleged, inter alia,

that this Court had adjudicated this same issue in his favor as

to tax year 2002 and that respondent had determined this same

issue in his favor as to tax year 2006. Petitioner attached

various substantiating documents to his petition, which documents
- 4 -

were detached by the Clerk of the Court prior to service of the

petition on respondent. See Rule 34(b).

For 2002 respondent issued a notice of deficiency dated

January 28, 2005, which notice disallowed petitioner’s alimony

deduction. On the basis of that notice of deficiency, petitioner

petitioned this Court on March 24, 2005, and a stipulated

decision was entered in that case deciding that there was no

deficiency for 2002.

For 2006 respondent issued a 30-day letter dated August 15,

2008. After corresponding with respondent’s Appeals Office,

petitioner received a letter dated November 17, 2008, stating

that no changes were being made to the return as filed for 2006. 

With respect to the instant case, on January 21, 2010,

respondent filed an answer denying all of petitioner’s

assignments of error.

On January 25, 2010, respondent referred this case to the

Appeals Office, and the case was assigned to Appeals Officer

Nancy Jones (AO Jones). On March 22, 2010, AO Jones sent a

letter to petitioner’s counsel requesting the specific

information and documentation as previously requested in the 30-

day letter.

On April 12, 2010, petitioner’s counsel faxed to AO Jones

the substantiating documents that were not attached to the copy

of the petition served on respondent by the Court. On April 21,
- 5 -

2010, petitioner’s counsel faxed additional substantiating

documents to AO Jones, including the specific information and

documentation requested in the 30-day letter and the March 22,

2010 letter.

During a conference call on April 28, 2010, AO Jones

requested relevant caselaw to support petitioner’s alimony

deduction. Petitioner’s counsel submitted such relevant caselaw

on May 12 and June 24, 2010.

On August 10, 2010, AO Jones sent petitioner’s counsel

decision documents conceding respondent’s only determination in

the notice of deficiency. A stipulated decision was subsequently

entered in this case on September 20, 2010.

On October 7, 2010, upon learning that petitioner wanted to

file the motion currently pending before the Court, respondent

filed an unopposed Motion To Vacate Decision, which motion was

granted on October 8, 2010. On November 1, 2010, the parties

submitted a Stipulation Of Settled Issues resolving the only

issue in this case.

On November 29, 2010, petitioner filed his motion for an

award of fees and costs. On February 24, 2011, respondent filed

a response to petitioner’s motion, objecting to its granting. 

Thereafter on April 11, 2011, petitioner filed a reply to

respondent’s objection.
- 6 -

Discussion

Section 7430 provides for the award of administrative and

litigation fees and costs to a taxpayer in a court proceeding

brought against the United States involving the determination of

any tax, interest, or penalty pursuant to the Internal Revenue

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

taxpayer: (1) Is the “prevailing party”; (2) exhausted available

administrative remedies within the IRS; (3) did not unreasonably

protract the proceeding; and (4) claimed reasonable

administrative and litigation costs. Sec. 7430(a), (b)(1), (3),

(c). These requirements are conjunctive, and failure to satisfy

any one will preclude an award of costs to the taxpayer. See

Minahan v. Commissioner, 88 T.C. 492, 497 (1987).

To be a “prevailing party”, the taxpayer must: (1)

Substantially prevail with respect to either the amount in

controversy or the most significant issue or set of issues

presented; and (2) satisfy the applicable net worth requirement. 

Sec. 7430(c)(4)(A). The taxpayer will nevertheless fail to

qualify as the prevailing party if the Commissioner can establish

that the Commissioner’s position in the administrative and court

proceedings was substantially justified. Sec. 7430(c)(4)(B)(i).

Respondent concedes that petitioner substantially prevailed

but argues that petitioner nevertheless should not be awarded
- 7 -

administrative and litigation fees and costs because respondent’s

position in the proceedings was substantially justified.

The Commissioner’s position is substantially justified if,

based 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). In other words, to be substantially justified, the

Commissioner’s position must have a reasonable basis in both law

and fact. Pierce v. Underwood, supra at 563-565; Swanson v.

Commissioner, 106 T.C. 76, 86 (1996). 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]

knew or should have known that * * * [his] position was invalid

at the onset”. Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.

1995), affg. T.C. Memo. 1994-182. We look to whether the

Commissioner’s position was reasonable given the available facts
- 8 -

and circumstances at the time that the Commissioner took his

position. Maggie Mgmt. Co. v. Commissioner, supra at 443;

DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

The fact that the Commissioner eventually concedes, or even

loses, a case does not 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). However, the Commissioner’s concession does remain a

factor to be considered. Powers v. Commissioner, 100 T.C. 457,

471 (1993), affd. in part, revd. in part and remanded on another

issue 43 F.3d 172 (5th Cir. 1995).

As relevant herein, the position of the United States that

must be examined against the substantial justification standard

with respect to the recovery of administrative costs is the

position taken by the Commissioner as of the date of the notice

of deficiency. Sec. 7430(c)(7)(B)(ii). The position of the

United States that must be examined against the substantial

justification standard 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); Sher v. Commissioner, 861 F.2d at 134-135; see sec.

7430(c)(7)(A). Ordinarily, we consider the reasonableness of

each of these positions separately in order to allow the

Commissioner to change his position. Maggie Mgmt. Co. v.
- 9 -

Commissioner, supra at 442 (citing Huffman v. Commissioner, 978

F.2d 1139, 1144-1147 (9th Cir. 1992), affg. in part and revg. in

part on another ground T.C. Memo. 1991-144). In the present

case, however, we need not follow this approach because

respondent’s position was essentially the same in the

administrative and judicial proceedings. See Maggie Mgmt. Co. v.

Commissioner, supra at 442. More specifically, respondent’s

position was that petitioner had failed to substantiate his

entitlement to the alimony deduction.

Deductions are matters of legislative grace, and the

taxpayer bears the burden of proof to establish entitlement to

any claimed deduction. INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). This burden requires the taxpayer to substantiate

deductions claimed by maintaining records necessary to establish

both the taxpayer’s entitlement to such items and the proper

amount thereof. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,

90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976); sec.

1.6001-1(a), Income Tax Regs.; see Rule 142(a); INDOPCO, Inc. v.

Commissioner, supra at 84; Welch v. Helvering, 290 U.S. 111, 115

(1933); Williams v. Commissioner, T.C. Memo. 1997-541 (The

Commissioner’s position was substantially justified because no

new information was received between the time the notice of

deficiency was issued and the time the answer was filed), affd.
- 10 -

without published opinion 176 F.3d 486 (9th Cir. 1999); see also

sec. 7491(a)(2)(A) and (B). A taxpayer’s self-serving

declaration is no ironclad substitute for the records that the

law requires. See Weiss v. Commissioner, T.C. Memo. 1999-17; see

also Seaboard Commercial Corp. v. Commissioner, 28 T.C. 1034,

1051 (1957) (a taxpayer’s income tax return is a self-serving

declaration that may not be accepted as proof for the deduction

or exclusion claimed by the taxpayer); Halle v. Commissioner, 7

T.C. 245, 247 (1946) (a taxpayer’s return is not self-proving as

to the truth of its contents), affd. 175 F.2d 500 (2d Cir. 1949).

A factual determination is required in order to decide

whether a taxpayer is entitled to the alimony deduction. See

sec. 71. We have held that whenever the resolution of

adjustments requires factual determinations, the Commissioner is

not obliged to concede those adjustments until the Commissioner

has received, and has had a reasonable time to verify, adequate

substantiation for the matters in question. See Huynh v.

Commissioner, T.C. Memo. 2002-110; Gealer v. Commissioner, T.C.

Memo. 2001-180 (and cases cited therein); O’Bryon v.

Commissioner, T.C. Memo. 2000-379 (and cases cited therein);

Cooper v. Commissioner, T.C. Memo. 1999-6.

Based on the facts available to respondent at the time the

notice of deficiency was issued and the answer was filed, as well

as longstanding legal precedent regarding the availability of tax
- 11 -

deductions, respondent’s position had a reasonable basis in both

law and fact and therefore was substantially justified. See

Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443. When

respondent issued the notice of deficiency and filed his answer,

he had not received documentation sufficient to substantiate

petitioner’s entitlement to the alimony deduction. See KahnLanger v. Commissioner, T.C. Memo. 1995-527.

Petitioner contends that it was unreasonable for respondent

to require adequate substantiation for the adjustment in issue

because: (1) This Court had adjudicated the same issue in

petitioner’s favor as to 2002 by entering a stipulated decision,

and (2) respondent had determined the same issue in petitioner’s

favor as to 2006. However, each taxable year stands alone, and

the Commissioner may challenge in a succeeding year what was

condoned or agreed to in a previous year. Auto. Club of Mich. v.

Commissioner, 353 U.S. 180 (1957); Rose v. Commissioner, 55 T.C.

28 (1970); see Ryan v. Commissioner, T.C. Memo. 1999-109 (it is

irrelevant whether the taxpayer was permitted to take alimony

deductions in prior years). Thus, petitioner’s entitlement to

the alimony deduction in prior years does not necessarily entitle

petitioner to the deduction in subsequent years.

We note further that when respondent finally received the

specific information and documentation as requested in the 30-day

letter, the documentation was considered by respondent’s Appeals
- 12 -

Office and a basis of settlement was reached within a relatively

brief time thereafter.3

In view of the foregoing, we hold that respondent’s position

in the administrative and judicial proceedings was substantially

justified.

Because respondent’s position was substantially justified,

we need not and do not decide whether petitioner exhausted his

administrative remedies, whether petitioner met the net worth

requirements, or whether the administrative and litigation costs

claimed by petitioner are reasonable in amount.

Accordingly, we hold that petitioner is not entitled to an

award of administrative and litigation costs.

Conclusion

We have considered all of the arguments made by petitioner,

and, to the extent that we have not specifically addressed them,

we conclude that they do not support a result contrary to that

reached herein.

In order to reflect the foregoing,

An appropriate order and

decision will be entered.

3 If the specific information and documentation requested

in the 30-day letter had been furnished to respondent, then most

likely a notice of deficiency would not have been issued. Query

if petitioner had attached the specific information and

documentation to his return, whether the 30-day letter would have

even been issued.