department of the treasury internal_revenue_service washington d c date gl-807896-98 uilc number date release internal_revenue_service national_office field_service_advice memorandum for from subject assistant chief_counsel field service cc dom fs internal_revenue_service national_office field_service_advice this field_service_advice responds to your memorandum dated date field_service_advice is not binding on examination or appeals and is not a final case determination this document is not to be cited as precedent legend a b year year year year issue whether the service erred in issuing a joint refund check to a and b conclusion if b filed a separate claim_for_refund the service should have issued b’s share of the refund to b any error on the part of the service however was not the cause of b’s nonreceipt of the refund because a bank cashed the jointly issued check even though it was only endorsed by a facts a and b filed a joint income_tax return for year this return was filed one month late the return showed no tax_liability and a and b were issued a refund of all of their withholding credits a and b subsequently divorced and in year a timely filed the year tax_return using the head_of_household status the service had begun an audit of a and b’s liability for year in year before a’s return was filed the service assessed additional tax penalties and interest for year during year and year a and b both made payments to satisfy this liability a paid a substantially greater part of the liability than did b in year b requested an audit_reconsideration as a result of the audit_reconsideration the service abated a portion of the additional_assessment this partial abatement resulted in an overpayment it does not appear that a claim_for_refund was ever filed for year the request for audit_reconsideration was granted and as a result the service during year issued a computer-generated refund check the refund check was issued jointly to a and b the refund check was sent to a’s address it appears that this was the address used by a and b during year although the check was issued to both a and b a alone endorsed the check and presented it to a bank the bank honored the check law and analysis because there is no administrative file in this case we do not have a copy of what b submitted at the time she requested audit_reconsideration if the audit_reconsideration contained a claim_for_refund either formal or informal the refund should have been apportioned in accordance with revrul_80_8 1980_1_cb_298 if the audit_reconsideration did not contain a claim_for_refund it was not inappropriate for the service to issue the refund check to both a and b in any event b would have recourse outside the tax laws against a and the bank for negotiating a check that was issued jointly to a and b but only endorsed by a if the request for audit_reconsideration included a claim_for_refund the service should have issued the refund in accordance with revrul_80_8 a claim_for_refund may be either formal eg on a form 1040x amended u s individual_income_tax_return or informal an informal claim must meet three requirements in order to be valid first it must be in writing or have a written component second it must specify the tax_year for which a refund is sought third it must state the basis for the overpayment and provide the service with enough information to examine the claim 314_us_186 if the request for audit_reconsideration contained such a claim and if that claim was submitted by b only the service should have issued the refund to b alone b’s share of the overpayment and therefore the amount of the refund that would be issued to b alone would be computed according to the formula set forth in revrul_80_8 assuming that the request for audit_reconsideration included a claim_for_refund the service should have issued to b alone b’s share of the refund instead the service issued the entire amount of the refund to both a and b the service issued b’s portion of the refund it also issued a’s portion of the refund b however did not get b’s portion of the refund due to actions on the part of a and the bank that cashed the jointly issued check any error the service may have made by issuing the full amount of the refund to both a and b did not lead to b’s nonreceipt of the refund case development hazards and other considerations if you have any further questions please call the branch telephone number


t c memo united_states tax_court david l bruner petitioner v commissioner of internal revenue respondent docket no filed date yale f goldberg david r jojola and derek w kaczmarek for petitioner doreen marie susi rachael j zepeda rick v hosler and katelynn m winkler for respondent memorandum opinion lauber judge this case is before the court on petitioner’s motion for award of litigation and administrative costs pursuant to sec_7430 and rule neither party requested a hearing on this matter and no material fact is in dispute we will therefore decide petitioner’s motion on the basis of the parties’ submissions and the existing record see rule a we conclude that petitioner is not the prevailing_party under sec_7430 and c because the position_of_the_united_states was substantially justified within the meaning of sec_7430 we will accordingly deny petitioner’s motion for fees and costs background the following facts are derived from the parties’ pleadings and motion pa- pers including the declarations and the exhibits attached thereto petitioner resid- ed in arizona when he filed his petition during and the relevant tax years petitioner was a member of circle road financial llc circle road a two-member llc formed in at all relevant times circle road has been treated as a partnership for federal_income_tax purposes circle road’s original operating_agreement dated decem- 1unless otherwise noted all statutory references are to the internal_revenue_code in effect at all relevant times and all rule references are to the tax_court rules_of_practice and procedure we round all monetary amounts to the nearest dollar ber provided that each member had a participation percentage and that profits losses and deductions would be allocated to each member on date circle road established a defined_benefit_plan under which it made contributions to retirement accounts set up for the members’ ben- efit circle road contributed to that plan dollar_figure in and dollar_figure in and claimed deductions for those contributions on schedules k-1 partner’s share of income deductions credits etc circle road allocated to petitioner ap- proximately of the contribution2 viz dollar_figure and of the contribution viz dollar_figure on his form sec_1040 u s individual_income_tax_return for and petitioner reported flow-through deductions of dollar_figure for and dollar_figure for the irs selected circle road’s and petitioner’ sec_2011 and sec_2012 returns for examination during its examination the irs challenged circle road’s allocation to petitioner of amounts exceeding of the retirement_plan contributions cir- cle road had amended its operating_agreement five times between and 2the balance of circle road’ sec_2011 contribution was made on behalf of its other member eneas kane and that portion of the contribution was allocated to him 3it is unclear why petitioner for reported a flow-through deduction of dollar_figure or dollar_figure less than the amount reported to him on the schedule_k-1 to make exceptions to the allocation of certain partnership items but none of these amendments addressed allocation of retirement_plan contributions and petitioner provided no documentation to substantiate that an amendment addressing this subject had been made on date the irs sent petitioner a notice_of_deficiency determin- ing deficiencies of dollar_figure for and dollar_figure for these deficiencies reflected partial_disallowance of flow-through deductions from circle road attrib- utable to the retirement_plan contributions on the attached form 886a explana- tion of items the irs stated because your distributive_share of the deductions for the contri- butions to the retirement_plan sponsored by circle road financial llc are limited to the amounts allowed in the operating_agreement for circle road financial llc you are allowed deductions for the contributions to the plan in the amounts of dollar_figure and dollar_figure for the taxable_year sec_2011 and sec_2012 respectively therefore your taxable_income is increased by dollar_figure and dollar_figure for the taxable_year sec_2011 and sec_2012 respectively for the irs allowed petitioner a deduction for of the amount that circle road had contributed and allocated to him dollar_figure dollar_figure for the irs allowed petitioner a deduction for of the total amount that cir- cle road had contributed and allocated to him dollar_figure dollar_figure be- cause petitioner for had claimed a deduction of only dollar_figure the adjustment to his income for that year was dollar_figure petitioner timely petitioned this court for redetermination in his petition he alleged that circle road’s members had modified the operating_agreement to permit a special_allocation of the deduction at issue and that their established course of dealing and performance was to specially allocate this deduction on date respondent filed his answer denying for lack of substantiation pe- titioner’s allegation that circle road’s operating_agreement had been modified in this way on date petitioner provided to the irs appeals_office a de- claration from circle road’s other member eneas kane in that declaration mr kane averred that circle road had specially allocated to petitioner both the cost and accompanying deduction attributable to the pension benefit he also averred that circle road’s special allocations were reflected in the respective mem- ber’s capital accounts he agreed to the special allocations and the way they were made the special allocations were consistent with our economic shar- ing arrangements and the operating_agreement as modified and circle road’s established course of dealing and performance was to specially allocate the pension deduction the irs appeals_office accepted mr kane’s declaration as establishing that he and petitioner had orally modified circle road’s operating_agreement to allow a special_allocation of the defined_benefit_plan contributions on that basis the parties began discussing a settlement of the underlying tax issues on date respondent filed a motion for leave to file an amendment to answer which we granted on date in the amendment to answer re- spondent noted that petitioner’s allowable deductions were subject_to the earned_income limitation in sec_404 that section provides in part that cer- tain retirement_plan contribution deductions are limited to the earned_income an individual derives from the trade_or_business with respect to which the plan is es- tablished the parties subsequently agreed that this limitation does not apply for because petitioner’s adjusted earned_income dollar_figure exceeded the alloca- tion to petitioner that the parties agree is proper dollar_figure the parties agree that this limitation does apply for because petitioner’s adjusted earned_income dollar_figure was lower than the allocation to petitioner upon which the parties have agreed dollar_figure on date the parties filed a stipulation of settled issues in which they agreed that petitioner’s distributive_share of the deduction attributable to circle road’s retirement_plan contributions is dollar_figure for and dollar_figure for petitioner is entitled to flow-through deductions of dollar_figure for and dollar_figure for there is no deficiency for and there is a deficiency of dollar_figure for this stipulation resolve d all issues in this case other than petitioner’s claim for litigation and administrative costs on date petitioner filed a motion for reasonable litigation and administrative costs and further briefing ensued a governing statutory framework discussion sec_7430 provides for the award of litigation and or administrative costs to a taxpayer in a proceeding involving the determination of any_tax interest or penalty such an award may be made where the taxpayer can demonstrate that he is the prevailing_party has exhausted administrative remedies within the irs has not unreasonably protracted the proceeding and has claimed rea- sonable costs sec_7430 b c and polz v commissioner tcmemo_2011_117 nguyen v commissioner tcmemo_2003_313 these requirements are conjunctive failure to satisfy any one precludes an award of costs to the taxpayer see 88_tc_492 marten v commissioner tcmemo_2000_186 respondent concedes that the second third and fourth requirements are satisfied here thus the only question is whether petitioner is the prevailing_party to be the prevailing_party a taxpayer must satisfy a net_worth require- ment sec_7430 provides with refinements inapposite here that a taxpayer cannot be a prevailing_party unless he is a party within the meaning of u s c sec d b that section provides in pertinent part as follows p arty means i an individual whose net_worth did not exceed dollar_figure or ii any owner of an unincorporated business or any partnership corporation association unit of local_government or organization the net_worth of which did not exceed dollar_figure at the time the civil_action was filed and which had not more than employees to be a prevailing_party the taxpayer must also establish that he substantially prevailed with respect to either the amount in controversy or the most significant set of issues presented sec_7430 the taxpayer has the burden of proving satisfaction of both requirements rule e b analysis the parties initially dispute whether petitioner satisfies the net_worth re- quirement petitioner concedes that his personal net_worth has exceed ed seven million dollars at all times relevant to seeking an award of costs in this matter respondent contends that the dollar_figure million net_worth limitation in u s c sec d b ii applies to petitioner as an owner of an unincorporated business and that he therefore cannot qualify as a prevailing_party within the meaning of sec_7430 see sec_301_7430-5 proced admin regs petitioner contends that the dollar_figure million net_worth limitation applies to the unincorporated business rather than its owner that circle road had a net_worth of less than dollar_figure million and fewer than employees at all relevant times and that petitioner as an owner of circle road is thus a party as defined in u s c sec d b given our disposition we need not decide this threshold question assuming arguendo that petitioner could meet the net_worth requirement he would still not be the prevailing_party unless he substantially prevailed with respect to the amount in controversy or the most significant set of issues present- ed a taxpayer will not be treated as the prevailing_party if the position_of_the_united_states in the proceeding was substantially justified sec_7430 the position_of_the_united_states is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis both in law and fact 106_tc_76 quoting 487_us_552 see also 861_f2d_131 5th cir aff’g 89_tc_79 100_tc_457 aff’d in part rev’d in part 43_f3d_172 5th cir the determination of reasonableness is based on all the facts of the case and the available legal precedent 94_tc_685 where a factual determination is re- quired the position_of_the_united_states is substantially justified until the taxpayer has provided substantiation sufficient to justify resolution of that factual issue in his favor goertler v commissioner tcmemo_2003_136 85_tcm_1297 the commissioner’s position may be substantially justified even if incor- rect ‘if a reasonable person could think it correct ’ fitzpatrick v commissioner tcmemo_2017_88 at quoting 108_tc_430 the fact that the irs loses a case or makes a concession does not by itself establish that the position taken is unreasonable but is a fact- or that may be considered maggie mgmt co t c pincite see 991_f2d_359 7th cir 92_tc_760 fitzpatrick at where a taxpayer seeks both litigation and administrative costs we apply the substantially justified standard to the irs’ position on two separate dates for purposes of the administrative_proceeding the irs’ position is that taken at the earlier of the date the taxpayer receives the determination of the irs appeals_office or the date of the notice_of_deficiency sec_7430 for purposes of a tax_court proceeding the irs’ position generally is that taken at the time the commissioner files his answer e g sher f 2d pincite respondent maintained the same position in the notice_of_deficiency and in his answer to the petition viz that petitioner was not entitled to claim flow- through deductions for amounts exceeding of circle road’s defined_benefit_plan contributions we accordingly evaluate those positions together see huff- man v commissioner 978_f2d_1139 9th cir aff’g in part rev’g in part tcmemo_1991_144 maggie mgmt co t c pincite cooley v commissioner tcmemo_2012_164 the regulations provide that for contributions to a defined_benefit_plan a partner’s distributive_share of i contributions made on behalf of self-employed individuals and ii deductions for such contributions is determined in the same manner as his distributive_share of partnership taxable_income sec_1 e - 1a f income_tax regs sec_702 provides that a partner or member of an llc treated as a partnership shall take into account his distributive_share of the partnership’s items of income and deductions sec_704 provides that a part- ner’s distributive_share generally shall be determined in accordance with the partnership_agreement sec_761 defines a partnership_agreement to include any modifications made prior to or at the time prescribed by law for the filing of the partnership return for the taxable_year which are agreed to by all the partners or which are adopted in such other manner as may be provided by the partnership_agreement modifications to a partnership_agreement generally may be made orally or in writing sec_1_761-1 income_tax regs on the form 886a the irs explained the adjustments in the notice of defi- ciency by stating that petitioner’s deduction was limited to the amounts allowed in the operating_agreement for circle road the operating_agreement stated that petitioner had a participation percentage and that all partnership taxable_income and deductions unless otherwise specified were to be allocated in accord- ance with that participation percentage the adjustments the irs made limiting petitioner’s deduction to of circle road’s contributions comport with its understanding that his deduction was limited to what was stated in the operating_agreement on date roughly five months after respondent filed his an- swer counsel for petitioner provided to the irs appeals_office a declaration from mr kane the other member of circle road in that declaration mr kane averred that he and petitioner had orally modified the operating_agreement to author- ize a special_allocation for retirement_plan contributions and the flow-through deductions attributable thereto although petitioner had previously provided the irs with written amendments that modified the operating_agreement in other respects this was the first evidence petitioner had supplied of an oral amendment affecting retirement_plan deductions after reviewing mr kane’s declaration respondent agreed to concede the deficiency for and reduce the deficiency for we find this position to be reasonable in fact and in law respondent properly made a partial concession of this case after petitioner supplied substantiation concerning the central factual issue in dispute before re- spondent received that substantiation respondent’s position--disallowing petition- er’s flow-through deductions to the extent they exceeded of circle road’s contributions--had a reasonable basis both in law and fact and was justified to a degree that could satisfy a reasonable person swanson t c pincite quoting 4during the examination the irs had issued multiple document requests seeking copies of circle road’s organizational documents including all amend- ments modifications supplemental agreements bylaws side letters and all other agreements and an explanation for all special_allocation of the schedule k items to the respective members one document request specifically sought informa- tion t o determine whether the special_allocation of the income and loss items on schedule k are appropriate under sec_704 petitioner provided the irs with circle road’s original operating_agreement and the five written amendments but no evidence of any oral amendments underwood u s pincite rosario v commissioner tcmemo_2002_ 84_tcm_392 because the position_of_the_united_states was substantially justified under sec_7430 petitioner was not a prevailing_party and thus is not entitled to an award of fees or costs see sec_7430 c to implement the foregoing an appropriate order and decision will be entered 5petitioner cites various documents generated during the and audits including notices of proposed_adjustment nopas issued to circle road to support his contention that the irs was pursuing various legal theories includ- ing theories based on sec_404 but the theory on which the irs ultimately settled was that the operating_agreement capped petitioner’s deductions pincite of circle road’s defined_benefit_plan contributions the amended nopa issued to circle road stated that because petitioner and mr kane each have a profits share the deductions in each tax_year are allocated to each partner and as explained in the text the notice of deficiency--the key document in question--ad- vanced that same position