t c memo united_states tax_court jung sik and bok s lim petitioners v commissioner of internal revenue respondent docket no filed date matthew j mccann for petitioners wendy l wojewodzki for respondent memorandum opinion gerber judge this matter is before the court on petitioners’ motion for award of litigation costs pursuant to sec_7430 and rule ' references to sec_7430 in this opinion are to that section as amended by the taxpayer bill of right sec_2 publaw_104_ sec_701 110_stat_1452 effective with continued all section references are to the internal_revenue_code in effect for the taxable_year at issue and all rule references are to the tax_court rules_of_practice and procedure unless otherwise indicated petitioners requested an evidentiary hearing however after considering the record and the parties’ memoranda we concluded that a hearing is not necessary to reach our decision see rule a the relevant facts are taken from the record and the parties’ memoranda at the time the petition was filed petitioners resided in temple hills maryland after concessions ’ the issues for our consideration are whether respondent’s position in the litigation proceedings was substantially justified and whether petitioners unreasonably protracted the proceedings ' continued respect to proceedings commenced after date the amendments to that section shift to the commissioner the burden of proving that the position_of_the_united_states was substantially justified sec_7430 b a judicial proceeding is commenced in this court with the filing of a petition see rule a petitioners filed their petition on date accordingly the amendments to sec_7430 are applicable here see 108_tc_430 respondent has conceded that petitioners substantially prevailed exhausted their administrative remedies and met the net_worth requirements in addition respondent conceded that his position after the calendar call of date was not substantially justified both parties agree that the hourly rate at which attorney’s fees should be awarded is limited to dollar_figure per hour discussion a general background respondent determined a deficiency in petitioners’ federal_income_tax of dollar_figure respondent conceded all adjustments determined in the notice_of_deficiency and the remaining issue for trial concerned whether petitioners were entitled to an overpayment to answer that question we had to decide whether the interest_paid by petitioners was deductible as business_interest if deductible as business_interest petitioners would have been entitled to certain deductions that they had not claimed on their returns and an overpayment the matter was decided in petitioners’ favor see lim v commissioner tcmemo_1998_432 filed date sec_7430 provides for the award of reasonable administrative and litigation costs to a taxpayer in an administrative or 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 administrative or litigation costs may be made where the taxpayer is the prevailing_party exhausted available administrative remedies ’ and did not unreasonably protract this requirement does not apply to an award for reasonable_administrative_costs see sec_7430 the administrative or judicial proceeding sec_7430 b to be a prevailing_party a taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented and meet the net_worth requirements of u s c section d b see sec_7430 a and a taxpayer will not be treated as a prevailing_party however if the united_states established that its position was substantially justified see sec_7430 b b substantial justification as we stated earlier respondent concedes that petitioner substantially prevailed and met the net_worth requirements moreover respondent concedes that his position after the calendar call on date was not substantially justified the parties primarily dispute at what point in the litigation proceedings respondent’s position was no longer substantially justified petitioners contend that respondents’ position was not substantially justified from the time of the issuance of the notice_of_deficiency accordingly petitioners claim legal expenses for the period beginning with the preparation and filing of their petition respondent asserts that his position was substantially justified until the case was called for trial at the date calendar the notice_of_deficiency was sent to petitioners on date respondent’s appeals officer requested a meeting with petitioners’ representative ina letter dated date petitioners’ counsel replied that a meeting was inconvenient at that time but that documents could be provided by mail the appeals officer agreed and provided counsel with a list of needed information the requested information was not provided until date after a timely review of the requested information respondent’s appeals officer concluded on date that petitioners were entitled to a refund and forwarded a proposed settlement computation to petitioners’ counsel petitioners’ counsel indicated his agreement by return facsimile that same day on date however petitioners’ counsel was advised by the appeals officer that his supervisor refused to approve the proposed settlement the case was forwarded to the internal_revenue_service irs district_counsel on date week before calendar call shortly after being informed that there would be no settlement with the irs appeals_office petitioners’ counsel although the settlement proposal required petitioners to concede deductions to which they were arguably entitled the settlement was accepted to avoid the further expense of trial advised that litigation costs would be requested if the case could not be resolved guickly at a date trial preparation conference the parties discussed a settlement under which respondent would allow the requested overpayment and petitioners would agree not to assert a claim for attorney’s fees petitioners decided not to accept the settlement and to proceed to trial the commissioner’s position is substantially justified if that position could satisfy a reasonable person and if it has a reasonable basis in both fact and law see 487_us_552 we examine the facts known to the commissioner at the time the position was taken see 108_tc_430 respondent must prove that his position was substantially justified see sec_7430 b the fact that the commissioner eventually loses or concedes a case does not establish an unreasonable position see 86_tc_962 however the commissioner’s concession does remain a factor to be considered see dugan v commissioner tcmemo_1997_458 contrary to petitioners’ position respondent contends that he was substantially justified in his position from the issuance of the statutory_notice_of_deficiency on date until the calendar call on date petitioners did not provide respondent with all relevant requested information until date therefore no settlement could have been reached prior to date see salopek v commissioner tcmemo_1998_ when respondent ultimately received the information the appeals officer concluded that petitioners were entitled to a refund and forwarded a proposed settlement to petitioners respondent did not spend an unreasonable amount of time reviewing the information and proposing a settlement to petitioner although the proposed settlement was ultimately rejected by the associate chief of the irs appeals_office and the case was forwarded to district_counsel the time respondent spent reviewing the proposed settlement was not unreasonable respondent should not have to bear the litigation costs for a reasonable period of time it may take to review documentation and or modify his position see 854_f2d_263 7th cir affg tcmemo_1987_52 respondent concedes that his position was not substantially justified after the calendar call on date but has not explained what additional facts rendered the position any more or respondent received the requested information from petitioners on date and proposed a settlement on date petitioners’ counsel agreed to the proposed settlement on date and was informed that the proposed settlement had been rejected by the associate chief of the internal_revenue_service irs appeals_office on date less justified between date the date the proposed settlement was rejected and date respondent has failed to establish that his position was substantially justified beyond date the date when the proposed settlement was rejected accordingly petitioners are entitled to attorney’s fees incurred after date when the case was forwarded from the irs appeals_office to the district_counsel c unreasonable protraction of proceeding respondent contends that petitioners unreasonably protracted the litigation proceedings but respondent failed to provide any examples of how petitioners acted unreasonably sec_7430 b provides that no award of litigation costs may be made for any portion of the proceeding that the prevailing_party unreasonably protracted after petitioners provided respondent with the requested information petitioners did nothing to protract the proceeding moreover petitioners’ counsel agreed to respondent’s proposed settlement agreement on the same day that it was received d amount of attorney’s fees and expenses to be awarded having determined when in the court_proceeding respondent’s position was no longer substantially justified we must determine the appropriate amount of attorney’s fees and expenses to be awarded petitioners submitted a bill showing dollar_figure of miscellaneous costs and expenses of that total dollar_figure’ in expenses was incurred prior to the time the case was forwarded to the district_counsel therefore petitioners are entitled to dollar_figure in costs and expenses petitioners’ attorney billed a total of hours on this case of that total hours were billed after the case was forwarded to the district_counsel an award relating to attorney’s fees incurred in is limited to dollar_figure per hour see sec_7430 revproc_98_61 1998_52_irb_18 accordingly we award petitioners attorney’s fees in the amount of dollar_figure plus attorney’s fees and costs incurred pursuing this motion to reflect the foregoing an appropriate order and decision will be entered ’ that amount includes the dollar_figure fee to file petitioners’ petition with the tax_court and dollar_figure in postage costs


internal_revenue_service number release date index number --------------------------- -------------------------- ---------------------------------- --------------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ----------------------- id no ------------------- --------------------------------------------------- telephone number --------------------- refer reply to cc psi b05 plr-117518-09 date date legend ------------------------------------------------------------- --------------------------------- ------------------------- --------------------------------------------------------------------------------- parent utility county project ----------------------------------------------------------------------------------------------------------------- project -------------------------------------------------------------------------------------------------------- authority --------------------------------------------------------------------------------------------------------- bonds --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ state_agency agreement customer ----------------------------------- ---------------------------------------- -------------------------------------------------------------- --------------------------------------------------------------- dear -------------- this letter responds to a letter dated date and subsequent correspondence submitted on behalf of parent by its authorized representative requesting a ruling under sec_118 of the internal_revenue_code facts utility is a subsidiary of parent and a member of parent’s affiliated_group that files a consolidated_return utility is in the business of transmitting and distributing electric power plr-117518-09 state and county have decided to proceed with project and project the purpose of project and project is to improve traffic flow project and project will be undertaken simultaneously in the interests of efficiency state has decided that authority is responsible for project as part of project authority will make payments and transfer property to utility for the purpose of undergrounding the existing overhead electrical lines and related equipment the money will come from bonds and from state for this purpose no money will come from agency under the agreement for this purpose county’s purpose for the undergrounding of the existing overhead electrical lines and related equipment is to improve community aesthetics and public safety the undergrounding of the existing overhead electrical lines and related equipment does not directly benefit particular customers or potential customers of utility in their capacity as customers according to county project is not a condition for project and project would have occurred regardless of project state has decided that authority is also responsible for project utility will provide new underground electrical lines and related equipment for project and customer authority will receive money from various governmental entities including agency under the agreement for this purpose the provision of new underground electrical lines and related equipment for project will directly benefit customer in its capacity as a customer of utility parent represents the following under penalties of perjury parent and authority will enter into separate contracts for project and project parent will separately account for project and project for financial_accounting and regulatory accounting purposes new customers not including customer will be connected to the undergrounded electrical lines and related equipment for project if they request service the capacity of the undergrounded electrical lines and related equipment for project will be the same as the capacity of the existing overhead electrical lines and related equipment before undergrounding customer will not receive any electricity from the undergrounded electrical lines and related equipment for project the undergrounded electric lines and related equipment for project and project will be placed in separate duct banks and in separate trenches the excavation work for project and project is being done concurrently to minimize disruption to the commuting public the undergrounded electric lines and related equipment for project will be installed much sooner than the undergrounded electric lines and related equipment for project parent requests a ruling that the payments and transfers of property by authority to utility for project for the purpose of undergrounding the existing overhead electrical plr-117518-09 lines and related equipment are not a contribution_in_aid_of_construction ciac under sec_118 and are a contribution to the capital of utility under sec_118 parent does not request a ruling for project law and anaysis sec_61 and sec_1_61-1 of the income_tax regulations provide that gross_income means all income from whatever source derived unless excluded by law sec_118 provides that in the case of a corporation gross_income does not include any contribution_to_the_capital_of_the_taxpayer sec_118 provides that for sec_118 purposes the term contribution_to_the_capital_of_the_taxpayer does not include any ciac or any other contribution as a customer or potential customer the house ways_and_means_committee report for the tax_reform_act_of_1986 explains that property including money is a ciac rather than a capital_contribution if it is transferred to provide or encourage the provision of services to or for the benefit of the person transferring the property h_r rep no 99th cong 1st sess vol c b the house report a utility has received property to encourage the provision of services if the receipt of the property is a prerequisite to the provision of the services if the receipt of the property results in the provision of services earlier than would have been the case had the property not been received or if the receipt of the property otherwise causes the transferor to be favored in any way however a transfer of property is not a ciac where it is clearly shown that the benefit of the public as a whole was the primary motivating factor in the transfer notice_87_82 1987_2_cb_389 provides that a payment received by a utility is not a ciac if it does not reasonably relate to the provision of services by the utility or for the benefit of the person making the payment but rather relates to the benefit of the public at large notice_87_82 provides as an example of a payment benefiting the public at large a relocation payment received by a utility under a government program to place utility lines underground in that situation the relocation payment is not considered a ciac where the relocation is undertaken for purposes of community aesthetics and public safety and does not directly benefit particular customers of the utility in their capacity as customers the payments and transfers of property by authority to utility for project for the purpose of undergrounding the existing overhead electrical lines and related equipment will benefit the public at large primarily by improving community aesthetics and public safety therefore we conclude that the payments and transfers of property by authority to utility for project for the purpose of undergrounding the existing overhead electrical lines and related equipment fall within the public benefit exception described in the house report and in notice_87_82 and are not a ciac under sec_118 plr-117518-09 next we must decide whether the payments qualify as a contribution_to_capital under sec_118 the legislative_history of sec_118 provides in part as follows this sec_118 in effect places in the code the court decisions on the subject it deals with cases where a contribution is made to a corporation by a governmental_unit chamber of commerce or other association of individuals having no proprietary interest in the corporation in many such cases because the contributor expects to derive indirect benefits the contribution cannot be called a gift yet the anticipated future_benefits may also be so intangible as to not warrant treating the contribution as a payment for future services s rep no 83rd cong 2d sess in 319_us_98 the court held that payments by prospective customers to an electric utility company to cover the cost of extending the utility s facilities to their homes were part of the price of service rather than contributions to capital the case concerned customers payments to a utility company for the estimated cost of constructing service facilities primary power lines that the utility company otherwise was not obligated to provide the customers intended no contribution to the company s capital later in 339_us_583 the court held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital the court reasoned that when the motivation of the contributors is to benefit the community at large and the contributors do not anticipate any direct benefit from their contributions the contributions are nonshareholder contributions to capital id pincite finally in 412_us_401 the court in determining whether a taxpayer was entitled to depreciate the cost of certain facilities that had been funded by the federal government held that the governmental subsidies were not contributions to the taxpayer s capital the court recognized that the holding in detroit edison co had been qualified by its decision in brown shoe co the court in chicago burlington quincy railroad co found that the distinguishing characteristic between those two cases was the differing purpose motivating the respective transfers in brown shoe co the only expectation of the contributors was that such contributions might prove advantageous to the community at large thus in brown shoe co since the transfers were made with the purpose not of plr-117518-09 receiving direct services or recompense but only of obtaining advantage for the general community the result was a contribution_to_capital the court in chicago burlington quincy railroad co also stated that there were other characteristics of a nonshareholder contribution_to_capital implicit in detroit edison co and brown shoe co from these two cases the court distilled some of the characteristics of a nonshareholder contribution_to_capital under both the and codes first the payment must become a permanent part of the transferee s working_capital structure second it may not be compensation such as a direct payment for a specific quantifiable service provided for the transferor by the transferee third it must be bargained for fourth the asset transferred foreseeably must benefit the transferee in an amount commensurate with its value fifth the asset ordinarily if not always will be employed in or contribute to the production of additional income and its value assured in that respect the payments and transfers of property by authority to utility for project for the purpose of undergrounding the existing overhead electrical lines and related equipment contain the characteristics of a nonshareholder contribution_to_capital described in chicago burlington quincy railroad co therefore we conclude that the payments and transfers of property by authority to utility for project for the purpose of undergrounding the existing overhead electrical lines and related equipment are a contribution to the capital of utility under sec_118 conclusion accordingly based on the foregoing analysis and the representations made we conclude that the payments made by authority to utility and transfers of property from authority to utility for project for the purpose of undergrounding the existing overhead electrical lines and related equipment are not a ciac under sec_118 and are a contribution to the capital of utility under sec_118 except as specifically set forth above no opinion is expressed or implied concerning the federal_income_tax consequences of the above described facts under any other provision of the code or regulations specifically we express no opinion regarding project this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent plr-117518-09 in accordance with the power_of_attorney on file with this ruling_request a copy of this letter is being sent to parent’s authorized representative sincerely paul f handleman paul f handleman chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110