ian d smith petitioner v commissioner of internal revenue respondent docket no 25605-15w filed date p a whistleblower provided information to r using p’s information r commenced examinations of a taxpayer that led to the assessment and collection of almost dollar_figure million r determined that slightly less than dollar_figure million of the collected_proceeds was collected using the information p provided r further determined that because less than dollar_figure million was based on p’s information the dollar_figure million threshold for applica- tion of the nondiscretionary award regime of sec_7623 had not been met accordingly r made a discre- tionary whistleblower award under sec_7623 p argues that the amounts in dispute referenced in sec_7623 is almost dollar_figure million and that the threshold for use of the nondiscretionary award of sec_7623 has been met held the amounts in dispute referenced in the sec_7623 threshold are the total amount of the liability that r proposed with respect to a taxpayer’s examina- united_states tax_court reports tion that was commenced using the information provided by a whistleblower and are not limited to the part of the col- lected proceeds attributable to the whistleblower’s informa- tion or specific allegations held further the dollar_figure million threshold of sec_7623 was met and p’s whistle- blower award should be determined under sec_7623 thomas c pliske and shine lin for petitioner richard l hatfield for respondent opinion gerber judge this whistleblower award case brought pursuant to sec_7623 sec_1 is before the court on the parties’ cross-motions for summary_judgment the seminal legal issue one of first impression concerns the interpreta- tion of the phrase in sec_7623 for purposes of determining whether the dollar_figure mil- lion threshold was met requiring payment of a whistleblower award under sec_7623 in dispute amounts background petitioner filed a form_211 application_for award for original information that respondent received on date on the form_211 petitioner alleged that a business was exchanging its products or services for gift certificates and that these barter transactions were not included as part of the business’ income petitioner also contended that cus- tomers’ gift certificates were given to the business’ employees as compensation and that the value_of_the_gift certificates was not treated as includible in the employees’ income ie not included on forms w-2 wage and tax statement this information was based on petitioner’s personal experience in a date letter respondent acknowledged receipt of the form_211 assigned a number to petitioner’s applica- tion and advised that the claim would be evaluated all section references are to the internal_revenue_code in effect at all relevant times all rule references are to the tax_court rules_of_practice and procedure respondent in his response to petitioner’s motion for summary judg- ment stated in the present case respondent and petitioner are generally in agreement as to the relevant facts and the proper interpretation of the statute presents a pure question of law smith v commissioner using petitioner’s whistleblower information respondent early in initiated both an employment_tax and an income_tax examination of the business_entity that petitioner had identified as a result of the employment_tax examina- tion on date the business agreed to employment_tax liabilities for various taxable quarters from through in the aggregate amount of dollar_figure on the same date the business also agreed to employment_tax penalties for various quarters from through in the aggre- gate amount of dollar_figure on date respond- ent’s employment_tax revenue_agent attributed dollar_figure in the aggregate of employment_taxes that were assessed and collected from the subject business directly to the information provided by petitioner’s whistleblower claim on date respondent’s income_tax revenue agent’s report proposed business income_tax adjustments for dis- allowed expenses of barter assets the income_tax revenue_agent noted that the subject business had reported all income from barter activity but that the adjustments resulted from failure to substantiate the barter-related expenses the amounts of those income adjustments in the report that the income_tax revenue_agent attributed to the barter deductions for the and fiscal years were dollar_figure dollar_figure dollar_figure and dollar_figure respectively those adjustments involving the disallowance of barter-related expenses ultimately resulted in the assessment and collection of income_tax in the aggre- gate amount of dollar_figure the income_tax revenue_agent also noted that the above amounts were attributable to the information in petitioner’s whistleblower claim because the barter accounts had been selected for scrutiny on account of the claim the total income_tax deficiency that was ulti- mately agreed to and paid_by the subject business was dollar_figure including the dollar_figure referenced in the income_tax revenue agent’s report respondent’s whistleblower analyst analyst in a memo- randum to his program manager stated that his review of the employment_tax adjustments supports a determination that the whistleblower information substantially contributed to the actions taken on several general ledger accounts the analyst determined that collected_proceeds subject_to a whistleblower award for the employment_taxes totaled united_states tax_court reports dollar_figure that amount exceeded the dollar_figure that the employment_tax examiner had determined to be attributable to the whistleblower claim the analyst’s more expansive approach included gift certificates and other items that were not specifically tied to the bartering but nonetheless gen- erated employment_tax liability as part of the completed audit process initiated by the whistleblower claim the analyst however stated that his review of the income_tax adjustments and example in the regula- tions leads him to the conclusion that the whistleblower submis- sion did not substantially contribute to the income_tax adjustments the only connection between the income_tax adjustments and the whistle- blower submission is the services choice of general ledger accounts to examine the reference to example in the analyst’s statement refers to example in sec_301_7623-2 proced admin regs he also relied on sec_301_7623-2 proced admin regs which contains a definition of amount in dispute in addition the analyst stated the income_tax adjustments were made based on a lack of substantiation or business_purpose which is a different fact pattern than the one alleged by the whistleblower the analyst’s conclusion was that the dollar_figure of income_tax collected from the business in connection with barter accounts was not attributable to petitioner’s whistleblower claim of that accordingly the analyst determined the dollar_figure of employment_tax penalty and interest only a portion dollar_figure was directly attributable to the whistleblower resulting in a determination of a discretionary award of dollar_figure under sec_7623 the analyst used sec_7623 because in his view the amount in dis- pute was less than the dollar_figure million sec_7623 threshold so that a mandatory to award under sec_7623 was not warranted with respect to the remaining tax penalties and interest dollar_figure the analyst determined that they had no direct relationship to the whistleblower information and therefore resulted in a discretionary award of dollar_figure under sec_7623 in the analyst’s report in which he determined that the whistleblower’s claim did not result in an income_tax defi- smith v commissioner ciency it was also noted that the income_tax examination of the subject business generated a dollar_figure income_tax defi- ciency which the subject business ultimately agreed to and paid in an date memorandum to his acting program manager the analyst sought clarification on the determina- tion of the amount to be attributed to the phrase collected_proceeds and related matters because of the confluence of the employment and income_tax deductions in the subject whistleblower’s claim the analyst explained that there was a direct relationship between the whistleblower’s claim and the employment_tax but not between the whistleblower’s claim and the income_tax with respect to the income_tax the whistleblower’s claim was that the subject business had failed to report the barter transactions in income the income_tax examiner determined that the barter transactions were includible in income but disallowed certain deductions relating to the barter transactions for lack of substantiation resulting in income_tax deficiencies the analyst questioned whether the income_tax deficiencies associated with the bar- tering accounts of the subject business are a part of col- lected proceeds and can the award percentage be different for the employment_tax and income_tax adjustments on date respondent issued a preliminary award recommendation under sec_7623 recommendation the recommendation followed the analyst’s determination that petitioner’s total whistleblower award was to be dollar_figure dollar_figure plus dollar_figure in an date letter petitioner’s counsel responded to the rec- ommendation disagreeing with the amount of the award in particular petitioner’s counsel contended that the award percentage should have been between and because the amount in dispute exceeded dollar_figure million petitioner’s counsel raised additional questions concerning interpretation of sec_7623 in a date final_decision under sec_7623 respondent advised petitioner that after considering his counsel’s contentions the amount of the whistleblower award would remain dollar_figure dollar_figure less a sequestration reduction excluding any award attributable to the income_tax in addition respondent advised that the award amount would be reduced by in accord with the united_states tax_court reports budget control act of as amended by the american tax relief act of requiring that automatic reductions take place as of date including awards paid under sec_7623 i summary_judgment discussion summary_judgment is intended to expedite litigation and to avoid unnecessary and expensive trials 61_tc_861 summary_judgment may be granted where the pleadings and other materials show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law rule b 118_tc_226 the burden is on the moving party to dem- onstrate that no genuine dispute as to any material fact remains and that he is entitled to judgment as a matter of law 116_tc_73 the parties filed cross-motions for summary_judgment and have shown and stated that there is no gen- uine dispute as to any material fact ii jurisdiction for review of whistleblower cases here we consider the standards for an award and the cal- culation of the monetary threshold for mandatory awards under sec_7623 we may exercise our jurisdiction to the extent authorized by congress 137_tc_37 in a whistleblower action we have jurisdiction only with respect to the commissioner’s award_determination or denial thereof sec_7623 135_tc_70 in this case the parties are information provided to respondent but disagree regarding the term amounts in dis- pute referenced in sec_7623 that section is the threshold for the mandatory award regime of sec_7623 and therefore the calculation of the amount of the whistle- blower award those matters are clearly within the scope of our jurisdiction authorized by congress in sec_7623 in agreement as to the smith v commissioner iii statute and underlying controversies sec_7623 authorizes the secretary to pay whistle- blower awards and to issue regulations with respect to the application of the enabling statute the secretary is author- ized to pay such sums as he deems necessary from amounts collected in the detection of underpayments of tax accord- ingly sec_7623 provides the secretary with complete discretion to pay sums limited only to the amounts collected sec_7623 and specifically provides for less discretionary authority to make awards to whistleblowers and in pertinent part contains the following language sec_7623 awards to whistleblowers - in general -if the secretary proceeds with any administrative or judicial action described in subsection a based on information brought to the secretary’s attention by an individual such individual shall subject_to paragraph receive as an award at least percent but not more than percent of the collected_proceeds the determination of the amount of such award by the whistleblower office shall depend upon the extent to which the individual substan- tially contributed to such action award in case of less substantial contribution - a in general -in the event the whistleblower office determines the claim to be based principally on disclosures of spe- cific allegations other than information provided by the individual described in paragraph the whistleblower office may award such sums as it considers appropriate but in no case more than percent of the collected_proceeds including penalties interest additions to tax and additional_amounts resulting from the action including any related actions or from any settlement in response to such action taking into account the significance of the individual’s information and the role of such individual in contributing to such action emphasis added in summary sec_7623 provides that where respondent proceeds with an action using information sup- plied by an individual the award shall be at least but not more than of the collected_proceeds depending on the extent to which the information substantially contributed to collection sec_7623 addresses circumstances where there is a less substantial contribution on the part of a whistleblower and provides respondent in such cir- cumstances with discretion to award an amount that does not exceed united_states tax_court reports sec_7623 is available for whistleblower awards only if the following sec_7623 thresholds are met application of this subsection -this subsection shall apply with respect to any action- a against any taxpayer but in the case of an individual only if such individual’s gross_income exceeds dollar_figure for any taxable_year subject_to such action and b if the tax penalties interest additions to tax and additional_amounts in dispute exceed dollar_figure emphasis added respondent concluded that the amounts in dispute did not exceed dollar_figure million and accordingly determined that a discretionary award under sec_7623 was appropriate petitioner contends that respondent incorrectly applied the sec_7623 threshold to limit the determination of the award to sec_7623 the main thrust and seminal core of petitioner’s argument focuses on the dollar_figure million threshold in sec_7623 and the phrase amounts in dispute specifically petitioner contends as a matter of first impression that respondent has read into sec_7623 a limitation with respect to the dollar_figure million threshold by concluding that amounts in dispute include only the amounts of collected_proceeds for which the whistle- blower provided direct or indirect information under petitioner’s interpretation the amounts in dispute in this case total dollar_figure which is the combined amount of the employment and income_tax deficiencies and penalties in dispute between the taxpayer and respondent because of examinations commenced on account of peti- tioner’s whistleblower claim accordingly under petitioner’s interpretation sec_7623 and rather than sec_7623 would be applicable and would have resulted in a larger award ostensibly and using the collected amounts attributed by respondent to petitioner’s direct information if sec_7623 applied petitioner’s award would nec- essarily be at least of dollar_figure or dollar_figure as opposed to the amount dollar_figure determined by respondent’s whistleblower office respondent argues that certain common words or phrases in sec_7623 require him to follow the same quan- titative measure in determining the dollar_figure million threshold of sec_7623 in particular respondent focuses on the smith v commissioner words any and action in the context of sec_7623 as follows if the secretary proceeds with any administrative or judicial action described in subsection a based on information brought to the sec- retary’s attention by an individual such individual shall subject_to paragraph receive an award t he determination of the amount of such award by the whistleblower office shall depend upon the extent to which the individual substantially contributed to such action emphasis added respondent goes on to contend that sec_7623 there- fore defines the scope of the words any_action for purposes of sec_7623 and accordingly governs the use of the phrase any_action in sec_7623 respondent’s reli- ance on the term in sec_7623 and as the link between those sections is misplaced action which appears the word action is used five times each in subsection b and and two times in subsection b subsection a is a historical remnant dating back to and sub- section b was added by legislation subsection a does not contain the word action and it provides for a discre- tionary award for detecting underpayments of tax or detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws accordingly action for purposes of subsection b is the detecting of underpayments of tax or violations of tax law without any qualifier as to quantity or amount the word action is used in subsection b and in connection with prescribing percentage limits for awards only from collected_proceeds resulting from the action depending on whether the whistleblower brought information or specific allegations to respondent’s attention further refinements involve the extent to which the individual substantially contributed to the action accordingly the word action is being used in that context and does not establish another technical definition or meaning for purposes of sec_7623 in general the use of the word action in the introductory phrase to sec_7623 t his subsection shall apply with respect to any action- emphasis added is in no manner linked to the con- cept of collected_proceeds or substantial contribution the word action is used in subsection b a in the following united_states tax_court reports if such context against any taxpayer but in the case of any indi- vidual only income exceeds dollar_figure for any taxable_year subject_to such action emphasis added here again the word action is used without specific limitations individual’s gross we are unable to accept respondent’s contention that the subsection b determination of the size or percentage of an award applies only to those portions that were directly or indirectly attributable to the whistleblower’s information or that respondent’s definition of amounts in dispute should be employed to determine whether the dollar_figure million threshold of subsection b b has been met the application of respondent’s position in this case would lead to anomalous results petitioner’s whistleblower claim caused the initiation of an examination that resulted in the collection of almost dollar_figure million of tax and penalties almost dollar_figure million of which was directly or indirectly attributable to petitioner’s informa- tion in spite of those results under respondent’s position the provisions of sec_7623 would not be applicable in this case the current whistleblower statute was enacted in to address perceived problems with the discretionary award regime tax relief and health care act of pub_l_no div a sec_406 sec_120 stat pincite cooper v commissioner t c pincite sec_7623 was enacted to encourage whistleblowers to provide information about the underpayment_of_tax and violation of tax laws 143_tc_393 cooper v commis- sioner t c pincite under the new provisions a whistle- blower generally is entitled to a minimum nondiscretionary award of of the collected_proceeds if the commissioner proceeds with administrative or judicial action using information provided in a whistleblower claim cooper v commissioner t c pincite the nondiscretionary min- imum award is clearly part of the statutory regime to encour- age whistleblowers in lippolis this court considered whether the dollar_figure million threshold of sec_7623 is jurisdictional or whether it is to be asserted as an affirmative defense lippolis v commissioner t c pincite in reaching the conclusion that it is not jurisdictional this court stated the phrase ‘any action’ refers to ‘any administrative or judicial action’ smith v commissioner with which the secretary ‘proceeds’ based on information pro- vided by a whistleblower under sec_7623 id pincite in that case the commissioner assessed and collected dollar_figure from the taxpayer and under sec_7623 awarded dollar_figure of the collected_proceeds and the whistle- blower sought to have the award come under sec_7623 accordingly the question arose of whether the sec_7623 threshold of dollar_figure million had been met although this court in lippolis specifically did not decide what con- stitutes the amounts in dispute it left for another day the question of whether the dollar_figure respondent used to com- pute the award constituted the entire amount s in dispute in whistleblower 22716-13w v commissioner 146_tc_84 this court considered whether foreign bank and financial accounts fbar civil penalties are additional_amounts described in sec_7623 to be considered in determining whether the dollar_figure million threshold had been met this court held that fbar civil penalties are not addi- tional amounts that could be counted in determining whether the dollar_figure million threshold has been met id pincite in that case the court did not consider or decide the question before us in petitioner’s case ie whether the amount in dispute should include only the amounts that would be subject_to the sec_7623 or award or should include the total amount in dispute between the commissioner and the tax- payer id pincite in whistleblower 21276-13w v commissioner 147_tc_121 this court considered whether the term collected_proceeds as used in sec_7623 should be construed as contended by respondent here as limited to having been collected pursuant to the internal_revenue_code or whether it should be more broadly defined in particular we had to decide whether criminal fines and civil forfeitures are col- lected proceeds for purposes of subsection b id pincite in that case the commissioner took the limited view that although tax restitution of dollar_figure constituted collected_proceeds the remaining dollar_figure of criminal fines and civil forfeitures did not id in whistleblower 21276-13w this court held that the whistleblower’s more expansive view of collected_proceeds was correct and that it included the dollar_figure amount along with the dollar_figure resulting in united_states tax_court reports a dollar_figure whistleblower award computed at the rate that had been agreed to by the parties id pincite we again note that the commissioner’s discretionary authority to pay awards to whistleblowers dates back to legislation enacted in act of mar ch sec stat pincite whistleblower 22716-13w v commis- sioner t c pincite that discretionary authority became sec_7623 and it was not subject_to judicial review until when sec_7623 was added when congress added the nondiscretionary award regime with minimum percent- ages for awards it also set a monetary threshold that must be met before the mandatory provisions of subsection b and come into play that monetary threshold was estab- lished to target large dollar cases it also appears that the mandatory award additions to sec_7623 were intended to motivate whistleblowers to come forward so that additional collections of tax would occur in interpreting the term amounts in dispute as used in sec_7623 we begin with the statute 437_us_322 the phrase amounts in dispute is not used in any other context in sec_7623 and the parties have not contended that the phrase is a term of art and or that the phrase had been used in other sections of the internal_revenue_code sec_7623 is plain and has a clear meaning in the context of sec_7623 and its intended congressional purpose 489_us_235 citing 242_us_470 where the statute has been expressed in plain terms that language should be given effect 458_us_564 citing 447_us_102 the sec_7623 phrase amounts in dispute is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower information once the monetary thresholds are met and the government recovers collected_proceeds resulting from the action the mandatory provisions of subsection b or apply see see ron west john h skarbnik frank l brunetti a primer for tax whistleblowers taxes-the tax magazine date smith v commissioner whistleblower 22716-13w v commissioner t c pincite conversely collected_proceeds as used in subsection b is limited by resulting from the action whereas amounts in dispute as used in subsection b is not here sec_7623 has a clear meaning congress intended to limit the nondiscretionary award regime to larger cases explicitly sec_7623 and b shall apply with respect to any action-against any taxpayer but in the case of any individual only if such individual’s gross_income exceeds dollar_figure for any taxable_year subject_to such action and if the tax penalties interest additions to tax and additional_amounts in dispute exceed dollar_figure the first monetary threshold applies to individuals and the second applies to all taxpayers subsection b is intended to make the nondiscretionary award program of subsection b and applicable to larger cases those where the amounts in dispute between the taxpayer and the commissioner exceed dollar_figure million once that threshold is met then subsection b or would apply and award percentages are to be made based on the standards of those subsections sec_7623 is simply a monetary threshold for application of the less discretionary whistleblower award regime the dollar_figure of gross_income threshold must be met where the taxpayer is an individual and the dollar_figure million amount in dispute must be met for any taxpayer the factors of sec_7623 and limiting the award to a par- ticular portion of collected_proceeds focuses upon the useful- ness of the whistleblower’s claim and should not be a refine- ment of the amounts in dispute as used in sec_7623 the facts of this case are illustrative of that distinction petitioner’s whistleblower claim regarding the barter and gifts caused respondent to examine those items and related accounts of the taxpayer resulting in almost dollar_figure million in collected tax revenue the next statutory step would be to determine what portion of those collected pro- ceeds resulted from the whistleblower’s information or claim the regulation promulgated with respect to sec_7623 is sec_301_7623-2 proced admin regs paragraph e i of the regulation defines amount in dis- pute for purposes of sec_7623 as follows united_states tax_court reports t he term amount in dispute means the greater of the maximum total of tax penalties interest additions to tax and additional_amounts that resulted from the action s with which the irs proceeded based on the information provided or the maximum total of such amounts that were stated in formal positions taken by the irs in the action s respondent’s analyst relied on this regulation for deter- mining that the dollar_figure million threshold was not met in this case the regulation does not support respondent’s narrow view that the amount in dispute is limited to the portion to which award percentages are applied as defined in sec_7623 and the regulation provides instead that the amounts in dispute are the amounts that resulted from the actions with which irs proceeded based on the whistleblower information accordingly it does not follow that the limiting standards of sec_7623 and providing for a percentage to be applied to the portion of collected_proceeds to which the whistleblower’s substantially contributed would also apply in determining whether the initial dollar_figure million threshold has been met conceptually sec_7623 is a threshold to ensure that the less discre- tionary mandate of subsection b is applied to taxpayers with a certain minimum amount of annual income or with a significant amount of tax_liability in effect respondent has backed into the subsection b and limitations to inter- pret the subsection b threshold information respondent’s analyst also relied on sec_301_7623-2 example proced admin regs that section addresses the concept proceeds based on which is an integral part of determining which percentages of sec_7623 and are to be used to calculate the whistleblower award all of the examples under sec_301_7623-2 proced admin regs are designed as guidance for determining whether whistleblower information was the source or the reason for respondent’s pursuit or examination of a taxpayer in example the commissioner pursued a taxpayer using whistleblower information and then by means of information requests and summonses developed additional information which the example concludes was not information that was proceeded on because of the whistleblower that example however was not intended to address the purely mathe- matical threshold of sec_7623 in the case before the court respondent proceeded using petitioner’s information smith v commissioner and the examination resulted in nearly dollar_figure million of tax in dispute of which almost dollar_figure million was directly or indirectly attributable to petitioner’s information those circumstances satisfy threshold of sec_7623 the next step would be to determine what por- tions of the proceeds collected were substantially or less substantially attributable to petitioner’s information the purely mathematical accordingly the amount in dispute for purposes of sec_7623 in this case was in excess of dollar_figure million and respondent’s use of the discretionary provisions of sec_7623 to determine the amount of the whistleblower award was in error petitioner also raised the following issues in his motion for summary_judgment whether collected_proceeds includes amounts which respondent would not have collected without petitioner’s whistleblower claim whether respondent applied the correct award percentages and whether respondent has the legal authority to unilaterally reduce an award by sequestration because we have decided that respondent’s use of sec_7623 in this case was incorrect petitioner’s motion for summary_judgment will be granted in part with respect to the sec_7623 threshold ques- tion finally our holding that respondent should have used sec_7623 to compute the amount of the award renders petitioner’s other concerns or arguments moot until an award has been determined under sec_7623 to reflect the foregoing an appropriate order will be issued f


t c memo united_states tax_court patty k copeland a k a patty k white petitioner v commissioner of internal revenue respondent alvin c copeland petitioner v commissioner of internal revenue respondent docket nos filed date j grant coleman for petitioners elaine harris warren and thomas l fenner for respondent memorandum opinion swift judge in these consolidated cases respondent determined deficiencies in petitioners’ federal income taxes and additions to tax as follows year additions to tax_deficiency sec_6621 c sec_6653 a sec_6653 a sec_6653 a sec_6659 patty k and alvin c copeland dollar_figure dollar_figure --- -_ _- big_number big_number - -_ _- big_number --- dollar_figure k dollar_figure big_number -- big_number xx big_number big_number --o- --- -0- -0- -0- alvin c copeland dollar_figure -0- _- -o- _o- _o- percent of interest accruing after date on portion of underpayment attributable to a tax-motivated transaction x percent of interest due on portion of underpayment attributable to negligence this matter is before us on the parties’ cross-motions for partial summary_judgment with regard to the following legal issues whether in analyzing claimed losses relating only to the amount of out-of-pocket cash invested in limited_partnerships the profit objective of the investments should be measured at the partnership level or at the individual partner level and whether increased interest under sec_6621 c applies to petitioners’ tax deficiencies attributable to petitioners’ limited_partnership investments unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue background many of the facts have been stipulated and are so found petitioners resided in metairie louisiana at the time they filed their petitions the activities and transactions of the limited_partnerships involved herein garfield oil_and_gas associates a utah limited_partnership and cardinal oil technology partners a pennsylvania limited_partnership hereinafter referred to as the garfield and cardinal limited_partnerships or as the partnerships are substantially identical to those of the limited_partnerships involved in our test case opinion in 99_tc_132 affd sub nom 28_f3d_1024 10th cir on their respective federal_income_tax returns for the years in issue petitioners claimed large losses and interest deductions relating to their investments as limited partners in the garfield and cardinal limited_partnerships respondent disallowed these claimed losses and interest deductions and petitioners filed the instant petitions contesting respondent's adjustments petitioners now concede all of the originally claimed tax benefits relating to their investments in the partnerships and petitioners seek a loss deduction only for the amount of cash they invested in the partnerships after a lengthy trial in the krause test cases we analyzed the objectives and activities of the particular partnerships involved in krause we concluded that the partnerships’ activities were not conducted at arm’s length that they were not legitimate transactions with economic_substance and that they lacked a profit objective we concluded that the licenses and q4e- leases entered into by the partnerships were not supported by economic_substance did not conform to industry norms and precluded any realistic opportunity for profit see id pincite we sustained respondent's disallowance of the claimed losses and interest deductions relating to the taxpayers’ investments in the partnerships and we imposed an increased interest rate under sec_6621 petitioners herein stipulate that the factual findings made in the krause test case opinion with regard to the partnerships involved therein also apply to the activities of the garfield and cardinal limited_partnerships we treat this stipulation as an admission that the activities of the garfield and cardinal limited_partnerships were not conducted at arm’s length that they were not legitimate transactions with economic_substance and that they lacked a profit objective discussion as we explained in vanderschraaf v commissioner tcmemo_1997_306 affd without published opinion 211_f3d_1276 9th cir it is well established that the issue under sec_183 as to whether a partnership investment has associated with it economic_substance and a profit objective is determined at the partnership level see 990_f2d_893 6th cir affg donahue v commissioner tcmemo_1991_181 830_f2d_499 3d cir - - affg tcmemo_1986_156 krause v commissioner supra pincite and cases cited therein 86_tc_1326 motion to vacate denied at tcmemo_1995_ affd 113_f3d_670 7th cir 78_tc_471 affd 722_f2d_695 llth cir 76_tc_759 ndollar_figure in analyzing economic_substance and the profit objective test courts focus on actions of the partners who manage affairs of the partnerships and upon the underlying activities of the partnerships see 204_f3d_1214 9th cir 166_f3d_825 6th cir drobny v commissioner t c pincite citing brannen v commissioner t c pincite 80_tc_972 affd without published opinion 742_f2d_1441 2d cir affd sub nom 731_f2d_230 4th cir affd without published opinions sub nom hook v commissioner kratsa v commissioner leffel v commissioner rosenblatt v commissioner zemel v commissioner 734_f2d_5 3d cir under any other approach different results would accrue to partners in the same partnerships even though the partners themselves may have had no control_over activities of the partnerships see 781_f2d_724 9th cir affg lahr v commissioner tcmemo_1984_472 resnik v commissioner -- - t c affd per curiam 555_f2d_634 7th cir for these reasons in analyzing the economic_substance and the profit objective of limited_partnership investments in particular individual actions of limited partners are not the focus of the analysis an analysis of the economic_substance and the profit objective element at the partnership level under sec_183 is consistent with and follows the general_rule of federal partnership_taxation that the treatment of partnership income loss deduction or credit items is to be determined at the partnership level see sec_702 55_tc_429 citing 393_f2d_573 9th cir affg t c memo sec_1_702-1 income_tax regs sec_761 defines a partnership for federal_income_tax purposes essentially as a group joint_venture or other unincorporated organization through which any business financial operation or venture is carried on see also sec_7701 a and sec_1_761-1 income_tax regs under which the term partnership is defined more broadly than the common-law meaning of partnership we discern no reason to deviate from the above partnership- level approach merely because petitioners herein have conceded the originally claimed partnership tax benefits and are now - seeking a deduction only for their out-of-pocket cash invested in the partnerships the garfield and cardinal limited_partnerships did not constitute mere passive coowners of property these limited_partnerships entered into transactions formed joint ventures operated gas wells and engaged in various other activities they carried on a financial operation or venture they are to be treated as partnerships under sec_761 even though the underlying activities of the partnerships lacked a profit objective under sec_183 the garfield and cardinal limited_partnerships each had the formal indicia of partnership status and conducted themselves generally as partnerships they are to be treated as partnerships the issue herein under sec_183 as to profit objective is to be analyzed at the partnership level the parties’ stipulation that activities and transactions of the garfield and cardinal limited_partnerships were not entered into with a profit objective does not affect the status of the partnerships as partnerships for federal_income_tax purposes section c increased interest with regard to increased interest under sec_6621 among other arguments petitioners contend that the temporary regulations under sec_6621 that extended increased interest to transactions lacking a profit objective are invalid and that - - imposition against them of increased interest would violate due process of law ’ see sec_301_6621-2t a-4 temporary proced admin regs fed reg date as we explained in krause v commissioner t c pincite imposition of increased interest under sec_6621 and its predecessor sec_6621 is largely mechanical sec_6621 provides an increased rate of interest for substantial underpayments attributable to tax-motivated transactions substantial underpayments are defined as underpayments in excess of dollar_figure by legislative_regulation see sec_6621 b among the types of transactions that are considered to be tax- motivated transactions within the meaning of sec_6621 are those with respect to which related tax deductions are disallowed under sec_183 for lack of profit objective see 91_tc_524 sec_301_6621-2t a-4 temporary proced admin regs fed reg date we note that in in amending sec_6621 to include sham transactions among the specified types of transactions that trigger increased interest congressional reports expressly commented with approval on the temporary legislative regulations under sec_6621 that included lack of profit_motive or as of date respondent asserts approximately dollar_figure of increased interest under sec_6621 and in excess of dollar_figure million of regular_interest under sec_6621 - objective as a ground for increased interest see h conf rept at ii-796 1986_3_cb_796 statement of the managers the validity of the above regulation and the applicability of sec_6621 increased interest to partnerships essentially the same as the garfield and cardinal partnerships involved herein was analyzed at length and expressly sustained by the court_of_appeals for the ninth circuit in its recent opinion in hill v commissioner f 3d pincite also imposition of increased interest under the above regulation in the krause test case was sustained by the court_of_appeals for the tenth circuit in its opinion in hildebrand v commissioner f 3d pincite in a number of cases the court_of_appeals for the fifth circuit has sustained imposition of increased interest under sec_6621 see 71_f3d_515 5th cir affg in part and revg in part tcmemo_1994_179 66_f3d_729 5th cir affg in part and revg in part tcmemo_1994_228 in 902_f2d_380 5th cir revg tcmemo_1988_408 the court_of_appeals for the fifth circuit on the facts of that particular case reversed our holding that increased interest under sec_6621 applied to the transactions in question in none of these cases did the fifth circuit suggest the invalidity of the regulations under section -- - c or any due process problem in the imposition of increased interest under sec_6621 as part of their due process argument petitioners note that the accrued interest has over the years accumulated against them to an amount far in excess of the income_tax deficiencies respondent counters that the bulk of the accrued interest consists not of increased interest under sec_6621 but of regular_interest under sec_6621 a petitioners’ reliance on 84_tc_985 and in re 137_f3d_337 5th cir is misplaced law v commissioner supra involved an untimely attempt by respondent to raise increased interest in an amended answer in re hardee supra was a bankruptcy opinion in which it was held that sec_6621 increased interest does not constitute a penalty for purposes of the bankruptcy code apart from sec_183 and the determination of profit objective thereunder petitioners contend that for purposes of increased interest under sec_6621 the language of sec_6621 imposes its own separate profit objective test at the partner-investor level we disagree as the court_of_appeals for the tenth circuit stated in hildebrand v commissioner supra pincite sec_6621 imposes an increased rate of interest on ‘any substantial_underpayment attributable to tax_motivated_transactions ’ which include activities not engaged in for profit in the court_of_appeals for the ninth circuit’s opinion in hill v commissioner supra pincite the following explanation is dispositive of petitioners’ arguments we specifically reject krause’s assertion that the tax_court erred in finding barton income fund liable for an increased rate of interest because a transaction which is determined to lack a profit_motive does not equal a tax-motivated transaction under sec_6621 sec_6621 imposes an increased rate of interest on ‘any substantial_underpayment attributable to tax_motivated_transactions ’ which include activities not engaged in for profit quoting in part hildebrand v commissioner f 3d pincite the reasoning in hildebrand is sound the secretary has authority to define certain transactions as tax motivated the secretary has defined transactions lacking a profit_motive under sec_183 as tax motivated the transactions in this case lack a profit_motive under sec_183 petitioners’ activities relating to these transactions are therefore tax motivated a close examination of sec_6621 c demonstrates that the secretary is well within the granted regulatory power to simply equate the violation of one code section with a violation of sec_6621 these and the remaining tax_motivated_transactions set out in sec_6621 a show a legislative pattern established by congress which treats violations of certain code sections as implicit violations of sec_6621 the secretary simply followed this pattern pursuant to the regulatory authority granted in sec_6621 c b by establishing regulations that make a violation of sec_183 a tax_motivated_transaction language in heasley v commissioner supra pincite suggesting that profit objective for purposes of sec_6621 c increased interest be evaluated at the individual investor level is not apropos heasley did not involve a partnership investment in light of the lack of profit objective and the lack of economic_substance associated with the activities and investments of the garfield and cardinal limited_partnerships petitioners are liable for increased interest under sec_6621 other arguments made by petitioners and not addressed specifically herein have been considered and are rejected for the reasons stated respondent's imposition of increased interest under sec_6621 is sustained we shall grant respondent’s motion for partial summary_judgment and deny petitioners’ motion for partial summary_judgment to reflect the foregoing an appropriate order will be issued


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 b01 plr-134185-16 date december legend x ---------------------------------------------- ---------------------------------------------------------------------------------------------- state --------------------- date ---------------------------- date date date date ------------------ ---------------------------- --------------------------------- ------------------------ llc1 ---------------------------------------------- ------------------------------------------------ llc2 --------------------------------------------- ------------------------------------------------- e ----------------------------------------------- --------------------------- plr-134185-16 f ----------------------------------------------- --------------------------- g ----------------------------------------------- ----------------------------- h -------------------------- ----------------------------------------------- a b c ----- -- dear ------------- this responds to the letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts according to the information submitted x was incorporated under the laws of state on date and elected to be an s_corporation for federal tax purposes effective date on date a shares of stock in x were transferred to each llc1 and llc2 partnerships for federal tax purposes the partners of llc1 were e f and g all individuals who are eligible s_corporation shareholders the partners of llc2 were e f and h all individuals who are eligible s_corporation shareholders llc1 and llc2 as partnerships were ineligible shareholders of an s_corporation on date x's attorneys learned that the transfer of stock to llc1 and llc2 terminated x's s election on date llc1 distributed all of its a shares of x stock to e f and g in accordance with their relative interests in llc1 b shares to each e and f and c shares to g also on date llc2 distributed all of its a shares of x stock to e f and h in accordance with their relative interests in llc2 b shares to each e and f and c shares to h x represents that from date onward it filed its tax returns as if it were an s_corporation x represents that the amount of tax paid during this period was the same as if e directly held the b shares held by each llc1 and llc2 f directly held the b shares held by each llc1 and llc2 g directly held the c shares held by llc1 and h directly held the c shares held by llc2 plr-134185-16 x represents that its eligible shareholders have filed all federal_income_tax returns consistent with x's s_corporation_election moreover x represents that the circumstances resulting in the possible termination of x's s_corporation_election were inadvertent and were not motivated by tax_avoidance x and its shareholders have agreed to make such adjustments consistent with the treatment of x as an s_corporation as may be required by the irs law sec_1361 defines an s_corporation as a small_business_corporation for which an election under sec_1362 is in effect sec_1361 defines a small_business_corporation as a domestic_corporation which is not an ineligible_corporation which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in subsection c or an organization described in subsection c who is not an individual c have a nonresident_alien as a shareholder and d have more than class of stock sec_1362 provides that an election under sec_1362 shall be terminated whenever at any time on or after the 1st day of the taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation sec_1362 provides in part that if an election under sec_1362 by any corporation was terminated under sec_1362 the secretary determines that the circumstances resulting in the termination were inadvertent no later than a reasonable period of time after the discovery of the circumstances resulting in the termination steps were taken so that the corporation for which the termination occurred is a small_business_corporation and the corporation for which the termination occurred and each person who was a shareholder in such corporation at any time during the period of inadvertent termination of the s election agrees to makes such adjustments consistent with the treatment of the corporation as an s_corporation as may be required by the secretary with respect to such period then notwithstanding the circumstances resulting in the termination the corporation is treated as an s_corporation during the period specified by the secretary conclusion based solely on the information submitted and the representations made we conclude that x's s election terminated on date when the x stock was transferred to llc1 and llc2 we further conclude that the termination was inadvertent within the meaning of sec_1362 accordingly under sec_1362 x will be treated as continuing to be plr-134185-16 an s_corporation on and after date provided that x's s_corporation_election was valid and not otherwise terminated under sec_1362 except for the specific ruling above we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the code specifically no opinion is expressed concerning whether x was otherwise eligible to be an s_corporation this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office we are sending a copy of this letter to x's authorized representative sincerely david r haglund david r haglund chief branch office of associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court michael j st claire petitioner v commissioner of internal revenue respondent docket no filed date andre alexander gibson for petitioner brandon s cline for respondent memorandum opinion guy special_trial_judge this matter is before the court on petitioner’s motion for litigation and administrative costs filed pursuant to sec_7430 and rules through respondent filed a response opposing petitioner’ sec_1 unless otherwise specified section references are to the internal revenue continued motion and petitioner filed a reply and a first amended reply to respondent’s response neither party requested an evidentiary hearing and the court concludes that such a hearing is not necessary to dispose_of petitioner’s motion see rule a we therefore decide the matter before us on the basis of the record that has been developed to date background petitioner was previously married to ethlyn st claire and they have three children together the marriage ended in date and at that time ms st claire had physical custody of the children because no appearance was entered by or on behalf of ms st claire in the divorce proceedings the court that entered the judgment dissolving the marriage reserved ruling on various issues including child custody child_support and visitation petitioner timely requested an extension of time to file his federal_income_tax return for on date petitioner’s counsel andre alexander gibson sent a letter to the internal_revenue_service irs stating our client petitioner electronically filed hi sec_2012 tax_return and sic or about date sic however the return was rejected on date based on the information and reason for the continued code as amended and rule references are to the tax_court rules_of_practice and procedure rejection it appears that another filer has claimed our clients children dependents for the following reason our client objects to any person being eligible to claim his children as dependents the custodial_parent has represented to our client that she did not file a return and that she has not given authorization to anyone to claim the children the custodial_parent did not file a tax_return and the custodial_parent has agreed and authorized our client to claim the children we have also attached hereto our client’ sec_2012 income_tax return with forms for each of his children which were executed by his former spouse - the custodial_parent our client also attaches the birth certificates of his children to establish that he is in fact the parent we have attached hereto form_2848 so that our office will receive communications on the issues related to this filing if you have any question on this matter please feel free to contact me at your convenience petitioner’ sec_2012 tax_return was filed on or about date as is relevant here petitioner claimed three dependency_exemption deductions reporting that two of the children were under the age of and a child_tax_credit of dollar_figure on date the irs sent a letter to petitioner informing him that his tax_return was under examination and requesting that he provide additional information to substantiate the dependency_exemptions and the child_tax_credit that he had claimed on date mr gibson sent a letter to the irs and attached copies of three forms release revocation of release of claim to exemption for child by custodial_parent dated date while each form included a signature under part ii release for future years it showed as the subject year the signatures on the three forms appear fairly uniform with some minor variations mr gibson also forwarded financial records showing that petitioner had transferred funds to ms st claire and his children in on date the irs sent a form 886-a explanation of items to mr gibson which stated that although petitioner had demonstrated that he was the biological father of the children he would need to submit to the irs a complete copy of your divorce decree separate_maintenance agreement any written_agreement showing which parent has custody and or is entitled to claim the dependent s the parties do not agree whether forms were attached to petitioner’s original tax_return in the light of our disposition of petitioner’s motion we need not resolve this factual dispute forms include three parts and separate signature lines for each part part i is reserved for a release of claim to exemption for the current_year part ii is reserved for a release of claim to exemption for future years and part iii is reserved for a revocation of release of claim to exemption for future years on date mr gibson sent a letter to the irs and attached several documents related to petitioner’s divorce proceedings mr gibson explained as previously mentioned that issues concerning child custody visitation and support had never been resolved he went on to assert that the irs should simply acknowledge that ms st claire had executed the forms and thereby released her right to claim the children as her dependents for on date the irs sent a letter and a form 886-a to mr gibson stating that petitioner was not entitled to the dependency_exemption deductions and the child_tax_credit in dispute because the form_8332 provided appears to be altered the letter invited petitioner to provide any additional documents that he wanted the irs to consider by date and stated that he was entitled to file an administrative appeal in a letter to the irs dated date mr gibson expressed his disagreement with the suggestion that the forms had been altered and questioned how the irs had made that determination without a sample of ms st claire’s signature he further asserted that because neither parent had been awarded legal custody of the children petitioner should be entitled to claim the children as his dependents without further inquiry arguing that petitioner had provided all of the information necessary to establish his entitlement to the dependency_exemption deductions and the child_tax_credit mr gibson attached form request for appeals review to his letter and requested that the matter be referred to the irs office of appeals appeals_office so that he could present the original forms for review on date the irs sent a letter and form 886-a to mr gibson stating that the irs would not allow the dependency_exemption deductions and the child_tax_credit in dispute on the grounds that the forms were incorrectly filled out the forms did not appear to have been submitted with petitioner’ sec_2012 tax_return petitioner did not provide any documentation that included ms st claire’s signature ms st claire was the custodial_parent and in the absence of valid forms petitioner did not provide documentation to satisfy the requirements set forth in irs publication your federal_income_tax the irs also stated that mr gibson’s request for review by the appeals_office was denied because the audit was being conducted as a correspondence examination in a letter to the irs dated date mr gibson again expressed his disagreement with the decision to disallow the disputed items and requested that the irs issue a statutory_notice_of_deficiency on date the irs issued to petitioner a statutory_notice_of_deficiency disallowing the dependency_exemption deductions and the child_tax_credit on date petitioner filed a timely petition for redetermination with the court in the petition petitioner referred to ms st claire as the alleged custodial_parent and stated that his eldest child now an adult was living with him and would testify that the forms were signed by ms st claire respondent’s counsel subsequently identified a possible address for ms st claire and on date mailed a letter to her requesting that she contact him regarding the authenticity of the forms ms st claire called shortly thereafter respondent’s counsel sent copies of the forms to her and she promptly verified that she had signed them on date respondent filed an answer to the petition and conceded all adjustments in the notice_of_deficiency in subsequent communications mr gibson requested that the irs reimburse petitioner for attorney’s fees and other costs that he incurred from date through date respondent offered to pay dollar_figure to petitioner to account for administrative costs in the form of attorney’s fees that petitioner had incurred from date when the irs denied mr gibson’s request for appeals at the time the petition was filed petitioner resided in florida contrary to the flush language of rule b the petition includes allegations in support of petitioner’s claim for litigation and administrative costs office review through date when mr gibson reviewed the notice_of_deficiency on date petitioner filed the motion pending before the court at that time petitioner asserted that he should be awarded attorney’s fees of dollar_figure and costs of dollar_figure incurred from date through date on date respondent filed a response in opposition to petitioner’s motion maintaining that any award should be limited to dollar_figure on date the court issued an order directing petitioner to file a reply to respondent’s response and to attach thereto an affidavit or declaration as described in rule d related to a dispute as to reasonable attorney’s fees simultaneously with the issuance of the court’s order on may petitioner filed an unsolicited reply to respondent’s response notably petitioner’s reply did not address respondent’s objection to an award of attorney’s fees computed at an hourly rate in excess of the statutory rate on date petitioner filed a first amended reply including a declaration signed by paul m cowan esq expressing his opinion as to the reasonableness of the hourly fees that mr gibson had charged petitioner in his as discussed in detail below petitioner maintains that his litigation and administrative costs comprising attorney’s fees should be computed at an hourly rate of dollar_figure the hourly rate he had agreed to pay mr gibson whereas respondent maintains that petitioner’s attorney’s fees should be computed at the lower statutory rate prescribed in sec_7430 amended reply petitioner conceded that he is not entitled to an award for attorney’s fees of dollar_figure incurred on date but included additional attorney’s fees of dollar_figure attributable to the preparation of his reply and first amended reply discussion under sec_7430 a judgment for reasonable litigation or administrative costs incurred in connection with a court or administrative_proceeding may be awarded if a taxpayer is the prevailing_party has exhausted his administrative remedies with the irs with respect to litigation costs only and did not unreasonably protract the proceedings sec_7430 b polz v commissioner tcmemo_2011_117 nguyen v commissioner tcmemo_2003_313 a taxpayer the moving party must satisfy each of the respective requirements to be entitled to an award of litigation or administrative costs under sec_7430 rule e see 88_tc_492 marten v commissioner tcmemo_2000_186 reasonable litigation the court provides this procedural history to emphasize that rule a contemplates that the court in its discretion may direct the moving party to file a reply to the commissioner’s response to a motion for reasonable litigation or administrative costs mr gibson’s failure to recognize this procedural rule appears to have needlessly added to the legal costs to his client and administrative costs include in relevant part court costs and fees paid_or_incurred for the services of an attorney sec_7430 and to be a prevailing_party the taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented and satisfy the applicable net_worth requirement sec_7430 the taxpayer will nevertheless fail to qualify as the prevailing_party if the commissioner’s position in the proceeding is shown to have been substantially justified sec_7430 the parties agree that petitioner substantially prevailed with respect to the amount in controversy satisfies the applicable net_worth requirement exhausted the administrative remedies available to him and did not unreasonably protract the proceedings in addition respondent concedes that petitioner is entitled to an award of dollar_figure for administrative costs incurred after date the date the irs denied petitioner’s request for appeals_office review through date the date mr gibson reviewed the notice_of_deficiency compensating petitioner for attorney’s fees for hours of work at the statutory rate of dollar_figure per hour otherwise respondent asserts that his position in the administrative and judicial proceedings was substantially justified to establish that his position was substantially justified the commissioner must show that his position was justified to a degree that could satisfy a reasonable person or that his position has a reasonable basis both in law and fact 106_tc_76 quoting 487_us_552 interpreting a similar legal standard in the equal_access_to_justice_act u s c sec a position has a reasonable basis in fact if there is relevant evidence that a reasonable mind might accept as adequate to support a conclusion 115_tc_366 citing pierce u s pincite in determining whether the position of the commissioner was substantially justified we must consider the basis for the legal position and the manner in which the position was maintained 86_tc_962 a significant factor to be considered is the information available to the commissioner at the time he established his position in the case and whether relevant information was presented to him sec_301_7430-5 proced admin regs the commissioner is entitled to maintain his position for purposes of determining whether it was substantially justified until adequate substantiation is received from the taxpayer see baldwin v commissioner tcmemo_2015_66 further where the resolution of adjustments hinges on factual determinations the commissioner is not required to concede the adjustments until he has received and has had reasonable_time to review sufficient substantiation for the matter in question see huynh v commissioner tcmemo_2002_110 the commissioner’s decision to concede a case is not conclusive that the taxpayer is entitled to an award under sec_7430 but a concession is a factor that may be considered see 991_f2d_359 7th cir 108_tc_430 where a taxpayer seeks both litigation and administrative costs we apply the substantially justified standard as of the two separate dates on which the commissioner took a position first in the administrative_proceeding and later in the court_proceeding see maggie mgmt co v commissioner t c pincite- for purposes of the administrative_proceeding the commissioner’s position is that taken on the earlier of the date of the receipt by the taxpayer of the notice of decision of the appeals_office or the date of the notice_of_deficiency sec_7430 generally the position_of_the_united_states in the judicial proceeding is established in the answer to the petition see eg 861_f2d_131 5th cir aff’g 89_tc_79 i administrative costs the irs took the position in the notice_of_deficiency and throughout the administrative proceedings that petitioner had not properly substantiated the dependency_exemptions and the child_tax_credit respondent maintains that the government’s position was substantially justified until date when petitioner was notified that his request for appeals_office review was denied petitioner counters that the government’s position was not substantially justified because he provided adequate substantiation from the outset of the examination by presenting the irs with copies of the forms in question as an initial matter we note that sec_7430 limits the term reasonable_administrative_costs to costs paid_or_incurred on or after the earliest of the date on which the taxpayer receives a notice of decision from the appeals_office the date of the notice_of_deficiency or the date on which the irs mails a first letter of proposed deficiency giving the taxpayer a right to protest the proposed deficiency to the appeals_office although petitioner apparently contends that he is entitled to administrative costs that he incurred as early as date we conclude consistent with the provisions of sec_7430 that he is not entitled to an award of any administrative costs incurred before date ie the date that the irs first sent him a letter that offered the opportunity for appeals_office review as a backdrop to our evaluation of whether the government’s position was substantially justified we will first outline the statutory provisions and legal precedents governing deductions for dependency_exemptions and the child_tax_credit sec_151 provides that a taxpayer generally is allowed a deduction for the applicable exemption_amount for each individual who is a dependent as defined in sec_152 of the taxpayer for the taxable_year sec_152 generally defines a dependent to include a qualifying_child or a qualifying_relative sec_152 provides special rules governing the assignment of dependency_exemptions in the case of parents who are divorced or legally_separated and who provide over one-half of their child’s support during a calendar_year in which the child is in the custody of one or both parents for more than one- half of the calendar_year in this scenario a noncustodial_parent may become a custodial_parent is defined for purposes of sec_152 as the parent having custody for the greater portion of the calendar_year and a noncustodial_parent means the parent who is not the custodial_parent sec_152 and b the record reflects that ms st claire was the children’s custodial_parent in continued entitled to a dependency_exemption deduction for minor children if two conditions are met the custodial_parent signs a written declaration releasing his or her claim to the exemption and the noncustodial_parent attaches such written declaration to his or her tax_return for the taxable_year sec_152 and b the required written declaration can be set forth on a completed form_8332 or a written_statement conforming to the substance of the form see 139_tc_468 aff’d 745_f3d_890 8th cir sec_24 allows a tax_credit for each qualifying_child of a taxpayer for whom the taxpayer is allowed a deduction under sec_151 sec_24 defines a qualifying_child as a qualifying_child as defined in sec_152 who has not attained the age of deductions and tax_credits are a matter of legislative grace and the taxpayer generally bears the burden of proving entitlement to any deduction or credit claimed rule a 503_us_79 292_us_435 it is well settled that deductions for dependency_exemptions and the child_tax_credit are subject_to this general_rule see 114_tc_184 continued aff’d sub nom 293_f3d_1208 10th cir gassoway v commissioner tcmemo_2015_203 having claimed dependency_exemption deductions and a child_tax_credit petitioner had the burden to present to the irs adequate substantiation during the examination although petitioner provided the irs with copies of forms the irs was not obliged to accept those documents at face value rather the irs had the right to develop and was justified in developing a record regarding petitioner’s relationship with ms st claire and the children and ultimately to challenge the authenticity of the forms this is particularly so given that some individual unidentified in the record had attempted to claim the children as dependents earlier in the tax_return filing season the signatures on the forms although substantially_similar were not identical and the forms were completed in a way that left some ambiguity as to their intended application considering all the circumstances we agree with respondent that until date the government’s position was reasonably based in fact and law and therefore was substantially justified and represented a good-faith effort to enforce the internal revenue laws see huynh v commissioner tcmemo_2002_110 sec_1_152-4 income_tax regs provides in pertinent part a written declaration that specifies all future years is treated as specifying the first taxable_year after the taxable_year of execution and all subsequent taxable years respondent reasonably concedes that at the conclusion of the examination process the irs was not justified in denying petitioner the opportunity for appeals_office review we view respondent’s concession as an acknowledgment that in the context of a correspondence examination petitioner had by then provided all the information reasonably available to him to substantiate the items in dispute it follows that petitioner is entitled to an award for administrative costs equal to reasonable attorney’s fees for hours of work ii litigation costs respondent asserts that petitioner is not entitled to an award of litigation costs because all substantive adjustments were conceded in the answer to the petition petitioner maintains that inasmuch as respondent conceded that it was unreasonable to deny him the opportunity for appeals_office review and the opportunity to resolve the matter administratively he should be entitled to an award that includes the cost of preparing and filing the petition for redetermination as previously discussed congress has mandated that claims for litigation and administrative costs be reviewed in the light of the government’s position at distinct times a process that allows the commissioner to change his position see maggie mgmt co v commissioner t c pincite in evaluating a taxpayer’s claim for litigation costs we evaluate the reasonableness of the government’s position as set forth in its answer to the petition see sher v commissioner f 2d pincite because respondent had verified the authenticity of the forms and conceded the disputed adjustments in his answer to the petition we conclude that the government’s litigation position was substantially justified and therefore petitioner is not entitled to an award of litigation costs related to the preparation and filing of the petition iii litigation costs attributable to petitioner’s motion for litigation and administrative costs respondent contends that petitioner is not entitled to an award for the costs he incurred in filing and prosecuting his motion for litigation and administrative costs because respondent made a reasonable offer to settle the matter before the motion was filed petitioner maintains that he is entitled to the full amount of the legal costs that he incurred in prosecuting his motion for costs the record reflects that mr gibson spent hours preparing and litigating the motion for costs reasonable_litigation_costs generally encompass the costs incurred to litigate a claim for litigation and administrative costs see huffman v commissioner 978_f2d_1139 9th cir aff’g in part rev’g in part tcmemo_1991_144 891_f2d_1167 5th cir rev’g 91_tc_673 dixon v commissioner tcmemo_2006_97 han v commissioner tcmemo_1993_386 we evaluate the costs that petitioner incurred to litigate his motion for costs however against his level of success in doing so see dixon v commissioner tcmemo_2006_97 discussing the supreme court’s treatment of the so-called limited success factor in 496_us_154 petitioner failed to persuade the court that he is entitled to reasonable_administrative_costs beyond the costs that respondent conceded or as discussed more fully below that he is entitled to attorney’s fees in excess of the statutory rate on this record we will award petitioner litigation costs to cover four hours or approximately one-quarter of the time that mr gibson devoted to preparing and prosecuting petitioner’s motion for costs iv reasonableness of litigation and administrative costs in the light of respondent’s concession that petitioner is entitled to administrative costs equal to reasonable attorney’s fees for hours of work in and having concluded that petitioner is entitled to litigation costs to cover reasonable attorney’s fees for four hours of work in we turn to the question of the proper hourly rate for computing those fees as mentioned above while petitioner maintains that it is reasonable to compensate mr gibson at a rate of dollar_figure per hour respondent asserts that attorney’s fees in this case should be capped at the lower statutory rate sec_7430 and limits the prevailing_party to an award of reasonable litigation and administrative costs in this regard sec_7430 and its flush language generally limits the hourly rate for attorney’s fees to dollar_figure per hour plus an adjustment for cost of living unless the court determines that a special factor such as the limited availability of qualified attorneys for the proceeding the difficulty of the issues presented or the local availability of tax expertise justifies a higher rate for purposes of this case the statutory rate for attorney’s fees incurred in and was dollar_figure per hour see revproc_2015_53 2015_44_irb_615 revproc_2014_61 2014_47_irb_860 petitioner bears the burden of proving that the amount of costs he claimed is reasonable see rule e mr gibson submitted to the court a declaration stating that his dollar_figure hourly rate is reasonable based on the prevailing community rate and his expertise in tax matters mr gibson stated that petitioner could not find an attorney to represent him at less than dollar_figure per hour and that it made practical sense for him to provide legal representation given that he had prepared petitioner’s tax_return for and was already familiar with the underlying facts of the case petitioner also relies on a declaration executed by mr cowan an attorney specializing in federal estate_tax matters who opined that mr gibson’s hourly rate was reasonable general expertise in tax law in itself is not a special factor warranting a fee award in excess of the statutory rate under sec_7430 see huffman v commissioner f 2d pincite 100_tc_457 aff’d in part rev’d in part and remanded on another issue 43_f3d_172 5th cir moreover there was nothing particularly unique or unusual about these proceedings involving a simple question of substantiation that presented extraordinary difficulty or required specialized expertise see nguyen v commissioner tcmemo_2001_41 considering all the facts and circumstances we conclude that petitioner has failed to establish any special factor that warrants attorney’s fees in excess of the statutory rate provided in sec_7430 consistent with the foregoing we conclude that petitioner is entitled to reasonable_administrative_costs of dollar_figure and reasonable_litigation_costs of dollar_figure for a total award of dollar_figure to reflect the foregoing an appropriate order and decision will be entered