Opinion ID: 510152
Heading Depth: 2
Heading Rank: 2

Heading: Award of Costs under Section 7430

Text: 12 Section 7430 of the Internal Revenue Code authorizes an award of litigation costs to a party who substantially prevails in civil tax litigation in the federal courts. 2 In order to be eligible for an award, the party must establish that the position of the United States in the civil proceeding was unreasonable. The Tax Court found that in determining the reasonableness of the government's position in this case, the government's in-court litigating position was dispositive. 3 13 We agree with the Tax Court that the government's conduct of the litigation and the position it took was reasonable. The taxpayers have the burden of proving unreasonableness, a burden which they have failed to carry. Tax Ct.R. 232(e). 14 The Harrisons filed their petition in June, 1984, and the IRS filed its answer denying the Harrisons' allegations in July. On December 17, 1984, after being informed that the partnership's audit had resulted in a no-change letter, the IRS district counsel informed the Harrisons' attorney that the IRS would concede the case subject to verification. The IRS formally conceded its case within a month. The IRS took the position of conceding the case as soon as it received and verified information demonstrating that that was the proper course. This was a reasonable position. As the Eleventh Circuit reasoned in Ashburn v. United States, 740 F.2d 843 (11th Cir.1984), [t]he government should not be compelled to decide immediately upon service of the complaint whether to concede or pursue the case. Id. at 850 (award of fees under the Equal Access to Justice Act); see also Ewing and Thomas, P.A. v. Heye, 803 F.2d 613 (11th Cir.1986) (government's litigating position reasonable when it settled case after filing suit); White v. United States, 740 F.2d 836, 842 (11th Cir.1984) (government's concession of issue three months after issue raised was reasonable); Baker v. Commissioner, 83 T.C. 822, 828 (1984), vacated on other grounds, 787 F.2d 637, 644 (D.C.Cir.1986) (concession of a case does not automatically mean that the conceding party's position in the civil proceeding was unreasonable). 15 The taxpayers asserted below that the IRS acted unreasonably in failing to request information from the taxpayers between the time they filed their petition and the time the IRS conceded the case. As the Tax Court found, however, it was the Harrisons' responsibility to come forward with evidence of the IRS's error. Tax Ct.R. 142(a). They failed to do so, and seem to have abandoned this claim on appeal. The Harrisons also contended that the IRS took an unreasonable position by insisting upon verification of the status of the partnership audit before conceding the case. The Tax Court found that this argument was meritless, and we agree. The Harrisons have failed to pursue this claim on appeal. As far as the IRS's litigating position is concerned, the Harrisons have failed to demonstrate that the IRS was less than completely reasonable in its actions. 16 The Harrisons on appeal seem to focus exclusively on the government's position before the Harrisons filed their petition. The Tax Court declined to rule on these prepetition arguments because of its finding that section 7430 dealt only with the government's litigation position. We discuss these arguments only briefly. 17 The Harrisons contend that the IRS improperly issued a notice of deficiency arbitrarily, disallowing the Harrisons' entire loss for the sole purpose of protecting itself from the expiration of the statute of limitations. Even if this were shown to be true, it would not be an unreasonable action for the IRS to take. 18 In Chaum v. Commissioner, 69 T.C. 156 (1977), the IRS issued a notice of deficiency to toll the running of the statute of limitations after the taxpayers refused to consent to an extension. The Tax Court rejected the taxpayers' arguments that the IRS's action was arbitrary and that the IRS should have the burden of proving otherwise. Id. at 160-64. In Wasie v. Commissioner, 86 T.C. 962 (1986), the Tax Court found that the IRS had acted reasonably in issuing a notice of deficiency where the taxpayer had refused to extend the statute of limitations. Id. at 969. In Roberts v. Commissioner, 62 T.C. 834 (1974), the taxpayer argued that the IRS cannot find a deficiency merely because a taxpayer does not furnish to it proof of the taxpayer's claim. The taxpayer contended that the IRS may assess deficiencies only when it has specific information that a deduction is not permitted. The Tax Court found no merit in this position, noting that [t]axpayers have no inherent right to deductions; they are matters of legislative grace. Id. at 836. 19 Although the Harrisons apparently did not refuse to extend the statute of limitations, the Tax Court found that the IRS did not receive their consent form. Therefore, the government acted reasonably in attempting to preserve its right to conduct a full investigation before making a final determination on whether it should allow the Harrisons' deduction. 20 The Harrisons suggest that Mearkle v. Commissioner, 838 F.2d 880 (6th Cir.1988), supports their position that the IRS cannot arbitrarily issue a notice of deficiency and determine the facts later. We disagree. In Mearkle, the Commissioner relied on a proposed regulation in disallowing the taxpayers' deduction for a home office. The underlying statute limited home office deductions to gross income derived from the business conducted out of the home office. The proposed regulation purported to define gross income as a net figure derived after subtracting some business expenses, a definition that eliminated the deduction for the taxpayers. The taxpayers filed a petition for redetermination of the deficiency. While their petition was pending, the Tax Court released an opinion in another case finding that the proposed regulation was inconsistent with the statute. The Sixth Circuit found that the Commissioner's continued reliance on a proposed regulation which he knew, or should have known, was patently invalid was not reasonable. Id. at 883. 21 The circumstances here are not comparable. Rather than forcing a taxpayer to choose between acceding to a regulation that had been held to be invalid or going to the expense of contesting it, the Commissioner here simply asked for more time in order to investigate the basis of a claimed deduction. Because the IRS did not receive the Harrisons' consent to an extension of time, its action in finding a deficiency in order to toll the statute of limitations was reasonable. Mearkle does not suggest otherwise. 22 We find that even if the Tax Court had considered the IRS's prepetition position in determining whether the Harrisons were entitled to recover litigation costs under section 7430, the result would have been the same. The IRS's position throughout the parties' dealings was reasonable.