Opinion ID: 514010
Heading Depth: 1
Heading Rank: 3

Heading: Actions of the IRS after District Counsel became involved.

Text: 23 Although the Tax Court was correct in holding that it could not consider actions of the IRS before the District Counsel became involved, there remains the issue of whether the IRS's actions following the time the Shers filed their petition were substantially justified. 24 The Tax Court held that the Shers failed to meet the prevailing party requirement under the Code because the IRS position after the Shers filed their petition was substantially justified. We agree with the Tax Court's finding. In reaching this conclusion, we reviewed the actions of the IRS District Counsel in answering the petition and the actions of the IRS Appeals Officer who handled the Shers' case after the District Counsel filed the answer. 25 The District Counsel received the petition and reviewed it along with the A.G. Edwards' letter, Mr. Sher's November letter, the relevant portions of the Shers' 1982 tax return, and the underreporter transcript. None of this information indicated that the original A.G. Edwards' statement was wrong as to the amount of income or the type of income--interest or dividend--paid to the Shers. The District Counsel had no reason to believe the information upon which she was relying was erroneous. Furthermore, even though the Shers had the burden to prove the IRS assessment was wrong, in their petition, the Shers failed to deny the IRS claim that A.G. Edwards paid the Shers $1325 in dividend income. See Rules of Practice and Procedure of the United States Tax Court, Rule 142(a). 26 The District Counsel's answer acknowledged that the Shers received $775 in interest income from A.G. Edwards, but went on to state that the IRS was asserting a deficiency based upon the $1325 in dividend income. This answer was substantially justified given the facts and claims pleaded by the Shers. Although we conclude that the position of the IRS in answering the Shers' petition was substantially justified, we recognize that under different facts, the answer filed by the IRS would be inadequate without further investigation. Reliance on IRS files alone would not have been sufficient if the petition and the documents in the file demonstrated the need for further investigation. 27 Similarly, our review indicates that the Appeals Officer's actions were substantially justified. Shortly after the District Counsel filed the answer, an IRS Appeals Officer contacted the Shers' counsel to obtain a copy of the Shers' amended 1982 return. The Appeals Officer later scheduled a conference with the Shers' attorney. At this conference, the Appeals Officer and the Shers' counsel determined that $775 of the alleged $1325 deficiency was interest income the Shers properly reported, but that A.G. Edwards erroneously listed as dividend income. At this time, there still remained a discrepancy of $550. The Appeals Officer gave the Shers' attorney copies of the documentation A.G. Edwards submitted to the IRS stating the income paid to the Shers. Upon reviewing this material, the Shers' attorney concluded that the $550 discrepancy arose because A.G. Edwards mistakenly attributed income from Mr. Sher's pension fund to the Shers themselves. The attorney discussed this error with the Appeals Officer who promptly stated that the issue of the $1325 deficiency would be decided in the Shers' favor. 28 The Appeals Officer acted reasonably in handling the Shers' case. She reviewed the information, conferred with the Shers' attorney, and settled the case. The position of the IRS was substantially justified. See Harrison v. Commissioner of Internal Revenue, 854 F.2d 263, 265 (7th Cir.1988) (The IRS took the position of conceding the case as soon as it received and verified information demonstrating that that was the proper course). 29 For the foregoing reasons, we AFFIRM the Tax Court's decision denying the Shers attorney's fees.