Court Opinion

ID: 4558458
Source: CourtListenerOpinion
Date Created: 2020-08-25 14:00:43.29457+00
Date Added: 2024-06-11T08:45:59.585828
License: Public Domain

Case: 20-60054        Document: 00515538451       Page: 1     Date Filed: 08/24/2020

            United States Court of Appeals
                 for the Fifth Circuit
                                                                       United States Court of Appeals
                                                                                Fifth Circuit

                                                                              FILED
                                                                        August 24, 2020
                                  No. 20-60054                           Lyle W. Cayce
                                                                              Clerk

 Paul Edwin Johnson; Susan H. Johnson,

                                                       Petitioners—Appellants,

                                      versus

 Commissioner of Internal Revenue,

                                                          Respondent—Appellee.

                          Appeal from a Decision of the
                            United States Tax Court
                                  No. 14429-18

 Before Smith, Willett, and Duncan, Circuit Judges.
 Jerry E. Smith, Circuit Judge:
           Paul and Susan Johnson petitioned the Tax Court for review of an IRS
 notice of deficiency assessing them about $51,000 in taxes, penalties, and
 interest. After the dispute was resolved in their favor, the Johnsons moved
 for costs under 26 U.S.C. § 7430. The Tax Court denied the motion, and we
 affirm.

                                        I.
           On their 2015 tax return, the Johnsons claimed $186,981 of income—
 of which $41,827 was taxable—from individual retirement accounts
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                                  No. 20-60054

 (“IRAs”), pensions, and annuities. Included in that $186,981 figure were
 $141,793 in non-taxable IRA distributions and $45,188 of pension and annu-
 ity income. The $141,793 distribution related to the Johnsons’ rolling over
 an IRA from one institution to another. Ultimately, $141,233 was rolled over
 after accounting for $560 in account-closing fees.
        The third-party documentation reported to the IRS told a different
 story. Specifically, the IRS received notice of three income streams: (1) Riv-
 ersource Life Insurance reported that the Johnsons received a $141,793 dis-
 tribution, all of which was taxable; (2) Northern Trust recorded that it paid
 the Johnsons $45,187, of which $44,826 was taxable; and (3) Equity Trust
 Company detailed that it made a $20,000 taxable distribution. Equity Trust
 also documented a non-taxable rollover contribution of $141,233.
        The IRS mailed the Johnsons a letter, informing them that their 2015
 return did not reconcile with the third-party information the IRS had re-
 ceived. Specifically, the letter referenced (1) the $141,793 distribution from
 Riversource, (2) the $20,000 payment from Equity Trust, and (3) a $106
 divided from Proshares Ultra Bloomberg Crude Oil. The letter explained
 that “[y]our trustee did not verify the amount claimed on your Form 1040 as
 a rollover to your [IRA]. If you made a partial rollover of the income in ques-
 tion, please provide a signed explanation in your response to this notice.”
        A veritable “Battle of the Letters” followed. The Johnsons re-
 sponded by asking for copies of the IRS’s documentation and stating that
 they already claimed the $141,793 rollover on their return. The IRS answered
 by asking the Johnsons—if they were claiming the $141,793 as a rollover—to
 send a “Form 5498 with the amount in box 2 or similar documentation.”
 The Johnsons never provided the requested support.
        Despite a series of twenty-four letters and phone calls, the IRS and the
 Johnsons were unable to reconcile their differences. As a result, the IRS pro-

                                       2
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                                        No. 20-60054

 vided the Johnsons with a summary of proposed changes to their 2015 return,
 which suggested an additional payment of $51,333 to cover the applicable
 taxes, penalties, and interest. 1 The Johnsons maintained that the IRS was
 improperly double counting a single IRA rollover and that they could not pro-
 vide documentation to support a second distribution that had never occurred.
          At an impasse, the IRS mailed the Johnsons a notice of deficiency,
 detailing the IRS’s determination that they owed the additional amount
 reflected in the summary of proposed changes. The Johnsons filed a petition
 in the Tax Court, explaining that they had closed out several accounts in an
 IRA before rolling them over to a different IRA. They clarified that the
 amount rolled over was about $500 less than the amount initially distributed
 to account for “fees related to closing out the accounts.” They posited that
 the $500 difference might explain the IRS’s mistaken assumption that they
 received two separate distributions of about $141,000.
          The Commissioner responded by (1) admitting to sending the notice
 of deficiency and (2) denying, “for lack of sufficient knowledge or informa-
 tion,” the Johnsons’ contention that the deficiency determination was incor-
 rect. Ultimately, after its Office of Appeals reviewed the case, the IRS and
 the Johnsons agreed to a stipulated decision that the Johnsons owed no addi-
 tional taxes or penalties for 2015. Shortly thereafter, the Tax Court rechar-
 acterized the stipulated decision as a “Stipulation of Settled Issues” and
 ordered the Johnsons to move for any fees and litigation costs within three
 weeks.
          Two weeks later, the Johnsons moved for thousands of dollars in
 costs. Of the amount sought, only $71 represented out-of-pocket expenses

          1
          The IRS also sent the Johnsons a publication detailing their rights to challenge the
 IRS’s determinations.

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                                      No. 20-60054

 (namely filing fees and postage). The Johnsons supplemented their motion,
 asking for almost twice as much as before. But, again, only $71 related to out-
 of-pocket costs.
        The Commissioner opposed the motion on three grounds. First, the
 Johnsons had not exhausted all administrative remedies before petitioning
 the Tax Court, as required by the Internal Revenue Code (“IRC”). Second,
 the Commissioner’s position in the litigation was “substantially justified.”
 And third, most of the costs the Johnsons sought did not constitute “rea-
 sonable litigation costs” under the IRC.
        The Tax Court agreed with the Commissioner, denied the motion,
 and entered judgment consistent with the stipulation. The court initially
 observed that “[t]he majority of the expenses that [the] Johnson[s] claim[ed]
 d[id] not constitute ‘reasonable litigation costs’ as Congress defined that
 term in [the IRC].” Consequently, the court limited its analysis to only the
 $71 related to filing fees and postage.
        As for those expenses, the court found that the IRS’s position was
 substantially justified. 2 Specifically, the court concluded that the Commis-
 sioner was entitled to seek clarification on whether the Johnsons (1) received
 $20,000 from Equity Trust, (2) rolled over the full amount of the IRA dis-
 tribution from Riversource, and (3) completed any such rollover within the
 IRC’s sixty-day window.
         The Commissioner, according to the court, was “not required to con-
 cede the adjustments until he [ ] received, and [ ] had a chance to review,
 sufficient substantiation” from the Johnsons regarding the disputed transac-
 tions. And because that documentation never came, the IRS’s position was

        2
           Accordingly, the Tax Court did not consider whether the Johnsons had exhausted
 the available administrative remedies.

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                                      No. 20-60054

 substantially justified, and the Johnsons were not entitled to costs. After un-
 successfully moving for reconsideration, the Johnsons appeal pro se.

                                            II.
         “We review the [Tax Court’s] denial of a request for litigation costs
 for abuse of discretion.” Estate of Cervin v. Comm’r, 111 F.3d 1252, 1256 (5th
 Cir. 1997). “Thus, we reverse only if we have a definite and firm conviction
 that an error of judgment was committed.” Nalle v. Comm’r, 55 F.3d 189,
 191 (5th Cir. 1995) (quotation marks omitted).
         In a tax case, a prevailing party may be awarded “reasonable adminis-
 trative costs” and “reasonable litigation costs.” 26 U.S.C. § 7430(a). A
 party “prevails” if it (1) “substantially prevail[s] with respect to the amount
 in controversy” or (2) “substantially prevail[s] with respect to the most sig-
 nificant issue or set of issues presented.” 3 “A party shall not be treated as
 the prevailing party,” however, “if the United States establishes that the
 position of the United States in the proceeding was substantially justified.”
 Id. § 7430(c)(4)(B)(i).
         “The IRS has the burden of establishing that its position was sub-
 stantially justified.” Estate of Baird v. Comm’r, 416 F.3d 442, 446 (5th Cir.
 2005). “A position is substantially justified when it is justified to a degree
 that could satisfy a reasonable person.” Ragan v. Comm’r, 135 F.3d 329, 334
 (5th Cir. 1998) (quotation marks omitted). In this context, “the ‘position of

         3
            26 U.S.C. § 7430(c)(4)(A)(i). The prevailing party must also show that the
 party’s net worth does not exceed $2 million. See id. § 7430(c)(4)(A)(ii) (stating that a
 prevailing party must meet “the requirements of the 1st sentence of section 2412(d)(1)(B)
 of title 28, United States Code”); 28 U.S.C. § 2412(d)(1)(B) (outlining the process by
 which a “party” must seek an award for “fees and other expenses”); id. § 2412(d)(2)(B)
 (defining “party,” most relevantly, as “an individual whose net worth did not exceed
 $2,000,000 at the time the civil action was filed”).

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                                      No. 20-60054

 the United States’ is the position taken by the IRS in the Tax Court.” 4
        When determining “whether the IRS has satisfied its burden . . . , the
 court examines the facts and legal precedents available at the time the IRS
 took its position.” Baird, 416 F.3d at 446–47. To evaluate a position’s rea-
 sonableness, “we consider all the facts and circumstances surrounding the
 dispute.” Nalle, 55 F.3d at 191. “A significant factor in determining wheth-
 er” the IRS’s position “is substantially justified . . . is whether . . . the tax-
 payer has presented all relevant information under the taxpayer’s control and
 relevant legal arguments supporting the taxpayer’s position . . . .” 26 C.F.R.
 § 301.7430-5(d)(1). “Of course, the ultimate failure of the government’s
 legal position does not necessarily mean that it was not substantially justified.
 It is, however, a factor to be considered.” Lennox v. Comm’r, 998 F.2d 244,
 248 (5th Cir. 1993).
        We must define the boundaries of the IRS’s “position.” Baird,
 416 F.3d at 447. The Johnsons posit that, because the Commissioner admit-
 ted to some of their factual allegations, the IRS’s position was that it had
 made a mistake. “[I]t is that mistake,” the Johnsons aver, “that the Commis-
 sioner must show to be substantially justified.” And because the Tax Court
 did not base its “substantially justified” determination on the IRS’s having
 erred, the Johnsons reason that the court abused its discretion.
        That characterization of the IRS’s position is belied by the record.
 When the Commissioner answered the Johnsons’ petition, he did not con-
 cede that the IRS had made a mistake but, instead, denied the bulk of the

        4
          Baird, 416 F.3d at 446; see also 26 U.S.C. § 7430(c)(7)(A) (“The term ‘position
 of the United States’ means . . . the position taken by the United States in a judicial
 proceeding to which subsection (a) applies.”); Nalle, 55 F.3d at 191 (“[T]he question is
 whether the Commissioner acted unreasonably—that is, whether she knew or should have
 known that her position was invalid at the onset of the litigation.”).

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                                       No. 20-60054

 Johnsons’ allegations “for lack of sufficient knowledge or information.” To
 the contrary, the Commissioner admitted only (1) that the IRS corrected the
 Johnsons’ 2015 return to show about $141,000 in additional income and
 (2) that the correction was based on information it had received from third
 parties.
         The Commissioner maintains that the IRS’s position was sub-
 stantially justified given the available information. The record plainly reflects
 a discrepancy between the Johnsons’ return and the IRS’s third-party mate-
 rial. Relevantly, the IRS had documents showing, inter alia, that (1) the
 $141,793 distribution from Riversource was taxable (not non-taxable as the
 Johnsons claimed), (2) $3,000 more of the $45,187 payment from Northern
 Trust was taxable than the Johnsons suggested, and (3) $20,000 of taxable
 pension income from Equity Trust had not been included in the return.
         Moreover, when the Commissioner answered, the IRS had not re-
 ceived any substantiating documents from the Johnsons. That was true even
 though the IRS provided the Johnsons with the relevant contact information
 so that they could follow up with the proper third parties directly. 5 It was not
 until this case was reviewed by the Office for Appeals—after the IRS had
 issued its notice of deficiency and the Commissioner had answered the
 petition—that the IRS connected the Riversource distribution with the con-
 tribution to the Equity Trust IRA.
         Because the Johnsons failed to provide “any documents, records, or
 other objective evidence” supporting that they had properly rolled over their
 IRA, the Tax Court reasoned that “the Commissioner [wa]s not required to
 concede the adjustments until he [ ] received and had reasonable time to

         5
           The IRS informed the Johnsons that it was unable to send copies of the documents
 that they had requested, because the IRS had received the information electronically.

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                                         No. 20-60054

 review, sufficient substantiation for the matter in question.” Given the avail-
 able facts, the Tax Court did not abuse its discretion by concluding that the
 IRS’s position was substantially justified. 6
                                     *    *   *    *    *
         Because § 7430’s requirements are conjunctive, we need not consider
 whether the Johnsons exhausted the available administrative remedies or
 whether their requested fees are reasonable. 7 The order of the Tax Court is
 AFFIRMED.

         6
            See, e.g., Sher v. Comm’r, 861 F.2d 131, 135 (5th Cir. 1988) (holding that the
 Commissioner’s position was substantially justified because, based on the information
 available, she “had no reason to believe the information upon which she was relying was
 erroneous”); Harrison v. Comm’r, 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. This was a reasonable position.”).
         7
           See 26 U.S.C. § 7430(a) (providing that prevailing parties may recover “reasona-
 ble administrative costs” and “reasonable litigation costs”); id. § 7430(b)(1) (mandating
 prevailing party have exhausted administrative remedies); id. § 7430(b)(3) (requiring costs
 be denied where the prevailing party protracted the proceedings); id. § 7430(c)(1) (defining
 “[r]easonable litigation costs”); id. § 7430(c)(4)(B)(i) (outlining “substantially justified”
 exception).

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