On November 9, 2020, the Tax Court issued a Memorandum Opinion in the case Dang v. Commissioner (T.C. Memo. 2020-150). The primary issue before the court in Dang v. Commissioner was whether the petitioners incurred “reasonable administrative costs” under IRC § 7430 and whether the petitioners are entitled to an award of reasonable litigation costs.
The Background to Dang v. Commissioner
In 2007, Mr. Dang started Copia Networks, Inc. (Copia), which purchased computers and other electronic equipment for resale to wholesalers in Vietnam. Upon completion of the audit the IRS mailed to petitioners a notice of deficiency in which it determined deficiencies of $83,000 and $24,000 for tax years 2008 and 2009, respectively, and accuracy-related penalties under section 6662. Ultimately, the parties entered into a stipulated decision and the IRS conceded the accuracy related penalties.
The Dang Plan
The petitioners requested that the IRS levy against funds held in Mr. Dang’s individual retirement account (IRA). Petitioners offered this alternative because a levy by the IRS is one of the exceptions to the additional tax on early distributions from retirement plans under IRC § 72(t). The IRS declined petitioners’ invitation because it determined that petitioners had alternative sources of funds that were sufficient to satisfy the liabilities in full.
The Dang Petition
The Dangs petitioned the Tax Court seeking a review of the determination that the selection of the levy source was a discretionary matter for IRS Collections and thus the levy source request was properly addressed to IRS Collections and not the Appeals Office. The IRS filed its answer conceding that the Appeals Office abused its discretion in rejecting petitioners’ offer to pay in full via a levy on the IRA. The IRS indicated that it would move to remand the case so the Appeals Office could correct its error and explained that the substitution of assets is a valid collection alternative and conceding that the Appeals Office should have considered petitioners’ request for the IRS to levy on the IRA. See Treas. Reg. § 301.6330-1(e)(3).
The Dang Litigation Costs
IRC § 7430 provides for an award of reasonable litigation and administrative costs to a taxpayer in a proceeding involving the collection of any tax, interest, or penalty. An award may be made where the taxpayer can demonstrate that he: (1) is the “prevailing party”, (2) has exhausted administrative remedies within the IRS, (3) has not unreasonably protracted the proceedings, and (4) has claimed “reasonable” costs. IRC § 7430(a), (b)(1), (3), (c)(1) and (2); Morrison v. Commissioner, 565 F.3d 658, 661 (9th Cir. 2009), rev’g on other grounds T.C. Memo. 2006-103; Alterman v. Commissioner, 146 T.C. 226, 227 (2016).
These requirements are conjunctive; failure to satisfy any one precludes an award of costs to the taxpayer. See Minahan v. Commissioner, 88 T.C. 492, 497 (1987); Marten v. Commissioner, T.C. Memo. 2000-186. As relevant here, a “prevailing party” is a party that “has substantially prevailed with respect to the amount in controversy” or “with respect to the most significant issue or set of issues presented.” IRC § 7430(c)(4)(A)(i). A party is not treated as a “prevailing party”, however, if “the United States establishes that the position of the United States in the proceeding was substantially justified.” Id.
A rebuttable presumption arises that the Government’s position was not substantially justified when it fails to adhere to applicable published guidance during the administrative proceeding. IRC § 7430(c)(4)(A)(ii). Applicable published guidance means regulations, revenue rulings, revenue procedures, information releases, notices, and announcements, as well as private letter rulings, technical advice memoranda, and determination letters issued to the taxpayer. IRC § 7430(c)(4)(A)(iv).
Reasonable Administrative Costs
Reasonable administrative costs are limited to those costs incurred by the taxpayer on or after the earliest of: (1) the date of the receipt by the taxpayer of the notice of determination, (2) the date of the notice of deficiency, or (3) the date of the first letter of proposed deficiency that allows the taxpayer to appeal a decision to the IRS Appeals Office. IRC § 7430(c)(2); Treas. Reg. § 301.7430-4(a).
Because an IRC § 6330/6320 proceeding ordinarily occurs only after an assessment is recorded, the date of the notice of determination is the only applicable date under the statute for a claim of administrative costs in section IRC § 6330/6320 cases to begin accruing. IRC § 7430(c)(2); see also Worthan v. Commissioner, T.C. Memo. 2012-263, at *18. And, because the notice of determination in IRC § 6330/6320 cases also concludes the administrative proceeding, a taxpayer cannot recover an award for administrative costs arising in an IRC § 6330/6320 proceeding. IRC § 7430(c)(2); see Worthan at *18; see also Treas. Reg. § 301.7430-3(a) and (b) (clarifying that hearings under IRC § 6320 and IRC § 6330 are collection actions and accordingly not administrative proceedings within the meaning of IRC § 7430).
Because the Dang petitioners’ administrative costs were incurred before the Appeals Office issued the notice of determination, they do not constitute “reasonable administrative costs.” In the light of this conclusion, the Tax Court did not decide whether the Dang petitioners were prevailing parties in the administrative proceeding.
Reasonable Litigation Costs
In order for a taxpayer to qualify for an award of reasonable litigation costs under IRC § 7430, the taxpayer must qualify as a “prevailing party.” IRC § 7430(a). As relevant here, a “prevailing party” is a party that has substantially prevailed with respect to the most significant issue presented, unless the IRS can show that its position was substantially justified. IRC § 7430(c)(4)(A)(i), (B).
For purposes of disposing of the Dang motion, the Tax Court assumed without deciding that petitioners met this first hurdle–they substantially prevailed with respect to the most significant issue presented. The Tax Court’s analysis focuses on whether respondent has shown that the “position of the United States” in the Court proceeding was substantially justified. The “position of the United States” in litigation is generally established in its answer. Huffman v. Commissioner, 978 F.2d at 1148.
The “substantially justified” standard means “‘justified in substance or in the main’–that is, justified to a degree that could satisfy a reasonable person.” Pierce v. Underwood, 487 U.S. 552, 565 (1988). A substantially justified position means a position with a “reasonable basis both in law and fact.” Id. To be substantially justified, however, means “more than merely undeserving of sanctions for frivolousness.” Id. at 566.
Because respondent conceded his error in his answer–the earliest possible opportunity–the Tax Court concluded that “the position of the United States” was substantially justified. See id. Respondent conceded the merits in full and moved for remand to give petitioners what they sought all along–a levy against Mr. Dang’s IRA.Add to favorites