Opinion
Docket No. 12017-87
1988-09-28
MARTIN T. EGAN AND SANDRA S. EGAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Martin T. Egan and Sandra S. Egan, pro se. William D. Reese, for Respondent.
HELD: Petitioner not entitled to litigation costs because respondent's position is substantially justified. Sher v. Commissioner, 89 T.C. 79 (1987), followed.
HELD FURTHER: Case not appealable to Second Circuit, therefore Weiss v. Commissioner, 850 F.2d 111 (2d Cir. 1988), revg. and remanding 89 T.C. 779 (1987), not followed. Martin T. Egan and Sandra S. Egan, pro se. William D. Reese, for Respondent.
SHIELDS, JUDGE:
In a deficiency notice dated February 5, 1987 respondent determined that there was a deficiency in petitioners' income tax for 1984 in the amount of $12,491.00 and that they were liable for additions to tax under sections 6653(a) and 6661 in the respective amounts of $624.55 and $3,122.75. When the case was called from the calendar for trial on April 11, 1988, the parties filed a Stipulation of Settled Issues in which respondent conceded that there is no deficiency in income tax or additions to tax due from petitioners for 1984. The matter is before us at this time on petitioners' motion for litigation costs pursuant to Rule 231.
FINDINGS OF FACT
After a careful review of the record, including the affidavits and exhibits filed in support of petitioners' motion and respondent's objection, we find it unnecessary to hold an evidentiary hearing as requested by petitioners because the facts in dispute are not relevant to our conclusion. The relevant facts which are undisputed are set out below.
Petitioners resided in Campbell, California at the time their petition was filed. In or before 1984, petitioner Martin T. Egan (hereinafter referred to as petitioner in the singular) purchased a certain parcel of real property (the Elwood property) at a trustee's sale for the benefit of himself and his sister and her husband who had advanced $28,000.00 of the funds used by petitioner to obtain the cashier's checks needed by petitioner to bid at the sale. The Elwood property was sold in 1984 and the proceeds of the sale including the $28,000.00 which belonged to petitioner's sister and brother-in-law were deposited by petitioner in one of his bank accounts (S & E Account). In 1984 petitioner also sold a parcel of real property (the Edith property) which he held as part of a joint venture and in which he had a basis of $10,500.00. He deposited the entire sales proceeds in the S & E Account.
By letter dated April 16, 1986 respondent's auditor, Kevin Abernathy, requested a conference with petitioners for June 11, 1986 concerning their 1984 return. In the letter Mr. Abernathy requested that petitioners bring to the conference bank statements for all of their personal and business bank accounts for December 1982 through January 1985. Petitioner appeared at the conference, produced some of the requested documents, and attempted to orally explain the apparent discrepancy reflected by the bank records which were incomplete since petitioner had failed to bring the records on the S & E Account.
On June 12, 1986, the auditor mailed petitioners a request for documents including statements on the S & E Account which had been used by petitioner in connection with his bids at trustee's sales. A second meeting between petitioner and the auditor was held on June 26, 1986, at which time petitioner produced documentation with respect to the S & E Account. After reviewing petitioner's records, including those on the S & E Account, Mr. Abernathy concluded that petitioners' taxable gross receipts for 1984 were understated by $38,500.00 of which $28,000.00 was represented by unreported proceeds received by petitioner from the sale of the Elwood property and $10,500.00 was represented by unreported proceeds received from the sale of the Edith property.
On October 3, 1986 petitioner again met with Mr. Abernathy and attempted to orally explain the $38,500.00 discrepancy. He stated that the $28,000.00 consisted of funds advanced to him by his sister and brother-in-law for use in his bids at trustee's sales and that this sum was returned to them in 1985 when he ceased attending such sales. With respect to the deposit of the proceeds from the sale of the Edith property, petitioner explained that he had $10,500.00 invested in the property and to that extent the deposit represented a tax-free return of capital. At this meeting, petitioner produced no documentary evidence tending to directly corroborate his oral statements with respect to either of the items in question.
At the end of the meeting on October 3, 1986, and also by letter dated October 5, 1986, Mr. Abernathy requested that by October 17, 1986 petitioner provide him with documents verifying the ownership of the $28,000.00 item as well as petitioner's basis in the Edith property. On October 15, 1986, petitioner mailed to Mr. Abernathy the following: (1) a letter dated October 14, 1986 from Catherine Isaacson (petitioner's sister) stating that $28,000.00 of the deposits to petitioners' bank account in 1984 belonged to her and her husband and was returned to them by petitioner in 1985; and (2) a copy of a Joint Venture Agreement relating to the Edith property which indicated that petitioner's investment in the joint venture was $10,500.00.
On October 20, 1986, petitioners received from respondent a Form 1902B, or thirty day letter, in which an upward adjustment to their taxable income for 1984 was proposed for the above $38,500.00. On October 21, 1986, Mr. Abernathy telephoned petitioner and indicated that he had not yet received the documentation contained in petitioners' mailing of October 15. Petitioner immediately hand- delivered copies of the documents to the auditor but on the same day petitioner's mailing of October 15 arrived at Mr. Abernathy's office.
Mr. Abernathy did not consider the additional documentation adequate support for petitioner's claims, and again requested that petitioner furnish transaction documents supporting his claims with respect to the return of the $28,000.00 to the Isaacsons and petitioner's basis in the Edith property. On October 22, 1986, a revised thirty day letter was mailed to petitioners which included additions to tax under sections 6653(a) and 6661 as well as the original income adjustment of $38,500.00.
Petitioners' claim that upon receipt of the revised thirty day letter they mailed to respondent, via certified mail return receipt requested, a protest of the proposed changes to their 1984 return and a request for a hearing with an Appeals Officer. Petitioners also claim that the certified receipt which was returned to them indicates that respondent received the protest and request for an appeals conference on November 3, 1986. Petitioners, however, did not submit a copy of the receipt in support of their motion and respondent claims to have no record of receiving the protest or request. In view of our conclusion which is hereinafter set out the existence or nonexistence of the protest and request for an appeals conference is irrelevant.
Upon receipt of respondent's notice of deficiency petitioners contacted representatives of respondent in an attempt to find out why they had not been granted a hearing with an Appeals Officer and were told that their protest and request was not in the file. They were also told that it was too late to file a new protest or request and that their only avenue for relief was to petition the Tax Court.
Donald G. Daiker, counsel for petitioners, filed their petition herein on May 8, 1987 and stated inter alia that ‘»t†he alleged omitted income of $38,500.00 consists of funds advanced by others to be used for the purchase of real property and said funds were not used and were returned to the parties advancing the sums.‘ The petition contains no allegation that part of the deficiency was due to the erroneous treatment by respondent of the return of petitioner's basis in the Edith property. In an answer filed on July 6, 1987 respondent's district counsel denied any error in the determination and denied petitioners' characterization of the alleged omitted income for lack of sufficient information. Prior to filing the answer respondent's district counsel was not involved in this case.
The case was assigned to Appeals Officer Clare Green on November 9, 1987. Ms. Green completed her review of the case file on December 18, 1987 and concluded that the portion of the adjustment which was attributable to the $28,000.00 item should be conceded by respondent due to the hazards of litigation as reflected in the expected testimony of petitioner's sister.
On December 22, 1987, Ms. Green conveyed her conclusion regarding the $28,000.00 item to Mr. Daiker and requested that any verification which he had with respect to the $10,500.00 item attributable to the Edith property be forwarded to her as soon as possible inasmuch as the case was set for trial on April 11, 1988. Having heard nothing from Mr. Daiker, on January 7, 1988 Ms. Green attempted to reach him by telephone to no avail. At her request respondent's counsel then wrote Mr. Daiker on January 11, 1988 requesting the documentation.
By letter dated January 18, 1988, Mr. Daiker forwarded to Ms. Green documents concerning the 1984 Edith property transaction and a letter of explanation which were received by respondent on January 21, 1988. In his letter, Mr. Daiker stated that the enclosed documents were the same as those that petitioner had originally offered to Mr. Abernathy. Upon receipt of these documents by respondent's office Ms. Green was out of town on business until February 5, 1988. On her return she reviewed the documents and Mr. Daiker's letter and on February 12, 1988, advised Mr. Daiker by telephone that respondent was willing to concede the $10,504.00 item attributable to the Edith property in view of the hazards of litigation reflected in the materials submitted with his letter of January 18, 1988.
In a telephone conversation with Ms. Green on February 23, 1988, Mr. Daiker agreed that under the circumstances of this case petitioners were not entitled to litigation costs and by letter dated March 1, 1988, Ms. Green forwarded to Mr. Daiker a proposed stipulation which reflected a concession by respondent that there was no deficiency in tax or additions to tax due from petitioners for 1984 and a concession by petitioners that respondent was not liable for litigation costs. Mr. Daiker did not respond to her letter and on March 23, 1988, or approximately three weeks before the trial date, Ms. Green telephoned him and was informed that petitioners would not concede the litigation costs. On March 24, 1988 the issue with respect to the litigation costs was removed by Ms. Green from the proposed stipulation and it was returned to Mr. Daiker. The stipulation was executed for petitioners by Mr. Daiker on March 28, 1988, by counsel for respondent on April 8, 1988, and filed with the Court when the case was called from the trial calendar on April 11, 1988. On or about May 4, 1988 petitioners paid an attorney fee in the amount of $6,495.00 to Mr. Daiker for services rendered in connection with their tax case. The amount of the fee was in accordance with a contingent fee arrangement entered into on February 5, 1987. On May 11, 1988 petitioners appearing pro se filed their motion for litigation costs.