Taxpayers were not entitled to an award of administrative costs as “prevailing party” under § 7430(c)(7) where IRS settled after taxpayer protested a 30-day letter, but without issuing a notice of deficiency or Appeals determination New 2/21/04 Updated 8/21/04

In Florida Country Clubs, Inc. v. Comm.,122 T.C. No. 3 (2004), the IRS sent taxpayers a 30-day letter proposing to increase the income reported on taxpayer’s 1993 and 1994 returns. After review of the report District Counsel rejected the reviewer’s proposal and advised the reviewer to obtain taxpayers’ agreement to extend the statutory period of limitations for assessment to allow time to further explore the facts of the case. Taxpayers consented to extend the limitations period until June 30, 1999. The IRS did not send a notice of deficiency to taxpayers or issue the reviewer’s proposal to petitioners.

During 1998 and 1999, the IRS issued to each taxpayer at least 3 revised 30-day letters proposing adjustments to taxpayer’s 1993 and 1994 reported income. On receipt of the final 30-day letters, taxpayers protested the proposed adjustments to the IRS Appeals Office. The parties settled the case sometime in April 2000, without respondent issuing either a notice of deficiency or an Appeals Office notice of decision. Pursuant to the settlement, the parties agreed petitioners owed no additional taxes for either 1993 or 1994, and were entitled to a refund for 1995.

Taxpayers filed a request for administrative costs under § 7430 which the IRS denied. On May 29, 2002 taxpayers timely filed their Tax Court petition seeking their administrative costs taxpayer incurred after January 18, 1999 under § 7430(f) and Rule 271.

To be a “prevailing party” a taxpayer must substantially prevail with respect to the amount in controversy or the most significant issue or set of issues presented. A taxpayer will not qualify as a prevailing party if the Government establishes that the United States’ position was substantially justified.

“Position of the United States” is defined in § 7430(c)(7) as the position taken by the Government in an administrative proceeding as of the earlier of:

  1. The date taxpayer receives the notice of decision of the Appeals Office, or
  2. the date of the notice of deficiency.

Prior to the issuance of either a notice of deficiency or an Appeals Office decision the Government is not considered as having taken any position.

The Court found that because this proceeding was commenced on May 29, 2002, and the costs were incurred after January 18, 1999, the amendments to § 7430(c)(2) made by the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3101(b), 112 Stat. 727 apply.

Prior to the RRA 1998 amendment, “reasonable administrative costs” were limited to costs incurred after the date of the notice of deficiency or Appeals Office decision (i.e., the same instances in which the Government is defined as having taken a position under section 7430(c)(7)). In RRA 1998, Congress amended § 7430(c)(2) defining “reasonable administrative costs” to include costs incurred from the “the date on which the 1st letter of proposed deficiency [the 30-day letter] which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent.” The Court found that while the RRA 1998 amendment moves the point in time in which administrative costs come within section 7430(c)(2), it does NOT move the point in time in which the Government is considered to have taken a position in section 7430(c)(7). Accordingly, the RRA 1998 amendment does not permit recovery of administrative costs where neither a notice of deficiency or Appeals Office decision was issued.