                               T.C. Memo. 2014-249



                         UNITED STATES TAX COURT



                    LARRY J. AUSTIN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28393-09.                          Filed December 11, 2014.



      John Edward Williams, for petitioner.

      Joy E. Gerdy Zogby, Paul T. Butler, and Nancy S. Vozar Knapp, for

respondent.



                           MEMORANDUM OPINION


      NEGA, Judge: This case is before the Court on petitioner’s motion for an

award of litigation and administrative costs. Petitioner seeks attorney’s fees,
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[*2] accounting fees, and other professional fees under section 7430 and Rule

231.1 We hold that he is not entitled to such an award.

                                      Background

      We briefly summarize the facts of this case to rule on the instant motion.

Our findings of fact are based on the pleadings, petitioner’s motion for an award

of litigation and administrative costs and respondent’s response thereto, and

petitioner’s reply to respondent’s response to petitioner’s motion. Neither party

requested an evidentiary hearing, and we see nothing in petitioner’s motion,

respondent’s response, or petitioner’s reply that necessitates a hearing. See Rule

232(a)(2). Petitioner resided in Virginia at the time he filed his petition.

      Petitioner received his law degree from Harvard Law School in 1980. From

the late 1990s through mid-2005 petitioner participated in and/or facilitated

various listed transactions subject to disclosure under section 1.6011-4(b)(2),

Income Tax Regs., including intermediary transaction tax shelters, tax avoidance

using artificially high basis transactions, partnership straddle tax shelters, and

distressed asset debt transactions.




      1
       All section references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
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[*3] From 2001 to 2004 petitioner was one of three managing directors of

Chenery Associates, Inc. (Chenery), a corporation with its main office in San

Francisco, California. As stated by petitioner in his petition, Chenery coordinated

the purchase of distressed assets in South Korea by U.S. residents. In or around

2001 petitioner established an account (Korean bank account) with the Seoul

branch of Citibank Korea, Inc., titled solely in his own name and over which he

held signatory authority. In 2001 there were total deposits of $4,108,631 into the

Korean bank account. In 2002 $773,911 was deposited into the Korean bank

account, and $1,450,000 was withdrawn. In 2004 $349,968 was deposited into the

Korean bank account, and $350,095 was withdrawn. Petitioner admits that the

2002 and 2004 transactions resulted in “about $1.8M of potential taxable income

to [p]etitioner with respect to his connection to the * * *[Korean bank account]”.

      Separate and apart from the Korean bank account at Citibank Korea,

petitioner established a bank account in his name at Korea Development Bank

(KDB account) as early as December 2001. In December 2001 petitioner

transferred $1 million from the Korean bank account to the KDB account. In

February 2002 petitioner transferred $406,026 from the Korean bank account to

the KDB account. In December 2004 petitioner transferred $30,000 from the

Korean bank account to his personal Chase Visa credit card account.
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[*4] Petitioner did not timely file individual income tax returns for tax years

2000-2004. In September and October 2006 petitioner filed late returns for tax

years 2000-2004. Petitioner reported interest income from the Korean bank

account on his delinquent returns for 2001, 2002, 2003, and 2004.

      Respondent issued a notice of deficiency to petitioner on August 31, 2009,

for tax years 2000-2004 determining deficiencies in petitioner’s income tax of

$143,696, $1,778,265, $75,702, $219,843, and $133,846 for tax years 2000, 2001,

2002, 2003, and 2004, respectively. Respondent determined section 6662(a)

penalties of $28,739, $348,509, $15,140, $43,969, and $26,769 for tax years 2000,

2001, 2002, 2003, and 2004, respectively. Respondent also determined section

6651(f) additions to tax for fraudulent failure to file of $107,772, $1,333,699,

$56,777, $164,882, and $100,385 for tax years 2000, 2001, 2002, 2003, and 2004,

respectively (or, in the alternative, that additions to tax under section 6651(a)

applied for those years). Respondent asserted that these deficiencies arose chiefly

from the following: (1) petitioner’s failure to report on his 2000 tax return a State

income tax refund of $581,314 for tax year 1999, (2) adjustment of petitioner’s

distributive loss from Platypus Holdings, Inc., from $106,277 as reported on his

2001 tax return to $16,842, and (3) allocation of taxable income to petitioner in

the amounts of the gross receipts deposited into the Korean bank account during
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[*5] 2001, 2002, and 2004. Respondent used the bank deposits method in his

determination that petitioner had taxable income as a result of deposits into the

Korean bank account. Respondent also disallowed some of petitioner’s itemized

deductions attributable to medical expenses.

      Petitioner filed the petition in this case on November 30, 2009. Petitioner’s

petition claimed that: (1) as part of Chenery’s purchase of distressed Korean

assets, Korea Development Bank (KDB) required Chenery to establish an escrow

account funded with $1 million, (2) the Korean bank account forms did not allow

him to indicate on the name of the account that he was acting as an escrow agent,

which is why the account was titled solely in the name of “Larry J. Austin”, and

(3) no part of the funds that passed into or out of the Korean bank account was his

personal funds.

      Petitioner and respondent entered into a stipulation of settled issues on

November 15, 2012. The stipulation of settled issues recites deficiencies in

petitioner’s Federal income tax and additions to tax and penalties due under

sections 6651(a)(1) and 6662(a) for tax years 2000, 2001, and 2004. In reaching

the stipulation of settled issues, respondent conceded that “several large transfers”

out of the Korean bank account were not income, and petitioner conceded over

$500,000 as income related to the Korean bank account.
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[*6]                                 Discussion

       Under section 7430(a), the prevailing party in any administrative or court

proceeding brought against the United States in connection with the

determination, collection, or refund of any tax, interest, or penalty pursuant to the

Internal Revenue Code may be awarded reasonable administrative and litigation

costs. To receive an award of costs, the taxpayer must: (1) be the prevailing

party, (2) have exhausted the available administrative remedies, and (3) not have

unreasonably protracted the proceeding. Sec. 7430(a) and (b)(1), (3).

Furthermore, the amount of costs requested must be reasonable. Sec. 7430(a).

The requirements of section 7430 are conjunctive, and failure to satisfy one of the

requirements will preclude recovery of costs by the taxpayer. See Minahan v.

Commissioner, 88 T.C. 492, 497 (1987).

       To be the prevailing party, the taxpayer must: (1) substantially prevail with

respect to either the amount in controversy or the most significant issue or set of

issues presented, and (2) satisfy the net worth requirements of section

2412(d)(1)(B). Sec. 7430(c)(4)(A)(i) and (ii). The taxpayer will nevertheless

generally fail to qualify as the prevailing party if the Commissioner establishes

that his position in the administrative and court proceedings was substantially

justified. Sec. 7430(c)(4)(B)(i). Although the taxpayer bears the burden of
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[*7] proving he substantially prevailed and meets the net worth requirements, the

Commissioner bears the burden of proving that the Government’s position was

substantially justified. Id.; Corson v. Commissioner, 123 T.C. 202, 206 (2004).

      Respondent concedes that petitioner substantially prevailed with respect to

the amount in controversy and meets the net worth requirements of section

2412(d)(1)(B) but argues that petitioner should be denied an award of

administrative and litigation costs and fees because respondent’s position in the

proceedings was substantially justified.

      The Commissioner’s position is substantially justified if, in view of all of

the facts and circumstances and the legal precedents relating to the case, the

Commissioner acted reasonably. Pierce v. Underwood, 487 U.S. 552 (1988); Sher

v. Commissioner, 89 T.C. 79, 84 (1987), aff’d, 861 F.2d 131 (5th Cir. 1988). A

“substantially justified” position is one that has “substantial evidence” to support

it and is “justified to a degree that could satisfy a reasonable person.” Underwood,

487 U.S. at 564, 565. Substantial evidence does not require a “large or

considerable amount of evidence, but rather ‘such relevant evidence as a

reasonable mind might accept as adequate to support a conclusion.’” Id. at 564-

565 (quoting Consol. Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)). The

Commissioner’s position may be incorrect but nevertheless be “substantially
                                          -8-

[*8] justified ‘if a reasonable person could think it correct’”. Maggie Mgmt. Co.

v. Commissioner, 108 T.C. 430, 443 (1997) (quoting Underwood, 487 U.S. at 566

n.2).

        Whether the Commissioner acted reasonably turns upon “those available

facts which formed the basis for the position taken in the notice of deficiency and

during the litigation, as well as upon any legal precedents related to the case.” Id.

(citing DeVenney v. Commissioner, 85 T.C. 927, 930 (1985)); see Nalle v.

Commissioner, 55 F.3d 189, 191-192 (5th Cir. 1995), aff’g T.C. Memo. 1994-182.

Further, the fact that the Commissioner eventually loses or concedes an issue does

not establish that his position was unreasonable. Estate of Perry v. Commissioner,

931 F.2d 1044, 1046 (5th Cir. 1991); Swanson v. Commissioner, 106 T.C. 76, 94

(1996); Sokol v. Commissioner, 92 T.C. 760, 767 (1989). However, it is a factor

to be considered. Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443.

        With respect to the recovery of administrative costs, the position of the

United States that must be examined against the substantial justification standard

is the position taken by the Commissioner in the notice of deficiency. Sec.

7430(c)(7)(B)(ii); Polz v. Commissioner, T.C. Memo. 2011-117, 2011 Tax Ct.

Memo LEXIS 114, at *8. With respect to the recovery of litigation costs, the

Commissioner’s position that must be examined against the substantial
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[*9] justification standard is the position taken in the answer to the petition.

Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir. 1991); Sher v.

Commissioner, 861 F.2d at 134-135; see sec. 7430(c)(7)(A). Ordinarily, we

consider the reasonableness of each of these positions separately so as to allow the

Commissioner to change his position. Maggie Mgmt. Co. v. Commissioner, 108

T.C. at 442 (citing Huffman v. Commissioner, 978 F.2d 1139, 1144-1147 (9th Cir.

1992), aff’g in part, rev’g in part, T.C. Memo. 1991-144). Respondent’s position

was essentially the same in both the administrative and the judicial proceedings.

See id. Specifically, respondent’s position with respect to several issues was:

(1) petitioner failed to report a State income tax refund; (2) petitioner overstated

his distributive share of losses from Platypus Holdings, Inc.; (3) petitioner had

unreported income from the Korean bank account; (4) petitioner was liable for the

section 6662(a) addition to tax; and (5) petitioner was liable for the section

6651(f) addition to tax or, in the alternative, the section 6651(a)(1) addition to tax.

In petitioner’s reply to respondent’s response to petitioner’s motion for an award

of administrative and litigation costs, petitioner conceded that respondent was

“substantially justified in proposing the state tax and Platypus issue, and with

respect to the accuracy related penalties and additions to tax”. Accordingly, the
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[*10] only issue we need analyze is whether respondent was substantially justified

in his position that petitioner had unreported income from the Korean bank

account.

      Bank deposits are prima facie evidence of income, and the Commissioner

does not need to prove a likely source of such income. Tokarski v. Commissioner,

87 T.C. 74, 77 (1986); Estate of Mason v. Commissioner, 64 T.C. 651, 656-657

(1975), aff’d, 566 F.2d 2 (6th Cir. 1977). The use of the bank deposits method has

long been sanctioned by the courts. Estate of Mason v. Commissioner, 64 T.C. at

656. The bank deposits method assumes that all money deposited into a

taxpayer’s account during a given period constitutes taxable income. Price v.

United States, 335 F.2d 671, 677 (5th Cir. 1964). When the bank deposits method

is used, “the Government must take into account any non-taxable source or

deductible expense of which it has knowledge.” Id. The taxpayer bears the

burden of proving that bank deposits come from nontaxable sources. Clayton v.

Commissioner, 102 T.C. 632, 645-646 (1994).

      There were large deposits into and withdrawals out of the Korean bank

account in 2001, 2002 and 2004. The account was titled solely in petitioner’s

name, and he held signatory authority it. Petitioner reported interest income from

the account on his personal income tax returns for 2001-04. Petitioner also
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[*11] transferred substantial amounts from the Korean bank account to the KDB

account and to his personal credit card account. Petitioner argues that his own

sworn statements and an affidavit from his copromoter at Chenery, Roy Hahn,

should have been sufficient to establish that the deposits into the Korean bank

account did not constitute taxable income. However, respondent requested third-

party documentation to corroborate petitioner’s statements, and petitioner did not

provide any documentation. It was reasonable for respondent to request

corroboration from third parties to confirm petitioner’s and Mr. Hahn’s statements

regarding the Korean bank account. See Simpson v. Commissioner, T.C. Memo.

1995-194, 1995 Tax Ct. Memo LEXIS 196, at *15; cf., e.g., DeVenney v.

Commissioner, 85 T.C. at 933. Given the foregoing, we find that respondent’s

position with regard to petitioner’s having unreported income from the Korean

bank account was substantially justified. Therefore, petitioner is not the

prevailing party with respect to this issue and may not recover any administrative

or litigation costs. See sec. 7430(c)(4)(B). Accordingly, we need not analyze the

other requirements of section 7430.

      In reaching our holding, we have considered all remaining arguments made

by the parties and, to the extent not discussed above, find those arguments to be

irrelevant, moot, or without merit.
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[*12] To reflect the foregoing, petitioner’s motion for an award of administrative

and litigation costs will be denied.


                                                An appropriate order and decision

                                       will be entered.
