                       T.C. Memo. 1999-380



                     UNITED STATES TAX COURT



    REESE B. BELSHEE, JR. AND BETTY J. BELSHEE, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2912-99.                   Filed November 17, 1999.



     D. Alden Newland, for petitioners.

     William J. Gregg, for respondent.



                       MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:    This matter is before

the Court on respondent’s motion to dismiss for failure to state

a claim upon which relief can be granted.    The issue for decision

is whether petitioners have stated a claim for administrative

costs pursuant to section 7430(c)(2).    As explained in detail
                                - 2 -

below, we will grant respondent’s motion to dismiss for failure

to state a claim upon which relief can be granted.1

Background

     In early 1996, petitioners entered into an offer in

compromise respecting their tax liability for the taxable year

1991.    Respondent accepted the offer in compromise, and

petitioners made full payment in satisfaction of the agreement.

See sec. 7122.

     Contrary to the terms of the offer in compromise, respondent

sent a notice of intent to levy to petitioners in 1997 demanding

payment of approximately $11,000 in tax liability for the 1991

taxable year.    After respondent refused petitioners’ initial

requests to withdraw the notice of intent to levy, petitioners

retained counsel to assist them.

     Petitioners’ counsel persuaded respondent to withdraw the

notice of intent to levy.    Shortly thereafter, petitioners’

counsel filed a claim with respondent requesting an award of

administrative costs; i.e., legal fees that petitioners incurred

in challenging the notice of intent to levy.    Although an Appeals

officer initially indicated that he would recommend that

petitioners be awarded $3,471, the claim for administrative costs



     1
        Unless otherwise indicated, section references are to
sections of the Internal Revenue Code.
                                   - 3 -

was disallowed in full.       Respondent’s notice stated in pertinent

part:

     We have completed our review of your claim for
     administrative costs under Section 7430 of the Internal
     Revenue Code. We have fully disallowed your claim
     because pursuant to Reg. Sec. 301.7430-3(a)(4),
     proceedings in connection with collection actions are
     not administration proceedings for the purposes of IRC
     Section 7430.

     Petitioners filed a timely petition for administrative costs

with the Court pursuant to section 7430(f)(2).       In response,

respondent filed a motion to dismiss for failure to state a claim

upon which relief can be granted.        Relying on section 301.7430-

3(a)(4), Proced. & Admin. Regs., respondent initially argued that

the collection action underlying petitioners’ claim for

administrative costs is not considered an administrative

proceeding within the meaning of section 7430.2

     Petitioners filed a response to respondent’s motion to

dismiss in which they assert that section 301.7430-3(a)(4),


     2
        Sec. 301.7430-3(a)(4), Proced. & Admin. Regs., provides
in pertinent part:

     (a) Administrative proceeding. For purposes of section
     7430, an administrative proceeding generally means any
     procedure or other action before the Internal Revenue
     Service that is commenced after November 10, 1988.
     However, an administrative proceeding does not include–

        *     *           *          *        *        *        *

          (4) Proceedings in connection with collection
     actions (as defined in paragraph (b) of this section),
     including proceedings under sections 7432 or 7433.
                               - 4 -

Proced. & Admin. Regs., is invalid insofar as it conflicts with

the plain language of section 7430(a), which provides that a

taxpayer generally may be awarded a judgment or a settlement for

reasonable administrative costs incurred in "any administrative

* * * proceeding which is brought by or against the United States

in connection with the determination, collection, or refund of

any tax, interest, or penalty under this title".

     This matter was called for hearing at the Court’s motions

session in Washington, D.C.   Counsel for both parties appeared at

the hearing and presented argument on the pending motion.

     Counsel for respondent argues that respondent’s motion

should be granted on the basis of the flush language of section

7430(c)(2) and Ball v. Commissioner, T.C. Memo. 1995-520.     The

flush language of section 7430(c)(2) provides:   "Such term

["reasonable administrative costs"] shall only include costs

incurred on or after the earlier of (i) the date of the receipt

by the taxpayer of the notice of the decision of the Internal

Revenue Service Office of Appeals, or (ii) the date of the notice

of deficiency."   Respondent asserts that petitioners have not

incurred "reasonable administrative costs" within the meaning of

section 7430(c)(2) since petitioners have not received either an

Appeals Office notice of decision or a notice of deficiency.

     Following the hearing, petitioners filed a supplemental

response asserting that, as a memorandum opinion, Ball v.
                               - 5 -

Commissioner, supra, is not controlling precedent.   In addition,

petitioners argue that the reasoning in Ball is flawed on the

ground that "it is unreasonable to interpret the 'flush language'

of subsection (c)(2) in a way that effectively narrows the scope

of section 7430's unambiguous and broad inclusion of collection

actions within the meaning of administrative proceedings".

Discussion

     We begin our analysis with the observation that, as a

sovereign, the United States is immune from suit except to the

extent that it specifically consents to be sued.   See United

States v. Sherwood, 312 U.S. 584, 586 (1941).   The scope of a

waiver of sovereign immunity is to be strictly construed in favor

of the sovereign.   See Department of the Army v. Blue Fox, Inc.,

525 U.S. 255, ___, 119 S. Ct. 687, 691 (1999), and cases cited

therein.

     In the Tax Equity and Fiscal Responsibility Act of 1982

(TEFRA), Pub. L. 97-248, sec. 292(a), 96 Stat. 324, 572, Congress

redesignated section 7430 section 7431 and enacted a new section

7430 which provided that certain prevailing parties would be

permitted to recover reasonable litigation costs from the United

States in cases brought by or against the United States to

determine, collect, or refund any tax, interest, or penalty.
                               - 6 -

Section 7430 was applicable to proceedings commenced after

February 28, 1983.   See TEFRA sec. 292(e)(1), 96 Stat. 574.3

     The Technical and Miscellaneous Revenue Act of 1988, Pub. L.

100-647, sec. 6239, 102 Stat. 3342, 3743, amendments to section

7430 expanded the relief provided under section 7430 to allow

certain prevailing parties to recover reasonable administrative

costs in addition to litigation costs.   Section 7430(a) sets

forth the general rule that the prevailing party in any

administrative or court proceeding which is brought by or against

the United States in connection with the determination,

collection, or refund of any tax, interest, or penalty may be

awarded a judgment or a settlement for reasonable administrative

costs incurred in connection with such administrative proceedings

and for reasonable litigation costs incurred in connection with

such court proceedings.


     3
         Sec. 7430 has been amended many times since its
enactment in 1982. The provisions of sec. 7430 applicable to a
given case depend on the date the proceeding is commenced and the
period within which the claimed costs were incurred.

     Congress amended sec. 7430 in the Taxpayer Relief Act of
1997 (TRA), Pub. L. 105-34, secs. 1285, 1453, 111 Stat. 788,
1038, 1055. Congress then amended sec. 7430 in the Internal
Revenue Service Restructuring and Reform Act of 1998 (RRA 1998),
Pub. L. 105-206, sec. 3101, 112 Stat. 685, 727. The amendments
made by TRA apply in the case of proceedings commenced after Aug.
5, 1997, and the amendments made by RRA 1998 apply to costs
incurred more than 180 days after July 22, 1998 (Jan. 19, 1999).
As the petition for administrative costs herein was filed on Feb.
12, 1999, relating to costs incurred before Jan. 19, 1999, the
TRA amendments to sec. 7430 apply and not the RRA amendments.
                                - 7 -

     The general rule set forth in section 7430(a) is qualified

by the limitations contained in section 7430(b) and the

definitions contained in section 7430(c).    The flush language of

section 7430(c)(2) provides that "reasonable administrative

costs" shall only include costs incurred on or after the earlier

of the date that the taxpayer receives an Appeals Office notice

of decision or the date a notice of deficiency is issued to the

taxpayer.

     The Court has narrowly construed the relief provided in

section 7430.    In Estate of Gillespie v. Commissioner, 103 T.C.

395 (1994), the Commissioner issued a 30-day letter proposing to

increase the taxpayer’s estate tax liability by approximately $9

million.    The taxpayer filed a protest with the appropriate

Appeals Office, and the matter was settled in the taxpayer’s

favor.   After the Appeals Office rejected the taxpayer’s request

for an award of administrative costs, the taxpayer filed a

petition for an award of administrative costs with the Court.

Relying on the flush language of section 7430, and noting that

the Commissioner had not issued either an Appeals Office notice

of decision or a notice of deficiency to the taxpayer, we granted

the Commissioner’s motion for summary judgment that the taxpayer

was not entitled to an award under section 7430.

     In Ball v. Commissioner, supra, the taxpayer filed

delinquent tax returns for 1984, 1985, and 1986.    The
                                - 8 -

Commissioner subsequently disallowed deductions that the taxpayer

had claimed on his returns, entered assessments against the

taxpayer in amounts greater than the taxes that the taxpayer had

reported on his returns, and issued notices of intent to levy to

the taxpayer.

     The taxpayer subsequently retained counsel who convinced the

Commissioner that the notices of intent to levy were based in

part on improper assessments.   In particular, the Commissioner

agreed that the assessments were improper insofar as they

exceeded the tax liabilities that the taxpayer had reported on

his returns.    The Commissioner conceded that assessments against

the taxpayer for amounts greater than the tax liabilities that

the taxpayer had reported on his returns were premature in that

the Commissioner was required to comply first with the normal

deficiency procedures starting with the issuance of a notice of

deficiency.

     Although the Commissioner abated the improper assessments,

the Commissioner disallowed the taxpayer’s claim for

administrative costs incurred in contesting the notices of intent

to levy.   The taxpayer responded by filing a petition for an

award of administrative costs with the Court.

     Upon review, we agreed with the Commissioner that the

taxpayer was not entitled to relief under section 7430 on the

ground that the Commissioner had not issued either an Appeals
                               - 9 -

Office notice of decision to the taxpayer or a notice of

deficiency as required under section 7430(c)(2).   In so holding,

we rejected the taxpayer’s argument that it was unfair to apply

the flush language of section 7430(c)(2) literally where the

Commissioner admittedly erred in failing to issue a notice of

deficiency to the taxpayer before the disputed assessments.

Further, after reviewing the legislative history underlying the

TAMRA amendments, we concluded that Congress intended that the

flush language of section 7430(c)(2) protect the Commissioner

from claims by taxpayers that positions taken by the Examination

and Collection Divisions of the Internal Revenue Service, before

administrative review, were not substantially justified.4

     Consistent with the plain language of section 7430(c)(2), as

well as the precept that a waiver of sovereign immunity is to be

strictly construed in favor of the sovereign, see Department of

the Army v. Blue Fox, Inc., 525 U.S. at ___, 119 S. Ct. at 691,

we hold that petitioners have failed to state a claim for

relief.5   In sum, because respondent has not issued either an

Appeals Office notice of decision or a notice of deficiency to


     4
        The facts in Ball v. Commissioner, T.C. Memo. 1995-520,
are substantially similar to those presented in this case, and we
are satisfied that the Court’s analysis in Ball is correct.
     5
        Because our holding is based on the plain language of
sec. 7430, specifically the flush language of sec. 7430(c)(2), we
need not consider petitioners’ contention that sec. 301.7430-
3(a)(4), Proced. & Admin. Regs., is invalid.
                             - 10 -

petitioners, they have not incurred administrative costs for

which a claim is cognizable under section 7430.

     To reflect the foregoing,

                                      An order of dismissal and

                                 decision will be entered.
