                          T.C. Memo. 2012-74



                    UNITED STATES TAX COURT



         MARITZA FURIATTI NEWMAN, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent

ROBERT MECK COMFORT AND OSCARLINA CAMPOS COMFORT,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket Nos. 25028-09, 1124-10.                Filed March 19, 2012.


        Ps were foreign citizens who worked in the United States at foreign
 embassies whose countries had not been certified by the U.S. State
 Department under I.R.C. sec. 893(b). Claiming tax exemption for those
 wages pursuant to I.R.C. sec. 893(a), Ps did not report their embassy wages
 as income. R issued notices of deficiency including the embassy wages as
 income, and Ps filed petitions. Before trial of these cases, this Court issued
 its Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), holding
 against the IRS’s interpretation of I.R.C. sec. 893(b). As to Ps, the IRS later
 conceded the I.R.C. sec. 893(b) issue and eventually conceded their cases
 altogether. Ps moved for administrative and litigation costs under I.R.C.
 sec. 7430.
                                           -2-

             Held: Notwithstanding our Opinion in Abdel-Fattah, R’s position in
      these cases, though incorrect, was “substantially justified” under I.R.C.
      sec. 7430(c)(4)(B)(i), so that Ps may not recover costs.



      A. Duane Webber and Kathleen A. Agbayani, for petitioners.

      Karen Lynne Baker and William J. Gregg, for respondent.



                             MEMORANDUM OPINION


      GUSTAFSON, Judge: These cases are now before the Court on motions for

costs filed pursuant to Rule 231 and section 7430.1 The procedural predicate for

those motions is as follows: On the dates given in the table below, respondent, the

Internal Revenue Service (“IRS”), issued a notice of deficiency (“NOD”) to Maritza

Furiatti Newman and an NOD to Robert Meck Comfort and Oscarlina Campos

Comfort; petitioners filed petitions in this Court; the IRS filed its answers; after the

cases were calendared for trial, but before trial, the parties filed




      1
       Unless otherwise indicated, all Rule references are to the Tax Court Rules of
Practice and Procedure, and all section references are to sections of the Internal
Revenue Code of 1986 (codified in 26 U.S.C., and referred to herein as “I.R.C.” or
“the Code”), as amended, in effect for the years at issue.
                                          -3-

stipulations of settled issues; and petitioners filed their motions for costs. The dates

of these actions were as follows:

                                    Newman                    Comfort
              Action              No. 25028-09               No. 1124-10

      NOD                         Aug. 6, 2009               Oct. 20, 2009

      Petition                    Oct. 20, 2009              Jan. 13, 2010

      Answer                      Dec. 16, 2009              Mar. 1, 2010

      Stipulation of
      settled issues              Dec. 14, 2010              Nov. 23, 2010

      Motion for costs            Jan. 28, 2011              Jan. 31, 2011

The issue for decision is whether the IRS’s position in these cases was

“substantially justified” for purposes of section 7430(c)(4)(B)(i). We hold in favor

of the IRS.

                                      Background

Petitioners’ employment and tax reporting

      Throughout the years at issue (i.e., 2002 through 2007 for Ms. Newman and

2003 through 2007 for the Comforts), Mrs. Comfort and Ms. Newman were

Brazilian citizens and were employed at the Brazilian Aeronautical Commission (the

“Commission”), which was a part of the Brazilian Embassy. Both Mrs. Comfort

and Ms. Newman lived in the United States pursuant to diplomatic A-2 immigrant
                                         -4-

visas that were renewed every two years on the basis of their continued employment

at the Commission. They both worked as bilingual technical assistants at the

Commission under annual renewable employment contracts.

      For the years at issue petitioners did not report the wages paid by the

Commission (“Commission wages”) on their Federal income tax returns, instead

taking the position that the Commission wages were exempt from tax under section

893(a) and, therefore, that petitioners had no income tax liabilities associated with

those wages.

The IRS’s initiative concerning employees of foreign embassies

      In 2006 the IRS conducted an initiative in connection with the employees of

foreign embassies, including the Embassy of Brazil. (Also included were employees

of the Embassy of the United Arab Emirates. See Abdel-Fattah v. Commissioner,

134 T.C. 190 (2010).) The IRS investigated several issues, including the exclusion

of embassy wages pursuant to section 893(a). Section 893(b) requires the U.S.

Secretary of State to certify to the Secretary of the Treasury the names of the foreign

countries that grant to employees of the U.S. Government an exemption that is

equivalent to the exemption under section 893(a), and the IRS took the position that

this certification was a prerequisite for exemption under section 893(a).
                                           -5-

Engagement of counsel

         In July 2008 petitioners’ counsel agreed to represent the Commission’s A-2

visa holders with respect to the section 893 income tax exemption issues that had

begun to arise for the Commission’s employees. Since the Commission and

petitioners could not afford to pay counsel’s customary fee for this work, counsel

agreed to represent petitioners and other A-2 visa holders during the administrative

phase for a limited fee (to be paid by the Commission) and thereafter on a pro bono

basis.

Administrative proceedings

         The IRS issued to Ms. Newman (on June 30, 2008) and to the Comforts (on

December 2, 2008) notices of proposed adjustment for their taxable years at issue.

The proposed adjustments included petitioners’ Commission wages as taxable

income because the IRS’s position at the time was that the Commission wages did

not qualify for exemption under section 893(a).

         In response to the notices of proposed adjustment, petitioners’ counsel

submitted to the IRS Office of Appeals protests to the notices of proposed

adjustment. The protests argued that petitioners’ Commission wages were exempt

under section 893(a) because, they contended, section 893(a) stands alone, and

petitioners’ situations satisfied all of the conditions in section 893(a).
                                           -6-

      On February 27, 2009, in accordance with section 893(b), the U.S.

Department of State certified to the Secretary of Treasury that Brazil does not tax

the wages, fees, or salaries of non-Brazilian employees of the U.S. Mission to Brazil

and that such employees perform services of a character similar to those performed

by employees of the Embassy and Consulates of Brazil in the United States. The

IRS maintained, however, that the Secretary of State’s certification applied only

prospectively, i.e., from the date of the certification, and therefore the certification

was not effective for petitioners’ tax years at issue.

      The IRS, in August 2009 (for Ms. Newman) and October 2009 (for the

Comforts), brought an end to petitioners’ administrative proceedings by issuing

notices of deficiency to petitioners for the taxable years at issue. In the notices of

deficiency the IRS determined that since Ms. Newman and Mrs. Comfort were

residents of the United States, their personal service wages from the Brazilian

Embassy (i.e., the Commission wages) were taxable by the United States.

Accordingly, the IRS determined that their Commission wages were taxable by the

United States and that petitioners had resulting deficiencies.2


      2
       The IRS determined in the notices of deficiency that Ms. Newman owed a
balance of $40,039 in tax, $9,009 in sec. 6651(a)(1) additions to tax, and at least
$4,978 in sec. 6651(a)(2) additions to tax, and that the Comforts owed a balance of
$81,060 in tax and $16,212 in sec. 6662(a)(2) penalties.
                                         -7-

Commencement of litigation

        Petitioners filed timely petitions for redetermination--Ms. Newman on

October 20, 2009, and the Comforts on January 13, 2010--asserting that their

Commission wages were exempt from tax. Petitioners resided in Maryland when

they filed their petitions. Petitioners were self-represented when they filed their

petitions, because counsel had evidently withdrawn from the representation by that

time.

        The IRS answered Ms. Newman’s petition on December 16, 2009, and the

Comforts’ petition on March 1, 2010. In its answers the IRS continued to deny that

the Commission wages were exempt from tax. The Court set Ms. Newman’s case

for trial to begin in Washington, D.C., during the week of June 21, 2010, but on

June 9, 2010, the Court granted the IRS’s motion to continue generally Ms.

Newman’s case. The Court set the Comforts’ case for trial during the Court’s trial

session beginning on November 29, 2010, in Washington, D.C. No trial ever

occurred in either of the cases.
                                        -8-

Proceedings in Abdel-Fattah

      As we have noted, the IRS had raised the section 893 exemption issue with

employees of multiple embassies. The issue was before this Court in a case brought

by an employee of an embassy of the United Arab Emirates--Abdel-Fattah v.

Commissioner, 134 T.C. 190 (2010)--in which the parties cross-moved for summary

judgment. (The taxpayer’s counsel in Abdel-Fattah was not the same counsel who

represents petitioners in these cases.) We held oral argument on the cross-motions

in Abdel-Fattah on March 18, 2010; and in that argument the Court did not suggest

to the IRS that its position regarding section 893 was unreasonable. On the

contrary, we said to the taxpayer’s counsel:

      [T]he support for saying that [section 893(b) is] a condition * * * is that it
      follows on immediately, which is not nothing, and addresses the same subject
      matter as the first part, the conditions, two of the conditions anyway, and says
      that those things shall be certified by the Secretary * * *. [I]f we want to do a
      plain meaning analysis we have to make sure that we give meaning to all of
      the words and all the sentences and all the subsections, but one criticism of
      [petitioner’s] position would be that it reads [subsection (b)] almost out of the
      statute. [Tr. at 16-17.]

      Nonetheless, the IRS’s position did not prevail. On April 27, 2010, this

Court issued an Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190, holding

that income of an employee working for a foreign embassy in the United States is

exempt from U.S. tax if the requirements of section 893(a) are satisfied, and that
                                         -9-

certification from the Secretary of State under section 893(b) is not a prerequisite

for exemption under section 893(a).

      The decision in Abdel-Fattah became final on October 11, 2010, when the

IRS did not file a notice of appeal.3

Re-entry of counsel

      On December 1, 2009, Ms. Newman re-engaged as counsel the same lawyers

who had assisted her in her administrative proceedings but had not filed her petition

in this litigation. On April 30, 2010, three days after the issuance of the Abdel-

Fattah Opinion, petitioners’ counsel filed their entry of appearance in Newman. On

August 26, 2010, the IRS informed petitioners’ counsel that it intended to concede

in Newman.

      Less than a month later, on September 20, 2010, Mr. and Mrs. Comfort re-

engaged as counsel those same lawyers. Counsel filed their entry of appearance in

Comfort three days later on September 23, 2010.

      The record does not show the reason for petitioners’ counsel’s exit from and

re-entry into these pro bono cases.


      3
       Although the Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190
(2010), was issued on April 27, 2010, it was necessary for the parties to make
computations under Rule 155. The Court did not enter its decision until July 12,
2010.
                                         - 10 -

IRS concessions

      Consistent with a later-announced action on decision (“AOD”) discussed

below, IRS counsel in the present cases began investigating whether petitioners met

the requirements of section 893(a). The IRS requested documents in both Newman

(in March 2010) and Comfort (in September 2010).

      On July 9, 2010, counsel for the parties met to discuss a stipulation of facts in

Newman, at which time petitioners’ counsel gave to the IRS information that was

relevant to the disputed issues in Newman. As is noted above, on August 26, 2010,

the IRS’s counsel advised petitioners’ counsel that the IRS was conceding the

Newman case.

      Similarly, petitioners’ counsel gave to the IRS information that was relevant

to the disputed issues in Comfort on October 28, 2010. Four days later, on

November 1, the IRS’s counsel informed the Comforts that the IRS intended to

concede its case in Comfort.

      On November 22, 2010, the Chief Counsel of the IRS published an AOD

with respect to Abdel-Fattah, advising that “the Service will no longer take the

position that the certification required by the Secretary of State in I.R.C. § 893(b)
                                         - 11 -

is a prerequisite for the tax exemption provided for in I.R.C. § 893(a).”4 Action on

Decision 2010-04 (Nov. 22, 2010).

      The next day--November 23, 2010--the parties in Comfort filed a stipulation

of settled issues, and the parties in Newman filed such a stipulation on

December 14, 2010.

Motions for costs

      In late January 2011, petitioners filed motions for awards of reasonable

litigation and administrative costs. The motions request costs for the services their

counsel performed during the administrative and litigation proceedings in their

respective cases.

      Petitioners argue that they are entitled to awards of costs under section 7430

because they were prevailing parties and the IRS lacked substantial justification to

      4
          The AOD also stated:

      However, the employee has the burden of proof to establish the
      enumerated conditions of I.R.C. § 893(a) are met. In disposing of
      cases where the State Department has issued an I.R.C. § 893(b)
      certification, the Service will apply the certification to all taxable years
      for which the facts and law are the same as those upon which the
      certification was based. In cases where the State Department has not
      issued an I.R.C. § 893(b) certification, the Service will continue to
      challenge a non-U.S.-citizen embassy employee’s claim of exemption
      if the employee fails to establish to the Service that the conditions of
      I.R.C. § 893(a)(2) and (3) are met as to that employee. [Action on
      Decision 2010-04 (Nov. 22, 2010).]
                                          - 12 -

deviate from the plain language of section 893. Petitioners rely on our Opinion in

Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), to support their contention. In

addition petitioners cite the fact that the IRS did not appeal the decision in Abdel-

Fattah and that the IRS eventually conceded its position in petitioners’ cases as well

as several other similar cases.

      The IRS responds by arguing first that petitioners did not incur any costs

associated with their proceedings and, therefore, are not entitled to an award under

section 7430. Alternatively, the IRS argues that petitioners were not prevailing

parties as required by section 7430 because the IRS’s position that section 893(b)

was a prerequisite for exemption under section 893(a)--although ultimately held

incorrect--was substantially justified.

                                       Discussion

I.    Operative legal principles

      A.     Section 7430 in general

      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, the “prevailing party” may be awarded reasonable administrative and

litigation costs incurred in connection with the proceeding. Sec. 7430(a). Costs

incurred include fees paid or incurred for the services of an attorney in connection
                                         - 13 -

with the proceeding. See sec. 7430(c)(1)(B)(iii); 26 C.F.R. sec. 301.7430-

4(b)(1)(iv), Proced. & Admin. Regs. The Court may award reasonable attorney’s

fees for pro bono legal services, even though a taxpayer does not “incur” those fees.

Sec. 7430(c)(3)(B).

      To recover incurred costs, the taxpayer: (1) must be the “prevailing party”,

sec. 7430(a); (2) must have exhausted administrative remedies, sec. 7430(b)(1); and

(3) must not have protracted the proceedings unreasonably, sec. 7430(b)(3). To

qualify as a “prevailing party”, the taxpayer: (1) must substantially prevail with

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

presented, sec. 7430(c)(4)(A)(i); and (2) must meet the timing and net worth

requirements of the first sentence of 28 U.S.C. section 2412(d)(1)(B), incorporated

by reference in section 7430(c)(4)(A)(ii).

      Most notably however, a taxpayer will nevertheless fail to qualify as the

“prevailing party” if the IRS can establish that its position in the proceedings,

though unsuccessful, was “substantially justified”. Sec. 7430(c)(4)(B)(i). By

denying costs where the IRS’s unsuccessful position was“substantially justified”,

section 7430 resembles 28U.S.C. section2412(d)(1)(A)5 and distinguishes itself

      5
       The Equal Access to Justice Act (“EAJA”) provides for awards of fees and
costs against the United States, in cases other than tax cases covered by
                                                                        (continued...)
                                         - 14 -

from some other fee-shifting statutes, in comparison with which section7430 is not

at all generous. By contrast, Rule54(d)(1) of the Federal Rules of Civil Procedure

as a general rule allows costs other than attorney’s fees to the prevailing party as a

matter of course.6 As to awards of attorney’s fees, section 7430 does not, like the

Fair Labor Standards Act, provide that “[t]he court in such action shall, in addition

to any judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorney’s

fee to be paid by the defendant, and costs of the action”, 29 U.S.C. sec. 216(b)

(emphasis added); nor does section 7430, like the Employee Retirement Income

Security Act (“ERISA”), provide that “the court in its discretion may allow a

reasonable attorney’s fee and costs of action to either party”), 29 U.S.C.




      5
        (...continued)
section 7430. See 28 U.S.C. sec. 2412(e) (2006) (“The provisions of this section
shall not apply to any costs, fees, and other expenses in connection with any
proceeding to which section 7430 of the Internal Revenue Code of 1986 applies”).
Like section 7430, the EAJA denies attorney’s fees if “the court finds that the
position of the United States was substantially justified”. 28 U.S.C.
sec. 2412(d)(1)(A).
      6
        See United States ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161,
1172 (10th Cir. 2009). This general rule of Fed. R. Civ. P. 54(d)(1)--that “costs
* * * should be allowed to the prevailing party” (emphasis added)--applies “[u]nless
a federal statute * * * provides otherwise”, so that the limits of section 7430 apply
not only in the Tax Court but also in Federal tax litigation in the district courts.
                                         - 15 -

sec. 1132(g)(1) (emphasis added).7 Rather, Congress has directed that no costs

(including attorney’s fees), however reasonably and necessarily incurred, will be

awarded to a winning taxpayer if the IRS’s position was “substantially justified”.

Sec. 7430(c)(4)(B)(i).

      The IRS agrees that petitioners (1) have substantially prevailed with respect

to the amount in controversy and with respect to the most significant issue in the

action, (2) meet the net worth requirements of 28 U.S.C. section 2412(d)(2)(B),

(3) exhausted the administrative remedies that were available to them, and (4) did

not unreasonably protract the administrative or judicial proceedings. Accordingly,

the only issue remaining with regard to petitioners’ eligibility for reasonable fee

awards is whether the IRS’s position in the proceeding was substantially justified.

      B.     Substantial justification in particular

      The IRS’s position is substantially justified if, based on all the facts and

circumstances of the case, it acted reasonably, that is, if the IRS’s position had a

reasonable basis in both law and fact. Pierce v. Underwood, 487 U.S. 552, 563

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

1988). The relevant inquiry is whether the IRS knew or should have known that its

      7
       See also 42 U.S.C. sec. 2000e-5(k) (Title VII; “In any action or proceeding
under this subchapter the court, in its discretion, may allow the prevailing party * * *
a reasonable attorney’s fee (including expert fees) as part of the costs”).
                                         - 16 -

position was invalid when adopted, given the facts available and any legal precedent

related to the case. Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir. 1995), aff’g

T.C. Memo. 1994-182; Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443

(1987); Prouty v. Commissioner, T.C. Memo. 2002-175. The Supreme Court has

warned that courts must “resist the understandable temptation to engage in post hoc

reasoning by concluding that, because a plaintiff did not ultimately prevail, his

action must have been unreasonable or without foundation.” Christiansburg

Garment Co. v. EEOC, 434 U.S. 412, 421-422 (1978). Or, as the Court of Appeals

for the D.C. Circuit put it, “courts need to guard against being ‘subtly influenced by

the familiar shortcomings of hindsight judgment.’” Taucher v. Brown-Hruska, 396

F.3d 1168, 1173 (D.C. Cir. 2005) (quoting Beck v. Ohio, 379 U.S. 89, 96 (1964)).

      The IRS’s position may be incorrect but nevertheless substantially justified

“‘if a reasonable person could think it correct’.” Maggie Mgmt. Co. v.

Commissioner, 108 T.C. at 443 (quoting Pierce, 487 U.S. at 566 n.2). The IRS’s

eventually conceding or even losing a case does not establish that its position was

unreasonable, but its concession does remain a factor to be considered. Sokol v.

Commissioner, 92 T.C. 760, 767 (1989).
                                         - 17 -

      As to matters of fact, in order for a position to be substantially justified,

“substantial evidence” must exist to support it. Pierce, 487 U.S. at 564.

“‘[Substantial evidence] does not mean 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 IRS is not obliged to concede adjustments whose

resolution requires factual determinations until it has received and had a reasonable

period of time to verify adequate substantiation for the matters in issue. See Nguyen

v. Commissioner, T.C. Memo. 2003-313; Huynh v. Commissioner, T.C. Memo.

2002-110.

      As to matters of law, “[g]enerally, the Commissioner’s position is considered

substantially justified when an issue is one of first impression.” Vines v.

Commissioner, T.C. Memo. 2006-258 (citing TKB Int’l, Inc. v. United States, 995

F.2d 1460, 1468 (9th Cir. 1993)). In particular, a position is substantially justified

when it is “a case of first impression,” it is “not contrary to any published decision”,

and a “reasonable person [could not] say that it lacked colorable justification.”

Estate of Wall v. Commissioner, 102 T.C. 391, 394 (1994).

      The mere fact that a case is one of first impression will not establish

substantial justification when the IRS’s position is in conflict with the “clear and
                                          - 18 -

unequivocal” language of the statute such that the IRS’s interpretation of that statute

is clearly unreasonable. Nalle v. Commissioner, 55 F.3d at 193. For instance, if the

IRS’s interpretation of a statute “‘lacked any ligaments of fact’ and was ‘clearly

erroneous’ as a matter of law”, Portillo v. Commissioner, 988 F.2d 27, 29 (5th Cir.

1993) (quoting Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th Cir. 1991)),

rev’g T.C. Memo. 1992-99, or if “[n]one of the arguments offered by the IRS during

the various stages of the litigation had even a chance of succeeding”, Beaty v.

United States, 937 F.2d 288, 292-293 (6th Cir. 1991), such an interpretation would

violate the “clear and unequivocal” language of the statute and would not be

substantially justified.

       However, the courts have not held that a Government position that is later

determined to be contrary to the plain meaning of a statute necessarily fails, for that

reason, to be substantially justified. Rather, if on a question of first impression the

Government takes a position that fails to give effect to the plain meaning of the

statute but that is still colorable, its position, though unavailing, may be substantially

justified and may not warrant an award of fees to its opponent. In Nalle v.

Commissioner, 55 F.3d at 190-191, for example, the Court of Appeals for the Fifth

Circuit had held that the regulation whose validity the IRS defended and on which

the IRS relied “contradicted the plain meaning of [I.R.C.] § 48”; but the court also
                                         - 19 -

held, id. at 194, that, for purposes of section 7430, the IRS’s position was

nonetheless substantially justified.8 Similarly, after the Supreme Court held

that a “literal reading of the” statutory language supported the conclusion adverse to

the Government and that “[t]he text of [18 U.S.C.] § 209(a) thus indicates that

employment status is an element of the offense”, Crandon v. United States, 494

U.S. 152, 159 (1990), the Court of Appeals for the Fourth Circuit (to which an

appeal would lie in either Newman or Comfort) nonetheless held, for purposes

of the Equal Access to Justice Act, see supra note 5, that before the Supreme Court

had so announced, the Government’s contrary position was nonetheless

“substantially justified”, see United States v. Paisley, 957 F.2d 1161, 1170 (4th Cir.

1992). A “plain meaning” analysis may be a very important consideration in




      8
        The Court of Appeals in Nalle addressed the question “whether the
Commissioner * * * knew or should have known that her position was invalid at the
onset of the litigation”, 55 F.3d at 191 (emphasis added), i.e., at a time when the
circumstances were equivalent to those in these cases now before us: At “the onset
of the litigation” in Nalle, when the petition was filed in the Tax Court, there was no
opinion of any court addressing the issue, and the IRS’s regulation and its litigating
position contradicted the plain meaning of the statute. The Tax Court later issued an
Opinion upholding the regulation and the IRS’s position, which the Court of
Appeals reversed, see Nalle v. Commissioner, 99 T.C. 187 (1992), rev’d, 997 F.2d
1134 (5th Cir. 1993); but that pro-IRS Tax Court Opinion did not exist as of “the
onset of the litigation” and therefore could not be cited as an authority giving rise to
substantial justification.
                                        - 20 -

determining whether the Government’s position is substantially justified, but it is not

always the only consideration.

      The foregoing principles must be applied to the IRS’s position on

section 893(a).

      C.     Section 893

      The primary substantive issue in petitioners’ administrative and judicial

proceedings was whether petitioners’ Commission wages were exempt from

taxation under section 893. Section 893(a) and (b) provides:

             SEC. 893(a). Rule for Exclusion.--Wages, fees, or salary of any
      employee of a foreign government or of an international organization
      (including a consular or other officer, or a nondiplomatic
      representative), received as compensation for official services to such
      government or international organization shall not be included in gross
      income and shall be exempt from taxation under this subtitle if--

                     (1) such employee is not a citizen of the United States, or
             is a citizen of the Republic of the Philippines (whether or not a
             citizen of the United States); and

                    (2) in the case of an employee of a foreign government,
             the services are of a character similar to those performed by
             employees of the Government of the United States in foreign
             countries; and

                    (3) in the case of an employee of a foreign government,
             the foreign government grants an equivalent exemption to
             employees of the Government of the United States performing
             similar services in such foreign country.
                                          - 21 -

             (b) Certificate by Secretary of State.--The Secretary of State
      shall certify to the Secretary of the Treasury the names of the foreign
      countries which grant an equivalent exemption to the employees of the
      Government of the United States performing services in such foreign
      countries, and the character of the services performed by employees of
      the Government of the United States in foreign countries.

That is, section 893(a) provides an exclusion on three conditions, and section 893(b)

provides that the Secretary of State shall certify two of the conditions.

      Before this Court’s Opinion in Abdel-Fattah v. Commissioner, 134 T.C. 190

(2010), there had been no published opinions precluding the IRS’s position that

section 893(b) certification was a prerequisite to an exemption under section 893(a).

However, in Abdel-Fattah we concluded “that under the plain language of the

statute, certification [by the Secretary of State] is not a condition or prerequisite of

the exemption”. Id. at 204.

      Under section 893 as we interpret it (and as petitioners have always

contended it should be interpreted), deciding whether a taxpayer is entitled to

exemption from income tax under section 893 still requires a factual inquiry--i.e., to

determine whether the conditions in section 893(a) have been met.
                                         - 22 -

II.   Analysis

      A.     The two phases of these cases

      To determine “substantial justification”, we must identify the point at which

the IRS first took the position that petitioners’ Commission wages were not exempt

from income tax under section 893, and we must then decide whether this position

from that point forward was substantially justified. Maggie Mgmt. Co. v.

Commissioner, 108 T.C. at 442. When determining whether the IRS’s position was

substantially justified as of a given date, a significant factor is whether the taxpayer

had presented all relevant information and legal arguments supporting the taxpayer’s

position. 26 C.F.R. sec. 301.7430-5(c), Proced. & Admin. Regs.

      In these cases the IRS maintained from the start that petitioners’

Commission wages were not exempt under section 893, and the IRS did not

deviate from this position until the parties settled. As proceedings in petitioners’

cases were taking place, this Court issued an Opinion and decided Abdel-Fattah,

which clarified the Tax Court’s interpretation of section 893 and provided

petitioners with new legal authority to support their position. Before the issuance

of Abdel-Fattah, there was no legal authority interpreting section 893. Given

petitioners’ reliance on Abdel-Fattah as new legal authority, it is appropriate to
                                          - 23 -

analyze the reasonableness of the IRS’s position in two phases--i.e., before the

Abdel-Fattah Opinion and after.

      B.     Substantial justification for the IRS’s pre-Abdel-Fattah position

      Since the legal issues in Abdel-Fattah and petitioners’ cases were the same

(i.e., whether section 893(b) is a prerequisite for exemption under section 893(a)),

the position that the IRS took in Abdel-Fattah is indicative of its position in

petitioners’ cases. Accordingly, if the IRS’s arguments in Abdel-Fattah were

reasonable, then its position in petitioners’ cases was also reasonable, at least until

the time that we issued our Opinion in Abdel-Fattah. That case raised an issue of

first impression. Although we did not ultimately agree with the IRS’s position, that

position had a colorable justification, based on its arguments as to (i) policy

objectives and (ii) the proximity of subsections (a) and (b) of section 893.

             1.     Policy objectives

      The IRS considered section 893 as a whole and argued that the purpose of

including subsection (b) in section 893 was to require the U.S. State Department’s

certification as a prerequisite for the income tax exemption under subsection (a).

We noted that the Code includes other provisions that do make a Government

official’s certification a prerequisite to a tax benefit; and we observed that these

provisions reflect a legislative choice not to “assign[] to the tax collector the task
                                         - 24 -

of making, in the first instance, difficult determinations that may be well outside his

knowledge or expertise” but instead to “commit[] the determination to the agency

with the relevant subject-matter expertise.” Abdel-Fattah v. Commissioner,

134 T.C. at 202-203. In that connection, we noted the IRS’s contention that

granting the section 893(a) tax benefit without the section 893(b) certification

“requires section 893 to be administered without the benefit of ‘State’s expertise in

the arena of international affairs’”, id. at 209; and we acknowledged that “[t]hese

issues of diplomacy and tax administration might be reasons to prefer a rule that

required State Department certification as a prerequisite to the income tax

exemption”, id. at 210.9 We ultimately determined that there is no basis to impute

such reasoning to the Congress that enacted section 893, but we cannot say that the

argument was unreasonable.

             2.     The proximity of subsections (a) and (b)

      As we noted at oral argument, the criteria for exemption under section 893

are stated in subsection (a), and the requirement that the Secretary of State certify


      9
        In De Allende v. Baker, 891 F.2d 7, 12 (1st Cir. 1989), the Court of Appeals
for the First Circuit similarly noted the Government’s proffered policy
considerations in holding that the Government’s position, which was contrary to the
plain meaning of 8 U.S.C. section 1182(a)(27) and that therefore failed on the
merits, see De Allende v. Shultz, 845 F.2d 1111 (1st Cir. 1988), was nonetheless
substantially justified for purposes of the EAJA.
                                         - 25 -

two of those criteria follows immediately in subsection (b)--which originally was in

the same subsection. Thus, the IRS’s position did not invent a limitation out of

whole cloth but rather urged that the certification--which certainly is provided for in

section 893(b)--is a prerequisite to the benefit in section 893(a)--to which the

certification certainly relates. The IRS’s position exaggerated the significance of

this arrangement in interpreting the statute, but it was not wrong to urge that this

arrangement be taken into account. The plain meaning of statutory language is not

determined without regard to its context; rather, “[t]he plain meaning of the statute’s

words, enlightened by their context”, Edwards v. Aguillard, 482 U.S. 578, 594

(1987) (emphasis added), governs our interpretation. We ultimately determined that

the proximity of subsections (a) and (b) did not vitiate the benefit conferred in

section 893(a) in the absence of the certification called for in section 893(b), so that

the arrangement of the statutory language does not overcome what is otherwise its

plain meaning; but the proximity of these provisions did help to justify the IRS’s

contrary argument.

      Since the IRS’s position in Abdel-Fattah was colorable, it was also

substantially justified. See Estate of Wall v. Commissioner, 102 T.C. at 394; see

also Nalle v. Commissioner, 55 F.3d at 193-194. Since the IRS’s position in Abdel-
                                            - 26 -

Fattah and its position in petitioners’ cases were the same, the IRS’s pre-Abdel-

Fattah position in petitioners’ cases was substantially justified.

      C.     Substantial justification for the IRS’s post-Abdel-Fattah position

      When Abdel-Fattah was issued, the situation changed. The issue was no

longer one of first impression, and the IRS’s position was now contrary to a

published Opinion, thus making the IRS’s position newly susceptible to the criticism

that it lacked substantial justification. It took several months (four months in Ms.

Newman’s case and six months in the Comforts’) after the decision in Abdel-Fattah

for the IRS to concede these cases, and petitioners argue that the IRS’s position was

not substantially justified during these periods. However, we find the IRS’s post-

Abdel-Fattah handling of these cases reasonable--and we therefore find its position

substantially justified--for two reasons:

             1.     Sufficient time to concede the section 893(b) issue

      Just as the IRS must be given a reasonable amount of time to change its

position when it becomes aware of new pertinent facts in a case, see Nguyen v.

Commissioner, T.C. Memo. 2003-313; Huynh v. Commissioner, T.C. Memo.

2002-110, so the IRS must be given time to reassess its position in light of new legal

precedent. We expect the IRS to administer the tax laws not ad hoc but uniformly.

If it is to do so, then decisions about the positions it will take on legal issues must be
                                        - 27 -

resolved centrally and not by various Chief Counsel attorneys handling various

cases. These cases were among a group of cases arising from the IRS’s initiative in

connection with the employees of multiple foreign embassies. Coordinated

decision-making necessarily requires time to present the issues to authorized

officials and to let them make decisions.

      Moreover, the decision whether to treat section 893(b) certification as a

prerequisite to section 893(a) exemption was necessarily bound up with the decision

whether to appeal Abdel-Fattah, but that appeal decision was not committed solely

to the IRS. Rather, under 28 U.S.C. section 519, that decision required the

involvement of the Department of Justice. We cannot criticize the IRS for allowing

this process to take its course in Abdel-Fattah before conceding Newman and

Comfort.

      We issued our Opinion in Abdel-Fattah on April 27, 2010; and on August 26

and November 1, 2010--i.e., four and six months later--the IRS’s counsel informed

Ms. Newman and the Comforts that the IRS would concede the section 893(b)

issue. That was a reasonable amount of time for the Government to decide to revise

its position and concede this issue.
                                         - 28 -

             2.     Sufficient time to address the section 893(a) issue

      Petitioners further criticize the IRS for taking several months after we issued

our Opinion in Abdel-Fattah to confirm that petitioners satisfied the requirements of

section 893(a). However, the IRS is not obliged to concede adjustments whose

resolution requires factual determinations until it has received and had a reasonable

period of time to verify adequate substantiation for the matters in issue. See Nguyen

v. Commissioner, T.C. Memo. 2003-313; Huynh v. Commissioner, T.C. Memo.

2002-110.

      Even though section 893(b) certification is not a prerequisite to section 893(a)

exemption, petitioners still had the burden to prove that they satisfied the three

conditions for an exemption set forth in section 893(a). See Rule 142; see also New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Ms. Newman did not

substantiate her citizenship or employment information until July 9, 2010. Similarly,

the Comforts did not substantiate Mrs. Comfort’s citizenship or employment

information until October 28, 2010.

      Petitioners point out, however, that before the decision in Abdel-Fattah, the

IRS asserted to petitioners and their counsel that the requirements of section 893(a)

were not at issue. Consequently, the IRS did not seek confirmation that petitioners

met those requirements. Petitioners urge that the IRS could and should have asked
                                         - 29 -

for that information before it issued notices of deficiency or defended them in

litigation.

       For us to hold that the IRS’s position was substantially justified is to hold that

the IRS was entitled to assume that position in conducting investigations and

determining deficiencies. Since we hold that the IRS was substantially justified in

taking the position that section 893(b) certification is a prerequisite to exemption,

the IRS was therefore not required to develop alternative positions before issuing

notices of deficiency or answering petitions.

       It is evidently true that the IRS did not challenge Mrs. Comfort’s or

Ms. Newman’s citizenship or employment status before Abdel-Fattah, but this was

natural because the IRS’s position up to that point was that the Commission wages

did not qualify for exemption under section 893(a) because section 893(b) had not

been satisfied. Accordingly, under the IRS’s pre-Abdel-Fattah position, whether

petitioners satisfied the citizenship and employment requirements of section 893(a)

was immaterial. Although the IRS could have investigated Mrs. Comfort’s and Ms.

Newman’s citizenship or employment situation as additional or alternate grounds to

support its position before Adbel-Fattah, the IRS was not unreasonable in declining

to do so.
                                        - 30 -

                                     Conclusion

      Since we have determined that the IRS was substantially justified in both its

pre-Abdel-Fattah and post-Abdel-Fattah positions, petitioners were not prevailing

parties for purposes of section 7430(c)(4). Accordingly, petitioners are not entitled

to an award of costs under section 7430.


                                                       Appropriate orders and

                                                 decisions will be entered.
