                                 T.C. Memo. 2015-66



                           UNITED STATES TAX COURT



                     CHAD R. BALDWIN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 16781-10.                           Filed April 6, 2015.



      Chad R. Baldwin, pro se.1

      Peter T. McCary and A. Gary Begun, for respondent.



                             MEMORANDUM OPINION


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

litigation and administrative costs pursuant to section 7430 and Rule 231.2

      1
       Shellie H. Hart entered an appearance for petitioner on October 28, 2013,
and withdrew as petitioner’s counsel on June 18, 2014.
      2
          All section references are to the Internal Revenue Code (Code) in effect at
                                                                       (continued...)
                                        -2-

[*2] Respondent filed a response opposing petitioner’s motion, and petitioner filed

a reply to respondent’s response. As discussed in detail below, we conclude that

respondent’s position in these proceedings was substantially justified, and

consequently we will deny petitioner’s motion.

                                    Background

      The following facts are based on the parties’ submissions and an evidentiary

hearing on the matter. Some of the facts have been deemed stipulated pursuant to

Rule 91(f) by reason of petitioner’s failure to properly respond to an order to show

cause.3 Petitioner resided in Florida when his petition was filed.

      In 2007 in addition to other employment petitioner worked as a salesperson

for Florida Leisure Products, Inc. (Florida Leisure). Florida Leisure did not have a

policy of reimbursing employees for business-related expenses. On a timely

submitted return for the 2007 tax year, petitioner deducted expenses for mileage

for his personal vehicle, travel expenses, business expenses, and meals and




      2
        (...continued)
all relevant times, and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
      3
       Proposed stipulations of fact were accepted as established by the Court’s
order on February 1, 2012.
                                        -3-

[*3] entertainment expenses.4 In early 2010 respondent conducted an examination

of petitioner’s 2007 tax return and requested additional information from

petitioner to substantiate the claimed employee business expenses as well as items

underlying other miscellaneous deductions. After petitioner failed to respond to

that request, respondent sent him an audit report proposing certain adjustments

with respect to these expenses and asked petitioner to respond to the report.

Again, petitioner did not respond. By letter dated June 21, 2010, respondent

determined a deficiency in petitioner’s 2007 income tax liability. Specifically,

respondent determinated that petitioner was not entitled to his claimed employee

business expense deduction and other miscellaneous deductions because petitioner

did not establish that he had paid or incurred the underlying expenses in the 2007

tax year and that the expenses were ordinary and necessary.

      On July 26, 2010, petitioner timely filed a petition with the Court for

redetermination of the deficiency. On August 24, 2010, respondent timely filed an

answer maintaining the arguments in the notice of deficiency.




      4
      Petitioner later claimed deductions for home office expenses and increased
amounts of business expenses and meals and entertainment expenses.
                                        -4-

[*4] In an effort to resolve petitioner’s case without litigation, respondent

assigned it to the Office of Appeals. The Office of Appeals contacted petitioner

by letter dated September 21, 2010, and explained its case handling process.

      By letter dated October 18, 2010, petitioner acknowledged receiving the

September 21 letter and stated that he would send documents to substantiate

expenses underlying his claimed deductions sometime in February 2011.

      Soon after, an Appeals officer scheduled a telephone conference with

petitioner for March 10, 2011. On March 7, 2011, the Appeals officer received a

package of documents from petitioner, including bank statements and a

handwritten mileage log. The Appeals officer and petitioner held their scheduled

telephone conference, during which the Appeals officer discovered that petitioner

had reached a settlement in a lawsuit against his former employer, Midwest Direct

of Canton, Inc. (MDI), during the 2007 tax year. Under the terms of the 2007

settlement MDI would pay petitioner $10,000 and forgo $13,186 of restitution

payments due from him.

      On September 14, 2011, the Appeals officer sent petitioner a proposed

decision for a deficiency for the 2007 tax year and asked him to respond by

September 26, 2011. Petitioner did not accept the proposed deficiency. By letter
                                        -5-

[*5] dated October 19, 2011, the Office of Appeals informed petitioner that his

case was being forwarded to respondent’s counsel for trial preparation.

      The Court set the case for trial during the trial calendar beginning on

February 6, 2012, in Tampa, Florida.

      On January 26, 2012, respondent filed a motion for leave to file amendment

to answer (motion for leave) and pleaded an increased deficiency based on

petitioner’s failure to include the MDI settlement proceeds on his 2007 Federal

income tax return. The Court ordered petitioner to respond to respondent’s motion

for leave on or before February 17, 2012. Petitioner did not timely respond.

      By order dated February 3, 2012, the Court continued the case and directed

petitioner to provide respondent with copies of all documents that he intended to

present at trial in support of his case on or before May 4, 2012. The Court warned

petitioner that any documents submitted thereafter might not be admitted at trial.

      On May 4, 2012, petitioner provided a packet of documents to respondent.

Soon thereafter, petitioner enlisted the help of Community Legal Services of Mid-

Florida. In a letter dated November 8, 2012, an attorney from this organization

provided respondent with six pages of documentation related to petitioner’s

claimed home office expense deduction. The attorney also stated that she would

no longer be working on petitioner’s case.
                                         -6-

[*6] On February 12, 2013, petitioner sent respondent a letter stating: “I still

haven’t sent you all of my receipts for tax year 2007! I have a LARGE

STACKED ENVELOPE of toll receipts that I dread having to photo copy [sic], as

it will take ALL DAY and cost $30 in ink and paper!!”

      On March 1, 2013, the Court granted respondent’s motion for leave and

filed respondent’s amendment to answer. Petitioner subsequently filed motions

contesting respondent’s amendment to answer. The Court denied these motions.

      On October 28, 2013, Shellie H. Hart entered an appearance as counsel for

petitioner. In the months following Mr. Hart’s entry of appearance, respondent

completed a full analysis of petitioner’s documents and determined that he had

properly substantiated his claimed deductions for the 2007 tax year. Mr. Hart also

notified respondent that petitioner’s MDI settlement proceeds were not taxable

because petitioner was insolvent when MDI forgave his restitution payments. The

remainder of petitioner’s settlement proceeds, which consisted of a cash payment

of $10,000, was not paid to petitioner until 2008 after his attorney subtracted

attorney’s fees.

      On March 6, 2014, the Court entered a stipulated decision signed by the

parties indicating there is no deficiency in income tax due from, nor overpayment

due to, petitioner for the taxable year 2007.
                                         -7-

[*7] On May 1, 2014, petitioner filed the motion pending before the Court,

prompting the Court to vacate and set aside the stipulated decision. See Rule

232(f) (stating that disposition of motion for reasonable administrative and

litigation costs shall be included in the decision entered in the case); sec.

7430(f)(1). Petitioner asserts that he is entitled to an award of $1,000 for

attorney’s fees and $2,000 for out-of-pocket expenses, for a total of $3,000.

Petitioner also asserts that his 2007 Federal income tax has been overpaid by

$2,680 and he is entitled to a refund.

                                      Discussion

      The parties agreed in a previously entered decision that there is no

deficiency due from nor overpayment due to petitioner for the 2007 tax year. That

decision was vacated only to permit petitioner to make a claim for costs. By order

dated October 1, 2014, the Court stated that to the extent that petitioner’s motion

for costs claims that his tax for the 2007 tax year was overpaid, the claim is not

properly raised and will not be considered. Therefore, the sole issue before the

Court is petitioner’s motion for litigation and administrative costs.

      Section 7430(a) permits the award of reasonable administrative and

litigation costs to a taxpayer in an administrative or court proceeding brought

against the United States in connection with the determination of any tax, interest,
                                        -8-

[*8] or penalty under the Code. An award of reasonable administrative or

litigation costs may be made where the taxpayer is the prevailing party and did not

unreasonably protract the administrative or judicial proceedings. See sec. 7430(a),

(b)(3). Litigation costs may be awarded only if the taxpayer exhausted available

administrative remedies. See sec. 7430(b)(1).

      To be a prevailing party, a 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) meet certain net worth requirements. See sec.

7430(c)(4)(A)(i) and (ii).

      Respondent concedes that petitioner substantially prevailed and meets the

net worth requirements. Respondent argues, however, that petitioner is not the

prevailing party because respondent was substantially justified in maintaining his

position in the administrative and judicial proceedings. Respondent also argues

that petitioner did not exhaust his administrative remedies, that petitioner

unreasonably protracted the judicial proceedings, and that the fees requested are

unreasonable.

      As a general rule, the taxpayer in an administrative or court proceeding is

not treated as the prevailing party if the Commissioner establishes that the position

of the United States was substantially justified. See sec. 7430(c)(4)(B)(i). The
                                         -9-

[*9] “position of the United States” is, in turn, defined in section 7430(c)(7) as the

position taken by the Government in an administrative proceeding as of the earlier

of: (1) the date of receipt by the taxpayer of the notice of decision of the Office of

Appeals or (2) the date of the notice of deficiency. The record does not reflect that

the Office of Appeals ever issued a notice of decision before the issuance of the

notice of deficiency; accordingly, respondent’s position in the administrative

proceeding was established as of June 21, 2010--the date of the notice of

deficiency. See sec. 7430(c)(7)(B); Fla. Country Clubs, Inc. v. Commissioner, 122

T.C. 73, 77 (2004), aff’d, 404 F.3d 1291 (11th Cir. 2005). Respondent’s position

in the judicial proceedings was established by his answer filed on August 24,

2010, and his amendment to answer filed on March 1, 2013. See sec.

7430(c)(7)(A); Grant v. Commissioner, 103 F.3d 948, 952 (11th Cir. 1996), aff’g

T.C. Memo. 1995-374; Huffman v. Commissioner, 978 F.2d 1139, 1148 (9th Cir.

1992), aff’g in part, rev’g in part and remanding on other grounds T.C. Memo.

1991-144. Although the positions the Commissioner takes in the administrative

and judicial proceedings are normally considered separately, the distinction is of

little consequence when the Commissioner takes the same position in both the

notice of deficiency and in the answer. See Livingston v. Commissioner, T.C.

Memo. 2000-387.
                                        - 10 -

[*10] The United States’ position is substantially justified if there is a reasonable

basis for it both in law and in fact. Pierce v. Underwood, 487 U.S. 552, 565

(1988). Whether the Commissioner’s position was reasonable depends on all the

facts known to him when he took positions in the administrative and judicial

proceedings. See Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997);

DeVenney v. Commissioner, 85 T.C. 927, 931 (1985). The fact that the

Commissioner eventually loses or concedes a case does not establish that his

position was unreasonable. See Sokol v. Commissioner, 92 T.C. 760, 767 (1989);

Wasie v. Commissioner, 86 T.C. 962, 969 (1986). A significant factor in

determining whether the Commissioner’s position is reasonable as of a given date

is whether, on or before that date, the taxpayer has presented all relevant

information under the taxpayer’s control and relevant legal arguments supporting

the taxpayer’s position. Corson v. Commissioner, 123 T.C. 202, 206-207 (2004);

sec. 301.7430-5(c)(1), Proced. & Admin. Regs.

      Respondent asserted in the notice of deficiency his administrative position

that petitioner was not entitled to certain miscellaneous deductions (after

limitations) because, at the time, petitioner did not establish that he had paid or

incurred the underlying expenses in the 2007 tax year and that the expenses were

ordinary and necessary. More than two years after petitioner received the notice
                                        - 11 -

[*11] of deficiency, petitioner sent a letter to respondent stating that he had not

submitted all of the relevant receipts for the 2007 tax year. It was not until more

than three years after the notice of deficiency was issued that petitioner submitted

all of the relevant documentation to respondent to prove his claims. Petitioner

argues that he was allowed the same deductions for previous years. The

Commissioner is not required, however, for any given year to allow a tax benefit

that was permitted for a previous or subsequent year. See, e.g., Lerch v.

Commissioner, 877 F.2d 624, 627 n.6 (7th Cir. 1989), aff’g T.C. Memo. 1987-

295; Pekar v. Commissioner, 113 T.C. 158, 166 (1999). The Commissioner is

entitled to maintain his position until adequate substantiation is received and

verified. Newman v. Commissioner, T.C. Memo. 2012-74; Hall v. Commissioner,

T.C. Memo. 2003-159, aff’d, 118 Fed. Appx. 308 (9th Cir. 2005). Accordingly,

we find that respondent’s administrative position had a reasonable basis in fact

and law and therefore was substantially justified.

      Respondent’s litigation position in his answer was the same position he took

during the administrative proceeding, and there is no indication that any

developments between the time he issued the notice of deficiency and the time he

filed his answer would render his litigating position any less justified. Therefore,

respondent was substantially justified in the litigation position taken in his answer.
                                        - 12 -

[*12] See Cooley v. Commissioner, T.C. Memo. 2012-164. Later, respondent

amended his answer to account for petitioner’s MDI settlement proceeds. When

respondent filed the amendment to answer, he did not know that petitioner was

insolvent at the time of the settlement. It was not until several months after the

Court filed respondent’s amendment to answer that petitioner’s attorney, Mr. Hart,

introduced the issue of petitioner’s insolvency and the application of a relevant

Code section to make the debt forgiveness nontaxable. On the basis of the facts

available to respondent at the time the amendment to answer was filed, as well as

the longstanding legal precedent that forgiven debt is generally taxable income,

respondent’s litigation position had a reasonable basis in both law and fact and

therefore was substantially justified. See Maggie Mgmt. Co. v. Commissioner,

108 T.C. at 443. We also note that respondent timely conceded that petitioner had

no deficiency, after receiving all the relevant documents to substantiate

petitioner’s expenses and being informed by Mr. Hart of petitioner’s insolvency at

the time of the settlement.

      In the light of our conclusions that respondent’s administrative and

litigation positions were substantially justified, we need not reach respondent’s

arguments that petitioner failed to exhaust administrative remedies and
                                       - 13 -

[*13] unreasonably protracted the proceedings and that the fees requested are

unreasonable.

      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.
