                        T.C. Memo. 2008-248



                      UNITED STATES TAX COURT



            WILLIAM AND LISA BRUNSELL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11763-06.              Filed November 3, 2008.



     Jeffrey D. Moffatt, for petitioners.

     Scott B. Burkholder, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This case is before the Court on

petitioners’ motion for litigation costs including attorney’s

fees pursuant to section 74301 and Rule 231.




     1
      All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
                                -2-

     We are asked to decide whether petitioners are entitled to

recover litigation costs.   We hold that they are not.

                            Background

     Petitioners reside in California.     Respondent issued

petitioners a Letter 566-B EZ (30-day letter), notifying

petitioners that respondent was examining their income tax return

for 2004, specifically with respect to the claimed dependency

exemptions and child tax credit.2     The 30-day letter requested

documentation to support petitioners’ claiming exemptions and

credits for three children listed on the return for 2004 and

informed petitioners that respondent would issue a deficiency

notice if petitioners failed to provide the necessary

documentation.

     Petitioners timely submitted additional documentation,

including school records for the children showing the children’s

address as petitioners’ address, the entry of judgment finalizing

petitioner wife’s divorce from her ex-husband, and the marital

settlement agreement giving sole physical custody of the three

children to petitioner wife.

     Respondent mailed petitioners a Letter 692 on March 6, 2006,

stating that even though respondent had received petitioners’

earlier mailing, petitioners still needed to provide additional


     2
      Petitioners still mistakenly believe that respondent’s
deficiency notice denied the earned income credit (EIC).
Petitioners did not seek the EIC for 2004.
                                -3-

information to claim the three dependency exemptions and the

child tax credit.   Respondent gave petitioners 15 days to submit

this additional information.   The letter also advised petitioners

that they could appeal the proposed changes to the Appeals Office

and included a copy of Publication 3498-A, The Examination

Process, which explained how to appeal respondent’s proposed

determination.

     Petitioners neither provided more information within the

15-day period nor made an appeal or protest to the Appeals

Office.   Respondent issued a deficiency notice on April 17, 2006,

disallowing the three dependency exemptions and the child tax

credit.   Petitioners did not request an Appeals Office conference

or file a protest before the deficiency notice was mailed, nor

did they participate in an Appeals Office conference before

filing the petition with this Court.

     Respondent conceded, after petitioners filed the petition

with this Court, that petitioners owed no deficiency.

Petitioners filed a motion for reasonable litigation costs

seeking $4,916 in fees paid to their attorney, $60 in court

costs, and an additional $10,084 in fees that they have not yet

paid their attorney but which they seek from the Court.3




     3
      Petitioners did not file an additional affidavit containing
detailed information regarding fee arrangements, hours spent,
etc., as required by Rule 232(d).
                                -4-

Respondent objects to this motion.    Neither party requested a

hearing.

                            Discussion

     We now address whether petitioners may recover any of the

$15,060 in litigation costs.   The prevailing party may be awarded

reasonable litigation costs in any court proceeding by or against

the United States.   Sec. 7430(a)(2).    If the Government

establishes that its position was substantially justified, the

moving party will not be treated as having prevailed.     Sec.

7430(c)(4)(B).   A prevailing party must establish, to obtain such

an award, that (1) the party has exhausted the administrative

remedies available; (2) the party has substantially prevailed in

the controversy; (3) the party satisfies certain net worth

requirements; (4) the party has not unreasonably protracted the

proceedings; and (5) the amount of costs is reasonable.4     Sec.

7430(b) and (c).   The requirements of section 7430 are

conjunctive, and the failure to satisfy any one of the

requirements precludes an award of costs.    See sec. 7430(b) and

(c); see also Rule 232(e); Swanagan v. Commissioner, T.C. Memo.

2000-294.




     4
      Respondent contends that petitioners’   evidence of the costs
they incurred is inadequate to satisfy this   requirement. It is
not necessary, however, to reach this issue   because petitioners
do not satisfy the threshold requirement of   exhausting their
administrative remedies.
                                 -5-

       A threshold requirement exists for the recovery of

litigations costs.    The taxpayer must have exhausted the

available administrative remedies before filing a petition.    Sec.

7430(b)(1); Burke v. Commissioner, T.C. Memo. 1997-127; sec.

301.7430-1(a), Proced. & Admin. Regs.    A taxpayer exhausts his or

her administrative remedies where an Appeals Office conference is

available only if the taxpayer participated in such a conference

before filing a petition.    Burke v. Commissioner, supra; sec.

301.7430-1(b)(1), (g), Example (11), Proced. & Admin. Regs.

Petitioners did not request an Appeals Office conference or file

a protest before the deficiency notice was mailed, nor did they

participate in an Appeals Office conference before filing the

petition with this Court.    None of the limited exceptions applies

to relieve petitioners of the requirement that they participate

in an Appeals Office conference to be treated as having exhausted

available administrative remedies.     See Shaw v. Commissioner,

T.C. Memo. 2005-106.

       The Appeals Office’s mission “is to resolve tax

controversies, without litigation.”    4 Administration, Internal

Revenue Manual (CCH), pt. 8.1.1.1(1), at 27,003 (Oct. 23, 2007).

The Internal Revenue Service is seeking facts during the Appeals

phase to decide whether it should determine a deficiency and

thereby force a taxpayer to incur litigation costs or pay the

tax.    See, e.g., Shaw v. Commissioner, supra.   This Court has
                                  -6-

previously warned taxpayers and their counsel that waiving the

opportunity for an Appeals Office conference does not comply with

the exhaustion-of-administrative-remedies requirement or preserve

a right to recover litigation costs.      Haas & Associates

Accountancy Corp. v. Commissioner, 117 T.C. 48, 62 (2001), affd.

55 Fed. Appx. 476 (9th Cir. 2003).      This Court seeks to preserve

the role that the administrative appeal process plays in

resolving tax disputes by requiring taxpayers to participate in

an Appeals Office conference before litigation.     See Burke v.

Commissioner, supra (citing H. Rept. 97-404, at 13 (1981) and

Senate Comm. on Finance, Technical Explanation of Committee

Amendment, 127 Cong. Rec. 32070 (Dec. 16, 1981)).

     We have considered all the arguments of the parties, and, to

the extent we have not addressed them, we find them to be

irrelevant, moot, or meritless.    We hold that petitioners did not

exhaust their administrative remedies by participating in an

Appeals Office conference, and, therefore, petitioners are not

entitled to an award of litigation costs.     Accordingly, we need

not, nor do we, address whether petitioners satisfied any of the

remaining requirements of section 7430.
                            -7-

To reflect the foregoing,

                                        An order will be issued

                                  denying petitioners’ motion

                                  for litigation costs, and

                                  decision will be entered for

                                  petitioners.
