                          125 T.C. No. 2



                      UNITED STATES TAX COURT



           KENNETH C. RATHBUN, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos.   14383-03, 14384-03,     Filed July 12, 2005.
                   14385-03, 14387-03,
                   14391-03.



          Ps seek administrative costs for expenses incurred in
     administrative proceedings with R regarding the 1993 taxable
     year. Ps contend that a letter issued by R in December of
     1995 constitutes a notice of the decision of the Internal
     Revenue Service Office of Appeals and R’s position in the
     administrative proceedings as provided by sec.
     7430(c)(7)(B), I.R.C.

          Held: The letter issued by R in December of 1995 is
     not a notice of the decision of the Internal Revenue Service



     1
      Cases of the following petitioners are consolidated
herewith: Doreen M. and Marc R. Fretwell, docket No. 14384-03;
Charles E. and Gladythe M. Rathbun, docket No. 14385-03; Linda J.
and Arlen R. Johnson, docket No. 14387-03; and Jana B. Rathbun-
Hanley, docket No. 14391-03.
                               - 2 -

     Office of Appeals. Consequently, Ps are not entitled
     to recover administrative costs because they are not
     prevailing parties under sec. 7430(c)(4), I.R.C.



     Nicole M. Chicoine, Darrell D. Hallett, and Cori E.

Flanders-Palmer, for petitioners.

     Gregory M. Hahn, for respondent.



                              OPINION


     NIMS, Judge:   This matter is before the Court on petitions

for administrative costs filed pursuant to Rule 271 and section

7430(f)(2).   Both sides have filed motions for summary judgment

under Rule 121.   The issue for consideration is whether

petitioners are entitled to reasonable costs for expenses

incurred in administrative proceedings with the Internal Revenue

Service (IRS) regarding their 1993 gift tax liabilities.    Unless

otherwise indicated, all Rule references are to the Tax Court

Rules of Practice and Procedure, and all section references are

to the Internal Revenue Code as amended.

                            Background

     Petitioners Charles Rathbun (Charles) and his spouse,

Gladythe Rathbun (Gladythe), are the parents of petitioners Linda

Johnson, Kenneth Rathbun, Jana Rathbun-Hanley, and Marc Fretwell

(collectively referred to herein as the Rathbun children).

Charles, Gladythe, and the Rathbun children are partners in the
                                  - 3 -

Mission Family Limited Partnership (limited partnership).     All

petitioners resided in the State of Washington at the time the

petitions were filed.

     On January 9, 1993, Charles purchased a winning ticket in

the Washington State lottery.     The winning ticket entitled the

owner to $15 million payable in equal installments of $750,000

over 20 years.    Respondent ultimately agreed that Charles

purchased the ticket on behalf of an informal family partnership.

See discussion infra p. 7.

     On January 11, 1993, petitioners retained attorney Ronald

Braley (Mr. Braley) and formed the limited partnership to

collect, manage, and distribute the proceeds of the lottery

winnings.    The partnership agreement specifies that Charles and

Gladythe are each 1 percent general partners in the limited

partnership.    The remaining 98 percent is owned by the limited

partners as follows:

            Partner               Percentage ownership

            Charles Rathbun               15.68
            Gladythe Rathbun              15.67
            Linda Johnson                 13.33
            Kenneth Rathbun               13.33
            Jana Rathbun-Hanley           13.33
            Marc Fretwell                 13.33
            Brian Fretwell1               13.33
     1
       Brian Fretwell’s petition was resolved separately in
docket No. 14386-03.
                               - 4 -

     On January 25, 1995, respondent issued individual notices of

proposed deficiency (1995 30-day letters) to Charles and

Gladythe.   Respondent alleged that the couple, as a “marital

community”, were the true owners of the winning lottery ticket

and that capitalizing the limited partnership with the right to

collect the prize constituted a taxable gift to the Rathbun

children.

     On March 24, 1995, Mr. Braley filed a written protest to

respondent’s 1995 30-day letters.   Mr. Braley challenged

respondent’s assertion that the ticket was owned by the marital

community and maintained that Charles purchased the ticket on

behalf of an informal family partnership.   Mr. Braley claimed no

taxable gifts were made because petitioners had a “common

understanding” that the prize would be shared by the entire

family in the event one of them held a winning ticket.   According

to Mr. Braley, petitioners created the limited partnership to

merely formalize the relationship between the family members and

to satisfy various requirements of the Washington State Lottery

Commission.

     The Rathbuns’ protest was assigned to IRS Appeals Officer

Fred Rawley (AO Rawley).   AO Rawley disagreed with Mr. Braley’s

arguments and was prepared to issue notices of deficiency to

Charles and Gladythe for the alleged 1993 gift tax liability.    In
                              - 5 -

November of 1995, AO Rawley sent the proposed notices of

deficiency to respondent’s District Counsel for review because he

viewed the issue involved as a “novel one”.

     On December 13, 1995, respondent’s District Counsel advised

against issuing the proposed notices of deficiency and

recommended that the cases be returned to respondent’s

Examination Division for further factual development.

     On December 26, 1995, AO Rawley sent a Form 3100, Appeals

Division Feedback Report and Transmittal Memorandum, to the

District Director in which the Appeals Office released

jurisdiction over the Rathbuns’ cases.   The form included the

following explanation:

          We were unable to resolve these two cases, and were
     prepared to issue Notices of Deficiency based on the
     examiner’s recommendation * * *. However, at our request
     Counsel reviewed the proposed notices; and they have
     strongly recommended that additional development be done by
     the Examination Division prior to issuance * * *. We are
     now concluding our consideration and releasing jurisdiction
     of these two cases so that the recommended development
     activity may be considered. We trust that you will take
     whatever action you consider appropriate, including the
     issuance of Notices of Deficiency at such time as you
     consider proper.

     On the same day, December 26, 1995, Mr. Rawley sent a letter

(December 1995 letter) to the Rathbuns’ attorney that stated:

          Dear Mr. Braley:

               We have completed our consideration of the two
          cases captioned above; and we are sorry that we were
          unable to reach a mutually satisfactory resolution. We
          have returned the cases to the District Director for
          whatever action he deems appropriate.
                               - 6 -

               Thank you for your cooperation; and if you have
          any further questions please contact me * * *.

                               Sincerely,


                               Fred R. Rawley
                               Appeals Officer

     On April 6, 1996, respondent served summonses on Charles and

Gladythe with respect to their 1993 gift tax liability.   Shortly

thereafter, the couple retained attorney Larry Johnson (Mr.

Johnson) to represent them with respect to respondent’s

examination.   On December 5, 1996, respondent’s examiner proposed

an alternative theory conceding that the Rathbun children, along

with their parents, were members of an informal partnership on

January 11, 1993, but that the children “gifted” a portion of

their interests in the lottery winnings to Charles and Gladythe

upon creation of the limited partnership.   Faced with

respondent’s new argument, the Rathbun children also retained Mr.

Johnson in February of 1997.

     On September 8, 1999, respondent issued additional 30-day

letters to Charles and Gladythe that mirrored the argument

outlined in the 1995 30-day letters.   On the same day, respondent

issued individual 30-day letters to the Rathbun children that

advanced the alternative theory.

     On November 10, 1999, Mr. Johnson filed a written protest to

the 30-day letters, and the case was reassigned to respondent’s
                               - 7 -

Appeals Office.   Respondent and petitioners eventually reached a

settlement in September of 2000.     The parties agreed that (1)

Charles purchased the winning lottery ticket on behalf of an

informal general partnership including his wife and children, and

(2) the transfer of the collection rights to the limited

partnership, under the terms of the partnership agreement,

reduced the partnership interests of each of the Rathbun children

from 14.29 percent to 13.33 percent.     Consequently, the Rathbun

children in 1993 each made a gift valued at $250,000 to their

parents, but no gift tax was owed because of the available

unified credit under section 2505.

      On December 8, 2000, petitioners submitted requests to

respondent for administrative costs under section 7430.     Linda

Johnson and Marc Fretwell filed joint requests with their

spouses, Arlen Johnson and Dorene Fretwell.     On May 27, 2003,

respondent sent separate letters to petitioners denying their

claims for administrative costs.     The respective petitions in the

underlying case were filed on August 28, 2003.     The cases were

then consolidated under Rule 141(a) on January 18, 2005.

                            Discussion

I.   Standard for Summary Judgment

      Rule 121(a) allows a party to move “for a summary

adjudication in the moving party’s favor upon all or any part of

the legal issues in controversy.”     Rule 121(b) provides that a
                                - 8 -

decision on such a motion shall be rendered “if the pleadings,

answers to interrogatories, depositions, admissions, and any

other acceptable materials, together with the affidavits, if any,

show that there is no genuine issue as to any material fact and

that a decision may be rendered as a matter of law.”   See

Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.

17 F.3d 965 (7th Cir. 1994).

II.   Section 7430

      Section 7430 provides for the award of administrative costs

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 pursuant

to the Internal Revenue Code.   An award of administrative costs

may be made where the taxpayer:   (1) Is the “prevailing party”;

(2) did not unreasonably protract the administrative proceedings;

(3) filed an application for administrative costs before the 91st

day after the date on which the final decision of the IRS was

made; and (4) claimed reasonable administrative costs.    Sec.

7430(a), (b)(3) and (4).   Our focus is on whether petitioners

were prevailing parties in their administrative proceedings with

the IRS.

      To be a prevailing party, the taxpayer must substantially

prevail with respect to either the amount in controversy or with

respect to the most significant issue or set of issues presented,
                                - 9 -

and, at the time the petition is filed, satisfy certain net worth

requirements.   Sec. 7430(c)(4)(A).     Section 7430(c)(4)(B),

however, provides that a taxpayer shall not be treated as a

prevailing party if the United States establishes that the

position of the United States in the proceeding was substantially

justified.   Section 7430(c)(7)(B) states that the term “position

of the United States” means the position taken by the United

States in an administrative proceeding as of the earlier of (1)

the date of the receipt by the taxpayer of the notice of the

decision of the IRS Office of Appeals, or (2) the date of the

notice of deficiency.    Respondent is not considered as having

taken any position in an administrative proceeding prior to the

issuance of an Appeals Office decision or a notice of deficiency.

See, e.g., Richardson v. Commissioner, T.C. Memo. 1991-427.

Taxpayers must, among other things, receive either a notice of

decision from the Appeals Office or a notice of deficiency to

qualify as prevailing parties in an administrative proceeding

under section 7430(c)(4).    Fla. Country Clubs, Inc. v.

Commissioner, 404 F.3d 1291 (11th Cir. 2005), affg. 122 T.C. 73

(2004).

     Petitioners never received a notice of deficiency from

respondent so we turn to the meaning of a notice of the decision

of the Appeals Office.    A notice of decision, for purposes of

section 7430, is “the final written document, mailed or delivered
                               - 10 -

to the taxpayer, that is signed by an individual in the Office of

Appeals who has been delegated the authority to settle the

dispute on behalf of the Commissioner, and states or indicates

that the notice is the final determination of the entire case.”

Sec. 301.7430-3(c)(2), Proced. & Admin. Regs. (the regulation

also treats a notice of claim disallowance issued by the Office

of Appeals as a notice of decision, but this relates to claims

for refund, which is not our situation).

       A 30-day letter does not constitute a position of the United

States, and a proposed notice of deficiency, circulated within

the IRS and not sent to taxpayers, is not a notice of deficiency

for purposes of section 7430(c)(7)(B)(ii).     Fla. Country Clubs,

Inc. v. Commissioner, supra.

III.    Contentions of the Parties

       Respondent contends that petitioners are not “prevailing

parties” for purposes of section 7430(c)(4) and cannot recover

administrative costs because the Appeals Office never took a

position through a notice of decision.

       Petitioners maintain that the December 1995 letter sent by

AO Rawley was an Appeals Office notice of decision.    Petitioners

specifically assert that the December 1995 letter was the final

determination of the entire case because the document indicated

that the Appeals Office had completed its consideration and

returned the cases to the District Director.
                                - 11 -

      We disagree with petitioners’ interpretation of the December

1995 letter.   Petitioners mistakenly equate an evaluation of the

issues in controversy and release of jurisdiction with a final

determination.     The letter’s content does not point to a final

determination as required by section 301.7430-3(c)(2), Proced. &

Admin. Regs.   The letter merely served to notify petitioners that

AO Rawley had finished his consideration and that respondent’s

District Director would take further action.     Moreover, in

December of 1995, respondent had yet to even include the Rathbun

children in his examination.     Since respondent failed to reach a

final determination, the cases were returned to the Appeals

Office following issuance of additional 30-day letters.

      For this reason, we conclude that the December 1995 letter

was not an IRS Appeals Office notice of decision.     In light of

our conclusion that petitioners never received a notice of

decision, it is unnecessary for us to discuss whether petitioners

substantially prevailed in their administrative proceedings.

IV.   Conclusion

      Respondent did not take a position in petitioners’ cases

because the December 1995 letter was not an Appeals Office notice

of decision.     Given that respondent never took a position for

purposes of section 7430(c)(4), petitioners are not “prevailing

parties” entitled to administrative costs under section 7430, and

we so hold.
                             - 12 -

     We have considered all the contentions and arguments of the

parties that are not discussed herein, and we find them to be

without merit, irrelevant, or moot.

     To reflect the foregoing,

                                      Appropriate orders and

                                 decisions will be entered for

                                 respondent.
