                        T.C. Memo. 2008-164



                      UNITED STATES TAX COURT



        BERNARD P. AND LORRAINE C. BALCK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10905-03.               Filed July 3, 2008.



     Dennis W. Hartley, for petitioners.

     David W. Sorensen and Paul C. Feinberg, for respondent.



                        MEMORANDUM OPINION

     SWIFT, Judge:   This matter is before us on petitioners’

motion for recovery of $5,534 in litigation costs, plus $750 in

legal fees relating to this motion.   A hearing was held on

petitioners’ motion on October 30, 2007, in Las Vegas, Nevada.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code.
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                           Background

     Petitioners resided in Wyoming at the time the petition was

filed.

     In 2001, petitioner Lorraine C. Balck (Balck) was charged

with and pleaded guilty to a Federal felony of filing with

respondent a false 1995 Federal income tax return in violation of

section 7206(1).

     In the criminal tax prosecution of Balck, the indictment

alleged that on her and her husband’s 1995 joint individual

Federal income tax return, Balck reported a negative taxable

income of $41,069 and no “Other income” even though Balck knew

that she had received in 1995 “Other income” of approximately

$225,000.

     After her guilty plea and entry of judgment in the criminal

case, on April 9, 2003, respondent mailed to Balck and to her

husband a notice of deficiency for 1995 in which respondent

charged Balck with “Other Income” of $246,851, which included the

omitted income that had been involved in the criminal case.

Based thereon, respondent’s notice of deficiency to petitioners

determined a deficiency in petitioners’ 1995 Federal income tax,

an addition to tax, and penalties as follows:
                                - 3 -
                                    Additions to Tax/Penalties
Year        Deficiency     Sec. 6651(a)(1)     Penalties     Penalties
1995         $74,664           $11,199          $14,932       $55,998


       On July 8, 2003, petitioners filed their petition in which

they disputed the income adjustment, the tax deficiency, the

addition to the tax, and the penalties.

       This case was set for trial in Las Vegas, Nevada, in

December 2004, in June 2005, and in February 2006.         However, each

of the scheduled trials was continued, generally on respondent’s

request.

       In January 2006, “due to [respondent’s] problems with the

case” respondent’s trial counsel encouraged petitioners to submit

to respondent an offer-in-compromise (OIC) under which

petitioners were to pay a total of $100 in full settlement of

their 1995 Federal income tax deficiency, addition to tax,

penalties, and interest.

       By memorandum dated February 16, 2006, respondent’s trial

counsel forwarded petitioners’ OIC for review and approval to

respondent’s OIC processing group in Memphis, Tennessee, with a

strong recommendation for approval.      In his transmittal note,

respondent’s trial counsel stated as follows:


       Pursuant to some Grand Jury problems, it has been
       decided by my national office that we cannot try this
       matter. It was suggested that we secure an OIC from
       the petitioners, as the petitioners assert that they
       are in their late 50's and 60's and are now retired and
       living off a social security pension, and that the OIC
       be forwarded with our recommendation that it be
       accepted.
                              - 4 -
     During 2006, petitioners’ OIC languished in Memphis without

approval.   On January 2, 2007, respondent’s trial counsel

returned petitioners’ OIC to petitioners with the $150 OIC filing

fee petitioners had paid, and respondent’s counsel explained in a

cover letter to petitioners in relevant part as follows:


     After further review of this matter, the I.R.S. has
     determined that it is prudent to concede this matter.
     Therefore, the Offer in Compromise that you submitted
     to this office is being returned. In addition, in
     order to finalize our settlement [sic], we must file
     with the Tax Court a decision document which shows no
     deficiency or liability.


     On February 2, 2007, an agreed decision that petitioners and

respondent submitted to the Court was entered reflecting a zero

tax deficiency and zero additions to tax for petitioners for

1995.

     Thereafter, petitioners filed the instant motion for

litigation costs, and on October 30, 2007, petitioners’ new

counsel entered his appearance and filed a motion to supplement

petitioners’ motion for litigation costs by adding to the record

an affidavit from petitioners as to their financial net worth

showing total assets of $1,750, total liabilities of $138,826,

and a negative net worth of $137,076.


                            Discussion

     For purposes of petitioners’ motion for litigation costs

under section 7430, respondent does not dispute that petitioners
                              - 5 -
exhausted all administrative remedies, did not protract the

proceedings, substantially prevailed, and satisfy the net worth

limitation of section 7430.

     Respondent, however, argues that petitioners’ motion for

litigation costs should be denied because respondent’s position

was substantially justified and therefore petitioners do not

qualify as the prevailing party, and because petitioners have not

adequately established the reasonableness of the litigation costs

they seek to recover.


Substantial Justification

     A party in this Court will not be treated as the prevailing

party in a case for purposes of the recovery of litigation costs

under section 7430 where respondent establishes that his position

in the case was substantially justified.    Sec. 7430(c)(4)(B)(i).

     Substantial justification for respondent’s tax deficiency

and penalty determinations exists where his determinations had a

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

552, 565 (1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987),

affd. 861 F.2d 131 (5th Cir. 1988).

     Respondent’s eventual and delayed notice to petitioners that

their OIC (which respondent had requested from petitioners) would

not be processed and that respondent would concede this case

outright–-deficiency, addition to tax, and penalties--not only

triggers our curiosity but calls for a meaningful, credible, and
                              - 6 -
specific explanation from respondent in order to satisfy

respondent’s burden under section 7430(c)(4)(B)(i) to establish

that his position was substantially justified.   The vague

statement in respondent’s correspondence that there existed some

grand jury problems with the case is inadequate to satisfy

respondent’s burden.1

     In light of respondent’s outright concession, the facts that

Balck was criminally prosecuted for 1995, the year involved

herein, and that Balck was charged with omitting from her

reported 1995 income $225,000 in taxable income and pleaded

guilty thereto do not establish that respondent’s position was

substantially justified.   Quite to the contrary, if there were

unspecified grand jury problems that necessitated respondent’s

concession of this case in 2007 (as respondent admits), those

grand jury problems could well have occurred back in 2001,

preceding the issuance of respondent’s notice of deficiency in

April 2003, and they perhaps should have prevented respondent’s

notice of deficiency from ever being mailed to petitioners.



     1
      At the Oct. 30, 2007, hearing on petitioners’ motion for
litigation costs, respondent called no witnesses to explain the
nature or extent of the grand jury problems or concerns that
caused respondent to concede, not settle, this case.
Respondent’s trial counsel attempted to provide an explanation,
but what was needed was the testimony of a Government fact
witness who could testify as to the facts surrounding
respondent’s concession (e.g., testimony as to what the problems
were, when they came to respondent’s attention, and how they were
dealt with), not an argument from respondent’s trial counsel that
does not constitute evidence.
                              - 7 -
     Respondent has not made an adequate effort to explain or to

acknowledge the underlying nature of the grand jury problems,

when or how they arose, and when respondent’s trial counsel and

other personnel of respondent first became aware thereof.

Without more information as to the grand jury problems, we

conclude that respondent has not established that his position

herein was substantially justified and that petitioners qualify

as the prevailing party under section 7430.


Reasonableness of Litigation Costs

     Although petitioners seek recovery of litigation costs of

$5,534, they have bills totaling $12,207--$8,867 for the services

of a forensic accountant and $3,340 for the services of a

certified public accountant (C.P.A.).   Additionally, petitioners

seek recovery of $750 in legal fees relating to the instant

motion.

     Billing statements from the accountant have been submitted

documenting her services to petitioners during the almost 5-year

duration of this case and the modest $8,867 billed to petitioners

therefor.   Also, for the $3,340 the C.P.A. billed to petitioners,

a billing statement has been submitted.   Respondent makes no

specific argument as to why these expenses should be regarded as

unreasonable under section 7430.   The explanation for the

difference between the $12,207 total reflected in the billing

statements and the $5,534 for which recovery is sought may be
                              - 8 -
that some of the billable hours appear to involve tax return

preparation, rather than matters relating directly to this case.

     On the rather sparse record before us, petitioners’ request

for an award of $5,534 in litigation costs, plus $750 relating to

this motion, is reasonable.

     For the reasons stated, petitioners’ motion for litigation

costs will be granted.


                                   An appropriate order and

                              decision will be entered.
