                         T.C. Memo. 2007-135



                       UNITED STATES TAX COURT



                MORTON AND ANNE KWESTEL, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8888-05.                 Filed May 30, 2007.



     Morton and Anne Kwestel, pro sese.

     Joseph J. Boylan, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:    Petitioners seek administrative costs under

Rule 271 and section 7430(f)(2).

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect at all relevant times, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
                                - 2 -
     The issue for decision is whether petitioners are entitled

to recover from respondent $7,253 in administrative costs

relating to petitioners’ claim for refund of $13,769 in overpaid

2001 Federal income taxes.   Hereinafter, all references to

petitioner in the singular are to petitioner Morton Kwestel.



                        FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     At the time the petition was filed, petitioners resided in

Rockaway, New Jersey.

     In 2001 petitioner converted a traditional IRA into a Roth

IRA under section 408A(d)(3).

     For 2001, petitioners timely filed their joint Federal

income tax return and paid the tax shown due thereon.   On their

return as filed, petitioners included in income the $55,065 in

accumulated untaxed IRA earnings.1

     On October 14, 2002, petitioner timely reversed the

conversion of his Roth IRA back into a traditional IRA under

section 408A(d)(6).2


     1
      Under sec. 408A(d)(3)(A) and (C), upon conversion of a
traditional IRA into a Roth IRA, the amount of untaxed earnings
in the IRA is includable in the taxpayer’s taxable income in the
year of the conversion.
     2
      Under sec. 408A(d)(6), a conversion of a traditional IRA
into a Roth IRA may be reversed so long as the transfer of funds
reversing the conversion is completed by the tax return filing
                                                   (continued...)
                              - 3 -
     On October 29, 2002, because of the reversal of the

conversion of his IRA account back into a traditional IRA and

because petitioner no longer had an obligation to report in his

2001 income the earnings from his IRA, petitioners filed with

respondent an amended 2001 joint Federal income tax return

reflecting gross income less the $55,065 in 2001 IRA earnings.

This reduction in income created a $13,769 tax overpayment that

petitioners claimed as a refund (refund claim).

     On July 24, 2003, in response to questions about

petitioners’ refund claim, petitioner met with respondent’s

Compliance Division officer and her supervisor.   Both of

respondent’s employees erroneously informed petitioner that

petitioner’s reversal of his IRA account back into a traditional

IRA was untimely and therefore that petitioners’ refund claim

would be disallowed.

     Also on July 24, 2003, respondent’s Compliance Division

mailed to petitioners a claim disallowance letter disallowing

petitioners’ refund claim and stating that petitioners could

appeal the disallowance to respondent’s Appeals Office.

     On September 4, 2003, petitioners’ accountant requested from

respondent’s National Office of Chief Counsel a determination as

to whether petitioners, on their amended 2001 tax return, timely


     2
      (...continued)
due date (including extensions) for the year in which the
conversion took place.
                              - 4 -
and properly treated under section 408A(d)(6) petitioner’s IRA

earnings as not includable in petitioner’s 2001 income.

     On September 17, 2003, respondent’s Compliance Division

mailed to petitioners a certified formal disallowance letter

disallowing petitioners’ $13,769 refund claim for 2001.

     On December 16, 2003, in response to petitioners’

accountant’s September 4, 2003, letter, the Employee Plans

Technical Branch of respondent’s National Office faxed to

petitioners’ accountant a letter indicating that petitioner was

to be treated as timely reversing the conversion of his

traditional IRA into a Roth IRA.

     On December 18, 2003, petitioners filed with respondent a

duplicate 2001 amended Federal income tax return, attaching to

this return a copy of the Employee Plans Technical Branch

December 16, 2003, favorable letter.

     On April 2, 2004, respondent’s Compliance Division mailed to

petitioners a letter reversing its earlier position and allowing

in full petitioners’ $13,769 refund claim.   On May 24, 2004,

respondent mailed to petitioners a check in the amount of $14,921

consisting of petitioners’ claimed tax refund plus interest.

     On or about August 1, 2004, petitioners mailed to respondent

their claim under section 7430 for $7,253 in administrative costs

relating to their attempt to resolve the question as to the

taxability of their IRA conversion and the reversal thereof.
                               - 5 -
     On April 13, 2005, respondent’s Appeals Office notified

petitioners of respondent’s disallowance of petitioners’ $7,253

claim for administrative costs.

     In the notice, respondent explained that, among other

reasons, because respondent had not issued an Appeals Office

notice of decision or a notice of deficiency for 2001 relating to

petitioners’ $13,769 tax refund claim, petitioners could not be

treated as a prevailing party under section 7430 and therefore

that petitioners were not entitled to administrative costs.


                              OPINION

     Generally, under section 7430 Congress has provided that

taxpayers may recover from respondent costs relating to

administrative proceedings in which the taxpayers substantially

prevail.   Section 7430(a) provides as follows:


     SEC. 7430(a). 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, interest, or penalty
     under this title, the prevailing party may be awarded a
     judgment or a settlement for--

                 (1) reasonable administrative costs incurred
           in connection with such administrative proceeding
           within the Internal Revenue Service
           * * *


     In section 7430(c)(2), administrative costs are defined to

include costs incurred on or after the earliest of the following:

(1) The date on which the taxpayer receives from respondent’s
                               - 6 -
Appeals Office a notice of decision, (2) the date of respondent’s

notice of deficiency, or (3) the date respondent mails a first

letter of proposed deficiency giving the taxpayer a right to

protest to respondent’s Appeals Office (commonly referred to as a

30-day letter).   The flush language of section 7430(c)(2)

provides as follows:


     Such term [administrative costs] shall only include
     costs incurred on or after whichever of the following
     is the earliest: (i) the date of the receipt by the
     taxpayer of the notice of the decision of * * *
     [respondent’s Appeals Office]; (ii) the date of the
     notice of deficiency; or (iii) the date on which the
     1st letter of proposed deficiency which allows the
     taxpayer an opportunity for administrative review in
     * * * [respondent’s Appeals Office] is sent.


     Because respondent’s first letter of proposed deficiency

(i.e., a so-called 30-day letter) typically is mailed to a

taxpayer by respondent’s Examination Division prior to any

contact between the taxpayer and respondent’s Appeals Office,

Congress clearly contemplated that under section 7430(c)(2)

taxpayers would be able to recover administrative costs

independently of any actual subsequent court litigation and

independently of any claim for recovery of litigation costs.

     Also applicable, however, to a claim for reimbursement of

administrative costs under section 7430, is the requirement that

a taxpayer must qualify as a “prevailing party”.   Sec. 7430(a).

For a taxpayer to qualify as a prevailing party, respondent’s
                               - 7 -
“position” must not have been substantially justified.   Sec.

7430(c)(4)(A) and (B).

     Under section 7430(c)(7)(B), respondent’s position that is

to be evaluated as to the justification therefor is identified as

the position respondent takes in the administrative proceeding as

of the earlier of either the date of receipt by the taxpayer of

respondent’s Appeals Office’s notice of decision or the date of

mailing to the taxpayer of respondent’s notice of deficiency

(i.e., no mention is made in section 7430(c)(7)(B) of the date of

respondent’s 30-day letter).

     Because of the more restrictive language of section

7430(c)(7)(B), we have held that a taxpayer cannot be treated as

a prevailing party under section 7430 where respondent is treated

as never having adopted a “position” in an Appeals Office notice

of decision or in respondent’s notice of deficiency.   See Rathbun

v. Commissioner, 125 T.C. 7, 14 (2005); Fla. Country Clubs, Inc.

v. Commissioner, 122 T.C. 73, 87 (2004), affd. 404 F.3d 1291

(11th Cir. 2005).

     Because respondent herein issued to petitioners neither an

Appeals Office notice of decision nor a notice of deficiency, we

cannot consider respondent to have adopted any position for

purposes of section 7430.   Petitioners therefore cannot be

treated as a prevailing party, and petitioners may not recover

their $7,253 in administrative costs.
                               - 8 -
     Petitioners contend that respondent adopted a position in

respondent’s Compliance Division’s September 17, 2003, certified

claim disallowance letter.3   However, under the plain language of

the statute, only respondent’s Appeals Office’s notice of

decision or respondent’s notice of deficiency establishes

respondent’s position for purposes of section 7430.   See Fla.

Country Clubs, Inc. v. Commissioner, supra at 86; Wade v. United

States, 865 F. Supp. 216, 219 (D.N.J. 1994).   Respondent’s

September 17, 2003, letter from respondent’s Compliance Division

is neither and does not establish respondent’s position for

purposes of section 7430.

     Congress considered and decided against changing the

definition of the “position” of the government” in section

7430(c)(7) to include positions taken by respondent in a 30-day

letter first proposing a tax deficiency.4

     Under the narrow statutory language of section 7430(c)(7) as

written, under respondent’s interpretative regulation under



     3
      Petitioners cite sec. 301.7430-3(c)(2), Proced. & Admin.
Regs., to support petitioners’ contention that a Certified Claim
Disallowance Letter may be treated as a document wherein
respondent states his “position” for purposes of sec. 7430 as
applied to refund claims. However, because the cited regulation
specifically requires that the notice of claim disallowance be
issued by respondent’s Appeals Office, the cited regulation does
not help petitioners.
     4
      See Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73,
78-86 (2004) (discussing the legislative history of sec. 7430)
affd. 404 F.3d 1291 (11th Cir. 2005).
                               - 9 -
section 7430 (sec. 301.7430-3(c), Proced. & Admin. Regs.) and

under the interpretation placed thereon by the referenced court

cases, taxpayers (such as petitioners herein) who do a good job

at the administrative level of resolving issues and getting

respondent to realize the error of his ways are precluded from

recovering administrative costs incurred in achieving those

favorable results.   To the contrary, taxpayers who do not do as

good a job at the administrative level and who receive adverse

Appeals Office notices of decision or notices of deficiency, but

who later convince respondent to concede issues or who

substantially prevail in litigation on the issues, are able to

seek a recovery of administrative costs.   In effect, taxpayers

who do a better job at the administrative level of resolving

issues raised by respondent on audit are prejudiced in their

ability to recover administrative costs under section 7430.

     Although we sympathize with petitioners’ situation, the

statute, as enacted, is controlling, and our authority is

limited.   As we stated in Metzger Trust v. Commissioner,

76 T.C. 42, 59 (1981), affd. 693 F.2d 459 (5th Cir. 1982):


     Courts do not have the power to repeal or amend the
     enactments of the legislature even though they may
     disagree with the result * * *
                             - 10 -
     Because the issue we address herein disposes of this case in

favor of respondent, we need not address either party’s further

arguments.

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent.
