                               T.C. Memo. 2012-235



                         UNITED STATES TAX COURT



                   ELTON S. DA SILVA, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

                  MARILDA F. DA SILVA, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 11859-10, 11903-10.             Filed August 13, 2012.



      Allen Duane Webber, Daniel V. Stern, and Ryan J. Kelly, for petitioners.

      Jeffrey E. Gold and Scott A. Hovey, for respondent.



                           MEMORANDUM OPINION


      HALPERN, Judge: These consolidated cases are before the Court on

petitioners' motions for award of reasonable litigation and administrative costs
                                         -2-

[*2] (motions).1 The procedural predicate for the motions is as follows:

Respondent separately determined deficiencies in Federal income tax with respect to

petitioners Marilda F. Da Silva and Elton S. Da Silva for tax years 2004-07 and

2005-07, respectively, on the basis, in part, that each had omitted from gross income

certain wage income received, as employees of the Embassy of Brazil, from the

Brazilian Aeronautical Commission (commission). Each petitioner assigned error to

respondent's determination principally on the ground that, as a foreign (Brazilian)

citizen and an employee of the Embassy of Brazil, his or her wages were exempt

from Federal income tax under section 893(a), which exempts from income taxation

compensation of certain employees of foreign governments. Respondent answered,

denying error, but, before trial, he conceded that the wages in question were exempt

from tax. The parties filed stipulations of resolved issues. Subsequently, petitioners

made the motions. The dates of the aforementioned actions are as follows:




      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                          -3-

[*3]                              Ms. Da Silva                      Mr. Da Silva
       Action                     No. 11903-10                      No. 11859-10

Notice of deficiency              Feb. 23, 2010                     Feb. 23, 2010

Petition                          May 24, 2010                      May 24, 2010

Answer                            July 7, 2010                      July 14, 2010

Notification of concession        Oct. 21, 2010                     Apr. 29, 2011

Stipulation of
 resolved issues                  Aug. 1, 2011                      July 28, 2011

Motion for costs                  Aug. 16, 2011                     Aug. 16, 2011

       The issue for decision is whether respondent's position in both cases was

"substantially justified" within the meaning of section 7430(c)(4)(B)(i). We hold

that it was.

                                      Background

       The facts and issues in these cases are sufficiently identical to the facts and

issues in Newman v. Commissioner, T.C. Memo. 2012-74, also involving

employees of the commission, that we refer readers to that report for a fuller

discussion of the pertinent background of these similar cases. Here, we shall

highlight certain issues, dates, and events that merit discussion. Petitioners resided

in Maryland when they filed the petitions.
                                          -4-

[*4] Section 893

      If certain conditions are met, section 893(a) excludes from gross income and

exempts from taxation compensation of certain employees of foreign governments

and international organizations. In the case of an employee of a foreign

government, one condition is that the foreign government reciprocate that treatment

for employees of the United States performing similar services in the foreign

country. Sec. 893(b). Until his concessions in these cases, respondent's position

was that section 893(b), which requires the U.S. Secretary of State to certify to the

Secretary of the Treasury the names of the foreign countries that reciprocate, is a

prerequisite for exemption under section 893(a). Because the Secretary of State did

not, until February 27, 2009, certify that Brazil satisfied the foregoing condition,

respondent determined deficiencies in tax for the years at issue.

Abdel-Fattah v. Commissioner and Aftermath

      In April 2010, we held in Abdel-Fattah v. Commissioner, 134 T.C. 190

(2010), that section 893(b) is not a prerequisite for exemption under section 893(a).

      On November 22, 2010, the Chief Counsel of the Internal Revenue Service

published an action on decision (AOD) with respect to Abdel-Fattah, advising that
                                          -5-

[*5] "the Service will no longer take the position that the certification required by

the Secretary of State in I.R.C. § 893(b) is a prerequisite for the tax exemption

provided for in I.R.C. § 893(a)." AOD 2010-04 (Nov. 22, 2010).

      In October 2010, before the issuance of, but consistent with the position

taken in, the AOD, respondent reviewed whether petitioners met the requirements of

section 893(a) and, finding the requirements satisfied, conceded both cases. On

October 21, 2010, he communicated his decision to Ms. Da Silva. On account of an

oversight related to moving offices, however, he did not notify Mr. Da Silva of his

concession until April 2011.

      On July 28, 2011, Mr. Da Silva and respondent filed a stipulation of resolved

issues, and, on August 1, 2011, Ms. Da Silva and respondent filed a stipulation of

resolved issues. The stipulations resolved all issues but for petitioners' respective

claims for litigation and administrative costs.

      Petitioners made the motions on August 16, 2011. Each motion requests an

award for fees incurred during the administrative and litigation proceedings.

                                      Discussion

I.    Introduction

      Section 7430 provides that a taxpayer may recover reasonable costs,

including attorney's fees, incurred in connection with any tax proceeding
                                          -6-

[*6] (administrative or judicial) against the United States if the taxpayer is the

prevailing party in the proceeding. To recover costs, the taxpayer must, among

other things, establish: (1) he is the prevailing party, (2) he has exhausted the

administrative remedies available to him, (3) he did not unreasonably protract the

proceedings, and (4) the amount of the costs requested is reasonable. See sec.

7430(a), (b), and (c). He will not be treated as a prevailing party if the

Commissioner establishes that his position in the proceeding was substantially

justified. Sec. 7430(c)(4)(B)(i).

      The parties join issue on whether petitioners incurred any costs associated

with their respective administrative and judicial proceedings and whether

respondent's position was substantially justified. Since we find that respondent's

position was substantially justified, neither petitioner is the prevailing party, and we

need not consider whether either incurred any costs.

      As evidence that respondent's position in these cases was not substantially

justified, petitioners point to the fact that the Commissioner lost in Abdel-Fattah,

failed to appeal his loss, and, by the AOD, conceded his error in insisting that

section 893(b) certification is a prerequisite to section 893(a) relief. Respondent

argues that his position in these cases was substantially justified because, before his

loss in Abdel-Fattah, in the absence of contrary judicial precedent or other
                                         -7-

[*7] contrary guidance, his position that section 893(b) was a prerequisite to section

893(a) relief was reasonable and following the decision in Abdel-Fattah, he

conceded the cases in a reasonable time.

II.   Substantial Justification

      The Commissioner's position is substantially justified if, considering all the

facts and circumstances of the case, he acted reasonably; that is, if his position had a

reasonable basis in both law and fact. Pierce v. Underwood, 487 U.S. 552, 563

(1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987), aff'd, 861 F.2d 131 (5th Cir.

1988). The relevant inquiry is whether the Commissioner knew or should have

known that his position was invalid when adopted, given the facts available and any

legal precedent related to the case. Nalle v. Commissioner, 55 F.3d 189, 191 (5th

Cir. 1995), aff'g T.C. Memo. 1994-182; Maggie Mgmt. Co. v. Commissioner, 108

T.C. 430, 443 (1997); Prouty v. Commissioner, T.C. Memo. 2002-175. Eventual

concession or loss of a case does not establish that the Commissioner's position was

unreasonable, but a concession is a factor to be considered. Sokol v.

Commissioner, 92 T.C. 760, 767 (1989). The U.S. Supreme Court has warned that

courts must "resist the understandable temptation to engage in post hoc reasoning by

concluding that, because a plaintiff did not ultimately prevail, his action must
                                           -8-

[*8] have been unreasonable or without foundation." Christiansburg Garment Co. v.

EEOC, 434 U.S. 412, 421-422 (1978).

       "Generally, the Commissioner's position is considered substantially justified

when an issue is one of first impression." Vines v. Commissioner, T.C. Memo.

2006-258 (citing TKB Int'l, Inc. v. United States, 995 F.2d 1460, 1468 (9th Cir.

1993)). In particular, a position is substantially justified when it is "a case of first

impression," it is "not contrary to any published decision", and a "reasonable person

[could not] say that it lacked colorable justification." Estate of Wall v.

Commissioner, 102 T.C. 391, 394 (1994). The mere fact that a case is one of first

impression, however, will not establish substantial justification when the

Commissioner's position conflicts with the "clear and unequivocal" language of the

statute such that his interpretation of that statute is clearly unreasonable. Nalle v.

Commissioner, 55 F.3d at 193.

III.   Newman v. Commissioner

       In Newman v. Commissioner, T.C. Memo. 2012-74, a Memorandum Opinion

of the Court, we considered arguments similar, if not identical, to the parties'

arguments here. We considered whether the Commissioner's position was

substantially justified during two phases of the Newman case: pre-Abdel-Fattah and

post-Abdel-Fattah.
                                          -9-

[*9] With respect to the first (pre-Abdel-Fattah) phase, we stated:

             Since the legal issues in Abdel-Fattah and petitioners' cases were
      the same (i.e., whether section 893(b) is a prerequisite for exemption
      under section 893(a)), the position that the IRS took in Abdel-Fattah is
      indicative of its position in petitioners' cases. Accordingly, if the IRS's
      arguments in Abdel-Fattah were reasonable, then its position in
      petitioners' cases was also reasonable, at least until the time that we
      issued our Opinion in Abdel-Fattah. That case raised an issue of first
      impression. Although we did not ultimately agree with the IRS's
      position, that position had a colorable justification, based on its
      arguments as to (i) policy objectives and (ii) the proximity of
      subsections (a) and (b) of section 893.

The same can be said here, and we adopt and incorporate our discussion in Newman

concerning policy and the proximity of subsections (a) and (b) of section 893. Our

conclusion in Newman with respect to the first phase is also appropriate to this case:

"Since the IRS's position in Abdel-Fattah was colorable, it was also substantially

justified. See Estate of Wall v. Commissioner, 102 T.C. at 394; see also Nalle v.

Commissioner, 55 F.3d at 193-194. Since the IRS's position in Abdel-Fattah and its

position in petitioners' cases were the same, the IRS's pre-Abdel-Fattah position in

petitioners' cases was substantially justified."

      With respect to the second (post-Abdel-Fattah) phase, we stated:

            When Abdel-Fattah was issued, the situation changed. The issue
      was no longer one of first impression, and the IRS's position was now
      contrary to a published Opinion, thus making the IRS's position newly
      susceptible to the criticism that it lacked substantial justification. It
      took several months * * * after the decision in Abdel-
                                        - 10 -

[*10] Fattah for the IRS to concede these cases, and petitioners argue that
      the IRS's position was not substantially justified during these periods.
      However, we find the IRS's post-Abdel-Fattah handling of these cases
      reasonable--and we therefore find its position substantially justified
      * * * [.]

Again, the same can be said here. The Commissioner needed sufficient time to

concede the section 893(b) issue. Our Opinion in Abdel-Fattah was issued on April

27, 2010. On October 21, 2010, and April 29, 2011--i.e., 6 and 12 months later--

respondent's counsel informed Ms. Da Silva and Mr. Da Silva, respectively, that

respondent would concede the section 893(b) issue. We view that as a reasonable

amount of time for the IRS to reconsider its position and concede that issue. It is

important to note that because of necessary Rule 155 computations, this Court did

not enter its decision in Abdel-Fattah until July 12, 2010. Taking into account that

parties have 90 days to appeal an adverse decision, the Opinion did not become

final until October 10, 2010, making the period between a final decision and

respondent's eventual concessions, at least for Ms. Da Silva, very short indeed.

      In the case of Mr. Da Silva, we recognize that 12 months could be seen as

excessive and therefore not reasonable. According to respondent, the delay was

only the result of inadvertence stemming from an office move. This alone does not

excuse such a delay. However, during the additional six months between
                                        - 11 -

[*11] when respondent decided to concede the case in October of 2010 and when

he finally communicated that to petitioner in April of 2011, there was no harm. The

Court docket reflects no activity during that time, and Mr. Da Silva's counsel did not

provide any services during that period. Thus, on the facts before us, and in the

absence of any activity, that amount of time was reasonable. See Filice v. United

States, 621 F. Supp. 1184, 1187 (N.D. Cal. 1985) (noting the lack of activity in the

case when determining the reasonableness of delay).

IV.   Conclusion

      As in Newman, since we have determined that respondent was substantially

justified in both his pre-Abdel-Fattah and post-Abdel-Fattah positions, petitioners

were not prevailing parties for purposes of section 7430(c)(4). Accordingly,

petitioners are not entitled to an award of costs under section 7430.


                                                       Appropriate orders and

                                                 decisions will be entered.
