                               T.C. Memo. 2014-44



                        UNITED STATES TAX COURT



                  MARY C. MCCAULEY, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 956-11.                        Filed March 13, 2014.



      Dolores C. Pino, for petitioner.

      Robert M. Romashko, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      MORRISON, Judge: The petitioner, Mary C. McCauley, was involved in

an administrative dispute with the IRS regarding her 2006 income-tax liability.

After she resolved the dispute through a compromise agreement, she requested

that the IRS reimburse her for the costs that she contended she incurred during the

dispute. The IRS Office of Appeals denied her request. McCauley now petitions
                                        -2-

[*2] for review of this denial. We have jurisdiction under section 7430(f)(2).1 See

also sec. 301.7430-2(c)(7), Proced. & Admin. Regs. We hold that McCauley is

not entitled to recover any costs because she was not the prevailing party in her

dispute.

                               FINDINGS OF FACT

        Some of the facts in this case have been stipulated. We incorporate those

facts in the Court’s findings of fact. McCauley was a resident of Illinois when she

filed her petition.

        In 2006, McCauley received $32,000 in settlement of an employment-

discrimination lawsuit against a former employer. In that lawsuit she was

represented by attorney Dolores Pino. She paid Pino $13,679.50 in 2006 for

handling the lawsuit. Besides the settlement proceeds, McCauley received

$20,116.50 in wages and $14,392.20 in taxable Social Security benefits during

2006.

        Assisted by Pino, McCauley filed her federal income-tax return for the 2006

tax year. The return reported a tax liability of $3,249. The taxable income upon

which this tax liability was based reflected the following calculations:


        1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 in effect at all relevant times.
                                        -3-

[*3] !       Taxable income did not include the $20,116.50 in wages.

             (The $20,116.50 was reported as wages on one part of the

             return. However, it was omitted from the computations of taxable

             income.)

      !      Taxable income included the $14,392.20 in taxable Social Security

             benefits.

      !      Taxable income included the $32,000 of settlement proceeds.

      !      Taxable income was reduced by $13,679.50 for the amount

             McCauley paid Pino for handling the employment-discrimination

             lawsuit. (However, the $13,679.50 appeared on the return in such a

             way that it was not apparent that it corresponded to a payment for

             attorney’s fees or that it corresponded to any payment at all.)

      In September 2007 the IRS sent McCauley a Notice CP11 in which it

recalculated McCauley’s tax liability as $11,076.2 The taxable income upon

which this tax liability was based reflected the following calculations:




      2
        A CP11 is a notice the IRS uses to inform a taxpayer of an amount due as a
result of mathematical or clerical errors on a return.
                                       -4-

[*4] !      Taxable income included the $20,116.50 in wages.

      !     Taxable income included the $14,392.20 in taxable Social Security

            benefits.

      !     Taxable income included the $32,000 of settlement proceeds.

      !     Taxable income was not reduced by $13,679.50.

      On September 17, 2007 the IRS assessed the $11,076 tax liability reflected

on the Notice CP11.

      McCauley disputed the assessment with the IRS. She was represented by

Pino. McCauley took the position that the $3,249 tax liability reported on her

2006 return was correct and the $11,076 tax liability that the IRS assessed was

wrong. The IRS took the position that the $11,076 assessment was correct.

       During her dispute with the IRS McCauley had a hearing with the IRS

Office of Appeals. On January 21, 2009, the Office of Appeals notified McCauley

that it had decided that the $11,076 assessment was correct.

      In January 2010, Pino spoke with an IRS examiner. Shortly afterwards, the

IRS reached a compromise agreement with McCauley regarding her 2006 income

tax liability. The compromise agreement was reflected in an amended return that

McCauley submitted on February 2, 2010, and by an abatement of tax by the IRS

on March 15, 2010. On the amended return McCauley calculated her taxable
                                        -5-

[*5] income by including the $20,116.50 in wages. The amended return reported

tax liability of $7,626. The abatement of tax resulted in the abatement of $3,450,

an amount that corresponds to a reduction in McCauley’s taxable income by the

$13,679.50 in attorney’s fees. After the abatement, $7,626 was left unabated. The

parties’ positions and their compromise agreement are illustrated by the following

table:

                                                                  Compromise
                                     IRS position taken in    agreement between
 Income items        McCauley’s       its Notice CP11 and     McCauley and IRS
      and           position taken     its Appeals Office    reflected in amended
 corresponding      on her return     decision of Jan. 21,         return and
    tax due           (and later)        2009 (and later)      abatement of tax
 Wages                   -0-            $20,116.50                $20,116.50
 Taxable
  Social
  Security
  benefits          $14,392.20           14,392.20                  14,392.20
 Settlement           32,000.00          32,000.00                  32,000.00
 Attorney’s
  fees               -13,679.50               -0-                  -13,679.50
   Tax                 3,249.00          11,076.00                   7,626.00

         On April 11, 2010, McCauley mailed the IRS a request for reimbursement

of the costs she allegedly incurred during her dispute. After receiving no response

from the IRS for over six months, McCauley filed a petition with this Court.
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[*6]                                 OPINION

       Under section 7430, a taxpayer who has prevailed in an administrative

proceeding with the IRS may be entitled to the reasonable administrative costs

incurred in connection with the proceeding. To be awarded administrative costs,

the taxpayer must prove that she was the “prevailing party” in the administrative

proceeding. Sec. 7430(a), (c)(4); Tax Ct. R. Pract. & Proc. 232(e). The

“prevailing party” is the party who has “substantially prevailed with respect to the

amount in controversy or * * * has substantially prevailed with respect to the most

significant issue or set of issues presented”, sec. 7430(c)(4)(A), and who meets

other requirements.

       The “amount in controversy shall include the amount in issue as of the

administrative proceeding date”. Sec. 301.7430-5(d), Proced. & Admin. Regs.

The “administrative proceeding date” is defined as the earlier of (1) the date of the

notice of deficiency or (2) the date the taxpayer received the notice of the decision

of the IRS Office of Appeals. Sec. 301.7430-3(c)(1), Proced. & Admin. Regs.

The IRS did not issue a notice of deficiency to McCauley. Its Office of Appeals

issued a notice of its decision on January 21, 2009. Therefore, the “administrative

proceeding date” is the date that McCauley received this notice, presumably

sometime shortly after its issuance on January 21, 2009.
                                       -7-

[*7] In her dispute with the IRS McCauley took the position that her tax liability

was $3,249. She maintained this position from the time she filed her return in

2007 until the parties reached the compromise agreement around January 2010.

The IRS took the position that McCauley’s tax liability was $11,076. It

maintained this position from the time it issued the CP11 in September 2007 until

the parties reached a compromise agreement around January 2010. The difference

between the two party’s positions--$7,827--is “the amount in issue” or the

“amount in controversy”. Of the $7,827 amount in controversy, McCauley

prevailed as to $3,450 (i.e., the IRS’s $11,076 position minus the $7,626 reflected

in the compromise agreement). Thus, of the $7,827 in controversy, McCauley

prevailed as to only 44% (i.e., $3,450/$7,827). On the basis of that percentage, we

hold that McCauley did not substantially prevail with respect to the amount in

controversy. See Bragg v. Commissioner, 102 T.C. 715, 719-720 (1994)

(taxpayers who had prevailed with respect to about 30% of the amount in

controversy were not prevailing parties); see also Andrews v. Commissioner, T.C.

Memo. 1985-559, 50 T.C.M. (CCH) 1404, 1405-1406 (1985) (taxpayers who

prevailed with respect to about 41% of the amount in controversy were not

prevailing parties).
                                         -8-

[*8] We also hold that McCauley did not substantially prevail with respect to the

most significant issue presented. The two issues presented in her dispute with the

IRS were: (1) whether her taxable income should be reduced by $13,679.50 for

the attorney’s fees for her employment-discrimination lawsuit and (2) whether her

taxable income should include $20,116.50 in wages. We hold that the attorney’s-

fee issue was not the most significant issue. In dollar amount, the attorney’s-fee

issue was worth less than the wage issue. The attorney’s-fee issue did not affect

McCauley’s other tax years. See sec. 301.7430-5(e), Proced. & Admin. Regs.

(“An issue or set of issues constitutes the most significant issue or set of issues

presented if, despite involving a lesser dollar amount in the proceeding than the

other issue or issues, it objectively represents the most significant issue or set of

issues for the taxpayer or the Internal Revenue Service. This may occur because

of the effect of the issue or set of issues on other transactions or other taxable

years of the taxpayer or related parties.”). The attorney’s-fee issue was not a

threshold, or “primary”, issue relative to the wage issue. The two issues were

unrelated. Cf. Huckaby v. United States Dep’t of the Treasury, 804 F.2d 297, 298-

300 (5th Cir. 1986) (in a wrongful-disclosure lawsuit against the IRS, the most

significant issue was whether the IRS was liable for damages, not the amount of
                                        -9-

[*9] damages). Although McCauley prevailed on the attorney’s-fee issue, this was

not the most significant issue presented.

      In summary, McCauley did not substantially prevail; therefore, she was not

the prevailing party. Therefore, she is not entitled to an award of any

administrative costs she may have incurred. In reaching our holdings, we have

considered all arguments made by the parties, and to the extent that we have not

discussed them, we find that they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                                    Decision will be entered for

                                              respondent.
