Filed: Dec. 31, 1996
Latest Update: Feb. 21, 2020
Summary: PUBLISH IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT _ No. 95-6951 _ Tax Court Docket No. 22193-93 DAVID L. and FAGALE D. GRANT, Petitioners-Appellants, versus COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. _ Appeal from a Decision of the United States Tax Court _ (December 31, 1996) Before KRAVITCH and ANDERSON, Circuit Judges, and HENDERSON, Senior Circuit Judge. PER CURIAM: This is an appeal by David L. and Fagale D. Grant from the denial of their motion for an awa
Summary: PUBLISH IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT _ No. 95-6951 _ Tax Court Docket No. 22193-93 DAVID L. and FAGALE D. GRANT, Petitioners-Appellants, versus COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. _ Appeal from a Decision of the United States Tax Court _ (December 31, 1996) Before KRAVITCH and ANDERSON, Circuit Judges, and HENDERSON, Senior Circuit Judge. PER CURIAM: This is an appeal by David L. and Fagale D. Grant from the denial of their motion for an awar..
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PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 95-6951
________________________
Tax Court Docket No. 22193-93
DAVID L. and FAGALE D. GRANT,
Petitioners-Appellants,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
________________________
Appeal from a Decision of the United States Tax Court
________________________
(December 31, 1996)
Before KRAVITCH and ANDERSON, Circuit Judges, and HENDERSON, Senior
Circuit Judge.
PER CURIAM:
This is an appeal by David L. and Fagale D. Grant from the
denial of their motion for an award of administrative and
litigation costs resulting from a redetermination by the United
States Tax Court of a deficiency asserted by the Commissioner of
Internal Revenue ("Commissioner") in their 1990 taxes. The Tax
Court entered judgment in their favor, from which judgment the
Commissioner did not file an appeal. The Grants subsequently
submitted this motion for an award of administrative and litigation
costs pursuant to 26 U.S.C § 7430. The Tax Court denied that
motion and this appeal followed. For the reasons stated below, we
affirm.
FACTS.
The following facts are derived from the evidence constituting
the record in this case. From 1982 to 1989, taxpayer David Grant
was employed by the State of Alaska ("State") and participated in
two State-sponsored retirement programs. One was the Alaska
Supplemental Annuity Plan ("SBS"), in which Grant had accumulated
over $46,000.00 when he left state service. The other was the
Grants' Alaska Public Employees Retirement System ("PERS") account,
which had a balance of about $14,600.00 at that time. Upon
returning to Alabama where they had previously lived, the Grants
ran up debts of approximately $30,000.00 and experienced difficulty
in meeting their obligations. After responding to a newspaper
advertisement concerning debt consolidation services, the Grants
began working with Eddie Johnson, a broker and insurance agent with
the Innovative Company ("Innovative"), in an effort to solve their
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financial problems. Johnson agreed to help the Grants work out
their troubles and to consolidate their payments to their
creditors. In January 1991, they began making monthly payments to
Innovative which, after deduction of a small fee, were to be
distributed among the various creditors. On Johnson's advice, in
February, Grant rolled over the funds in his SBS account into an
annuity contract with Jackson National Life Insurance Company
("Jackson"). This strategy would permit him to immediately borrow
up to ten percent of the amount of the annuity from Jackson.
Grant had decided not to withdraw or transfer the funds in his
PERS account because of the adverse tax consequences. Since the
State's contributions had not previously been taxed, that portion
of the fund, over $9,000.00, would be subject to taxation upon
withdrawal. This decision notwithstanding, a form was prepared and
sent to the State requesting the release of the funds in the PERS
account. On October 24, 1990, a State employee wrote Grant
informing him that he would need his wife's consent to withdraw the
funds. Fagale Grant went to Innovative and signed a consent form,
under the impression that it related to the SBS account. The State
issued a check for the balance in the PERS account in November 1990
and mailed it to the address specified in the refund request, a
post office box maintained by Maurice Bailey, the owner of
Innovative. The check was deposited with the endorsement "For
Deposit Only Innovative Co." and what purported to be Grant's
signature. No witness at the Tax Court hearing, however, could
account for the ultimate disposition of those funds. In January
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1991, the State filed a Form 1099-R with the Internal Revenue
Service ("IRS") reporting the lump sum distribution of Grant's PERS
account. Bailey prepared the Grants' 1990 income tax return but
did not include as income the taxable portion of the distribution
from the PERS account.
In March 1991, the Grants borrowed ten percent of the value of
their annuity from Jackson. Shortly thereafter, the Grants
received a second check from Jackson for ten percent of the
remaining equity in their account. Neither of the Grants had
requested this additional sum. They contacted Johnson for an
explanation, and he told them he had filed the second application
because he thought the first one had been lost. On his advice, the
Grants left this check with Johnson, who said he would return it to
Jackson. Some time later, the Grants contacted Jackson and were
informed that the check had not been returned. In the interim, the
Grants became suspicious that Innovative was misapplying some of
the monthly payments they were making because they received
complaints from their creditors that they were not being paid. The
Grants made their last monthly payment to Innovative in June, 1991.
They subsequently instituted civil proceedings against the
Innovative Company, Bailey, Johnson, and Jackson to recover the
second Jackson annuity payment and the misappropriated monthly
payments. They obtained a consent judgment against Johnson for
$6,325.00 in December 1992.1
1
This judgment represented the amount of the second check
drawn against the annuity with Jackson, approximately $3900.00,
some amount for the misappropriated monthly payments, and the
4
In February 1993, the IRS notified the Grants that they had
improperly failed to include the taxable portion of the PERS
account lump sum distribution in their taxable income for 1990.
The Grants retained an attorney and contacted the State in an
attempt to clarify the situation. They did not, however, at that
point provide any information which would permit the IRS to
definitely conclude that its initial determination was in error.
Hearing nothing further, on July 12, 1993, the IRS issued a notice
of deficiency, seeking additional taxes of $2,340.00 and interest
of $403.00.
By letter dated September 7, 1993, the Grants' attorney
informed the IRS that the withdrawal of funds from the PERS account
was the fraudulent act of an "insurance agent" retained by the
Grants to assist them in their financial matters. The letter
further stated that the Grants had retained litigation counsel to
sue the agent and his company. Also, according to the letter, the
State of Alaska was making a determination as to whether to pursue
a fraud claim against the bank which had cashed the check and was
planning to reinstate the funds to Grant's account. In a telephone
conversation and in a letter dated October 5, 1993, the IRS
initially indicated that it would accept this explanation of the
matter.
remainder was punitive damages, according to David Grant's
testimony. Jackson apparently paid approximately $1000.00 to
settle the claim against it. Of that amount, Grant testified that
he received approximately $300.00; the remainder apparently went
for attorney's fees. This judgment did not include any amounts
relating to the PERS account, which the Grants did not yet know had
been withdrawn.
5
The Grants received no formal notification from the agency,
however, and filed a petition in the Tax Count challenging the
agency's deficiency assessment on October 15, 1993. By letter
dated October 27, 1993, the Accounting Services Manager for the
State of Alaska informed Grant that the State believed it had
handled the matter correctly, that both requests for refunds had
been signed by him and accompanied by a notarized signed spousal
waiver and that it had issued the checks for both accounts in his
name to the address specified in the refund requests. In that
official's view, the fact that the Form 1099-R with respect to the
PERS distribution sent to Grant's address had not been returned and
the fact that Grant had not inquired about the PERS account for
three years even though he did not receive the yearly statement or
quarterly newsletter sent to all those with active accounts
corroborated his view that the account had been properly closed by
the State.
The IRS filed its answer to the Grants' petition on
November 26, 1993. The case was tried by the Tax Court on
April 25, 1994. The Grants, Eddie Johnson and Maurice Bailey
testified. In a memorandum opinion issued following the trial, the
Tax Court found that Grant had not authorized the withdrawal of
funds from the PERS account, that Johnson had forged Grant's
signature on several documents, and that the Grants had not
received any economic benefit from the amount withdrawn from the
PERS account. Accordingly, the Grants were not required to report
that amount in their taxable income for 1990. The Commissioner did
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not appeal that determination.
The Grants then filed a motion seeking an award of
administrative and litigation costs under authority of I.R.C. §
7430 and Rule 231 of the Tax Court Rules of Practice and Procedure.
The Tax Court concluded that the government's position, in both the
administrative proceedings and the litigation, was substantially
justified and denied the motion. The Grants then filed this
appeal.
STANDARD OF REVIEW.
We review the denial of a motion for an award of
administrative and litigation expenses for an abuse of discretion.
In re Rasbury, 24 F.3d 159, 165-68 (11th Cir. 1994).
DISCUSSION.
A taxpayer who prevails in an administrative or judicial
proceeding may be awarded his reasonable costs incurred in such a
proceeding. 26 U.S.C. § 7430(a). Under the statute, a judgment
for costs may be entered in favor of the taxpayer if he 1) was the
"prevailing party," 2) has exhausted all available administrative
remedies and 3) did not unreasonably protract the proceedings. In
this case, the Commissioner conceded that the Grants had exhausted
their administrative remedies and had not unreasonably protracted
the proceedings. Therefore, the only issue remaining was whether
the Grants were the prevailing parties as defined in the statute.
To qualify as a "prevailing party," a taxpayer must establish
that 1) the position of the government in the proceeding was not
substantially justified, 2) the taxpayer has substantially
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prevailed and 3) the taxpayer satisfies the applicable net worth
requirements. 26 U.S.C. § 7430(c)(4)(A). Again, the Commissioner
conceded that the Grants had substantially prevailed and that they
met the net worth requirements. The only disputed question was and
is whether the government's position was substantially justified.
The government's position is substantially justified if there
is a reasonable basis for it both in law and in fact. See Pierce
v. Underwood, 487 U.S. 552,
108 S. Ct. 2541,
101 L. Ed. 2d 490 (1988).
That inquiry is directed to the government's position at two
distinct stages: the date the IRS issued the notice of deficiency
in the administrative proceedings, July 12, 1993, and the period
following the filing of the government's answer in the Tax Court
litigation, November 26, 1993. See 26 U.S.C. § 7430(c)(7); Huffman
v. C.I.R.,
978 F.2d 1139, 1148 (9th Cir. 1992). In this case, the
government's position at these two stages was essentially the same:
that the taxpayers had constructively received as income during
1990 the taxable portion of the distribution from the PERS account
because that amount had been paid to the taxpayers' agent at their
direction. The taxpayers bear the burden of proving that the IRS's
position in the proceeding was not substantially justified in law
and in fact. See T.C.R. 232(e); Cooper v. U.S.,
60 F.3d 1529, 1531
(11th Cir. 1995).
On appeal, the Grants contend that the government's position
at the relevant times was unreasonable with respect to both law and
fact. In their view, in formulating its legal position in this
case, the government ignored the fundamental rule that an amount is
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not to be included in gross income unless the taxpayer received
some benefit from the income item. Further, they argue that the
government ignored those cases holding that funds received and
misappropriated by an agent do not constitute income for the
taxpayer when the taxpayer was unaware of the misappropriation and
received no benefit from the funds. Finally, the taxpayers
summarily urge that the factual record demonstrates that the
government's position was unreasonable in these circumstances.
The government, on the other hand, maintains that the
taxpayers have waived any argument regarding the legal
reasonableness of its position because they did not raise that
issue in the Tax Court. It points to language in the Tax Court's
opinion on this motion which notes that "[p]etitioners have not
argued that respondent's position was not reasonable as a matter of
law." Memorandum Opinion filed Aug. 8, 1995, at 10. The
government appears to be correct in this instance. As a general
rule, a taxpayer may not address an issue on appeal which it has
not first presented to the Tax Court. See, e.g., Estate of Quirk
v. C.I.R., 928 F.2d 751, 756-759 (6th Cir. 1991); Shades Ridge
Holding Co., Inc. v. U.S.,
888 F.2d 725, 727-28 (11th Cir. 1989).
Further, assuming that this argument is not barred, it is without
merit. Since the receipt and deposit of these funds in an
Innovative account for the use and benefit of the taxpayers would
have, as a matter of law, resulted in the receipt of taxable income
by the taxpayers, the IRS's position was legally reasonable. See
2 Mertens Law of Federal Income Taxation §§ 17.15-17 (1996).
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The government also alleges that its position was clearly
factually reasonable in light of the information available to it on
the date it issued the notice of deficiency and the date it filed
its answer to the petition. Following the IRS's initial contact
with the Grants in February 1993, the taxpayers informed the agency
that they had not authorized the release of the funds in the PERS
account and believed it to be the result of fraud. They did not
provide the IRS with any documentation to support these claims
until the September 7, 1993, letter from their lawyer to the
service. Therefore, since the agency was in possession of a
facially valid Form 1099-R from the State documenting a
distribution from the PERS account to the Grants, it was plainly
reasonable for the agency to proceed to the next step and issue a
notice of deficiency on July 12, 1993.
While, on initial receipt of the September 7, 1993, letter,
the service indicated that the information contained therein might
provide a basis for resolving the issue in the taxpayers' favor, it
soon became apparent that several of the representations contained
in the letter were inaccurate. Specifically, the IRS learned that
the Grants had not filed a lawsuit against Johnson or Innovative
for recovery of the funds from the PERS account and that the State
was not pursuing a fraud claim against any bank and, further, was
not planning to reinstate the disbursed funds to Grant's PERS
account. The agency also learned 1) that the taxpayers had
authorized Johnson to purchase an annuity with funds from Grant's
SBS account, 2) that the taxpayers had contracted with Innovative
10
to receive money from them and distribute it among their creditors,
3) that the check issued to Grant for the amount in his PERS
account had apparently been endorsed by Grant and deposited in an
Innovative account and 4) that several documents filed with the
State in connection with the withdrawal of funds from the two
accounts contained what purported to be Grant's signature, as well
as the notarized signature of his wife.
Given that these were the facts available to the IRS at the
time the government had to formulate its answer to the taxpayers'
Tax Court petition, its answer was clearly factually reasonable.
To an impartial observer, it could not have been clear at that time
who had authorized the withdrawal from the PERS account and on
whose behalf those funds had and were being used. Indeed, it was
not until the trial of this case, at which time the judge found the
testimony of the Grants to be credible and that of Eddie Johnson
not to be credible, that this matter could properly be resolved in
the taxpayers' favor. 2 Since the judge who heard this testimony
and had to clear up the conflicting accounts of the events here
2
Appellants contend in their brief that they supplied
additional information to the government on December 20, 1993,
which rendered the government's position in the litigation
unreasonable. (Appellants' Brief at 17). Their only citation for
this proposition is to the motion for administrative and litigation
expenses signed by their attorney. No documents allegedly
submitted to the respondent on that date are attached to the
motion. ( See R1-9). As the Tax Court observed, "petitioners
failed to establish what information was actually provided to
respondent on that date. Therefore, the Court is unable to
determine if the information provided to respondent at that time
was sufficient to warrant respondent's concession of the issue.
After December 20, 1993, respondent did not receive any other
information from petitioners until the trial on April 25, 1994."
(Order filed August 8, 1995, at 12).
11
also ultimately found that the government's position was
substantially justified, that conclusion carries considerable
weight. Therefore, we conclude that the Tax Court did not abuse
its discretion in denying the petitioners' motion for an award of
administrative and litigation expenses.
Accordingly, the judgment of the Tax Court is AFFIRMED.
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