HALPERN,
Petitioners have moved for reasonable litigation costs (motion). Respondent objects (objection). We will deny the motion. All 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.
Dollar amounts have been rounded to the nearest dollar. We draw the facts under the heading
Respondent determined a deficiency in, and an accuracy-related penalty with respect to, petitioners' 2007 Federal income tax. Petitioners assigned error to all of the adjustments giving rise to the deficiency and to the accuracy-related penalty. The parties filed a stipulation of settled issues (stipulation) addressing all of the adjustments and the penalty. There remains for resolution only the motion.
The circumstances giving rise to the motion are as follows. After petitioners commenced this case by filing the petition (and after respondent answered), respondent, on February 7, 2011, prematurely assessed petitioners' 2007 tax.
Petitioners seek reimbursement of $3,160 for their attorney's fees and costs. They state: "the sole issue for which they are seeking * * * costs * * * is with respect to the respondent's clearly improper and illegal assessment of a tax liability for 2007".
Section 7430 provides that a taxpayer may recover reasonable costs, including attorney's fees, incurred in connection with any tax proceeding (administrative or judicial) against the United States if the taxpayer is the prevailing party in the proceeding. To recover costs, the taxpayer must 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.
Respondent objects to the motion on the grounds that (1) petitioners are not the prevailing party and (2) their claimed litigation costs are unreasonable.
The term "prevailing party" is for purposes of section 7430 a term of art.
Petitioners make no claim that they substantially prevailed with respect to the amount in controversy. Nevertheless, respondent argues that they did not because they were unsuccessful as to the greater part of the combined deficiency and penalty. The deficiency respondent determined with respect to petitioners' 2007 Federal income tax is $10,438 and the accuracy-related penalty he determined is $2,088. Pursuant to the stipulation, there is due from petitioners a deficiency of $5,950 and a penalty of $1,190. Respondent argues that, because petitioners were therefore unsuccessful as to 57% of the combined deficiency and penalty, they did not substantially prevail as to the amount in controversy. We need not decide whether petitioners substantially prevailed with respect to the amount in controversy because we treat their failure to argue the point in the affirmative as a concession that they did not.
Nor do petitioners claim that they substantially prevailed with respect to the adjustments giving rise to the deficiency in tax or with respect to the accuracy-related penalty. That they did not so prevail is borne out by the stipulation, which shows that they prevailed only as to respondent's disallowance of their claimed medical expenses. The disallowed medical expenses were one of three adjustments (the other two involving charitable contribution and miscellaneous itemized deductions), all of which appear to have been made for lack of substantiation. The disallowed medical expenses had the smallest impact ($11,999) on petitioners' taxable income, as computed by respondent in determining the deficiency in tax. The impact of the disallowed charitable contribution and miscellaneous itemized deductions was $13,831 and $18,594, respectively.
Petitioners claim their prevailing party status with respect to the subject of the motion to restrain; i.e., "Respondent's clearly improper and illegal assessment of a tax liability for 2007". They elaborate: "Petitioners are the `prevailing party' insofar as the Respondent admitted the illegality of the assessment made, the improper seizure and application of the Petitioners' 2010 refund against such assessment, and ultimately reversed and abated such assessment against the Petitioners, and released their 2010 income tax refund." Petitioners certainly did prevail in the sense they describe; however, that is not a sufficient showing for us to find that they are the prevailing party in this proceeding. For us to so find, we would have to find, among other things, that respondent's improper action in prematurely assessing their 2007 tax liability and applying the overpayment against that liability (the premature assessment issue) was the most significant issue presented.
Petitioners have failed to show that they prevailed with respect to the most significant issue (or set of issues) presented.
Because petitioners are not the prevailing party in this proceeding, they are not entitled to an award of reasonable litigation costs.