Paul Frehe Enterprises, Inc. v. Commissioner ( 1996 )

106 T.C. No. 25UNITED STATES TAX COURT
PAUL FREHE ENTERPRISES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22080-91. Filed June 13, 1996.
Jack H. Kaufman, for petitioner.
Linda L. Conway and James J. Posedel, for respondent.
Petitioner moved for award of reasonable
litigation costs in a so-called actuarial case.
Held, respondent's position was substantially
justified. Held, further, petitioner's motion for
award of reasonable litigation costs is denied.
OPINION
CLAPP, Judge: This case is before us on petitioner's Motion
for Award of Reasonable Litigation Costs pursuant to section 7430
and Rules 230 through 232.
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After concessions by respondent, we must decide whether
respondent's litigating position was "not substantially
justified", as that phrase is used in section 7430(c)(4)(A)(i).
If that question is resolved in favor of petitioner, then we must
decide whether the amount of costs and attorney's fees claimed by
petitioner is reasonable.
All section references are to the Internal Revenue Code, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. References to section 7430 are to that section as
amended by section 1551 of the Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2752 (effective for proceedings commenced after
December 31, 1985), and by section 6239 of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3743-3746 (effective for proceedings commenced after November 10,
1988).
Section 7430(a) authorizes the Court to award reasonable
administrative costs and reasonable litigation costs to taxpayers
who prevail against the United States in civil tax litigation.
To obtain an award of litigation costs taxpayers must prove that
they are the "prevailing party" within the meaning of section
7430(c)(4), which requires, inter alia, that they establish that
the Commissioner's position in the proceeding was not
substantially justified.
The position taken by the United States, for purposes of
administrative costs, refers to the position taken in an
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administrative proceeding, determined in this case as of July 22,
1991, the date of the notice of deficiency. Sec.
7430(c)(7)(B)(ii). The position taken by the United States, for
purposes of litigation costs, refers to the position of the
Unites States in a judicial proceeding. Sec. 7430(c)(7)(A). A
judicial proceeding is commenced in this Court with the filing of
a petition. Rule 20(a). Generally, the Commissioner takes a
position on the date the answer is filed. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part
and revg. in part T.C. Memo. 1991-144. In order to recover
administrative costs and litigation costs, the taxpayer must
establish that the position of the United States was not
substantially justified both in the administrative and court
proceedings. Id. at 1143-1147. It is not entirely clear from
petitioner's motion whether petitioner seeks the recovery of
reasonable administrative costs. The ambiguity does not change
our analysis. Respondent contends, and petitioner does not
dispute, that the position taken in her answer, filed November
22, 1991, did not differ from the position taken in the notice of
deficiency. In both, respondent maintained that petitioner had
not demonstrated entitlement to the deductions for contributions
to a qualified retirement plan.
Petitioner's case is one of many so-called actuarial cases
which resulted from respondent's actuarial project involving the
reasonableness of actuarial assumptions in connection with
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deductions for contributions to individual defined benefit
pension plans.
Many of the issues raised in petitioner's Motion for Award
of Reasonable Litigation Costs were answered by this Court in
Price v. Commissioner, 102 T.C. 660, 662-665 (1994), affd.
without published opinion sub nom. TSA/Stanford Associates, Inc.
v. Commissioner, 77 F.3d 490 (9th Cir. 1996). There is no need
to repeat that discussion.
The statutory notice of deficiency in this case was issued
by respondent on July 22, 1991. The petition was filed on
September 30, 1991. In June of 1995, respondent made a full
concession of the underlying actuarial issues. A decision of no
deficiency in income tax and no additions to tax was signed by
petitioner's counsel on June 29, 1995, and by respondent's
counsel on July 13, 1995, and was filed with this Court as a
Settlement Stipulation on July 18, 1995.
During this intervening period prior to respondent's
concession, the following cases were decided by this Court in
favor of the taxpayers and were affirmed by the Courts of Appeals
for the Fifth, Second, and Ninth Circuits: Vinson & Elkins v.
Commissioner, 99 T.C. 9 (1992), affd. 7 F.3d 1235 (5th Cir.
1993); Wachtell, Lipton, Rosen & Katz v. Commissioner, T.C. Memo.
1992-392, affd. 26 F.3d 291 (2d Cir. 1994); and Citrus Valley
Estates v. Commissioner, 99 T.C. 379 (1992), affd. in part and
remanded in part 49 F.3d 1410 (9th Cir. 1995). These were
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considered the lead actuarial cases. The parties selected the
lead actuarial cases as a group in order to raise all or
substantially all issues necessary to resolve the hundreds of
actuarial cases pending across the country. The parties
contemplated and understood that the lead actuarial cases were
considered a package. The relevant dates for these cases are as
follows:
Tax Court Tax Court
Opinion Decision Appealed by Disposition
Filed Entered Commissioner on Appeal
Vinson & Elkins 7/14/92 9/14/92 12/10/92 11/29/93
Wachtell, Lipton 7/14/92 2/16/93 05/12/93 06/06/94
Citrus Valley 9/29/92 2/23/93 05/19/93 03/08/95
The District Court for the Western District of Michigan
decided the issue of reasonableness of actuarial adjustments in
favor of the taxpayers. Rhoades, McKee & Boer v. United States,
822 F. Supp. 445 (W.D. Mich. 1993), affd. in part and revd. in
part and remanded 43 F.3d 1071 (6th Cir. 1995). On remand,
however, the District Court found that the actuarial assumptions
used were not reasonable in the aggregate. Rhoades, McKee & Boer
v. United States, 76 AFTR 2d 95-6394, 95-2 USTC par. 50,486 (W.D.
Mich. 1995). We also note that in 1989 the Court of Appeals for
the Seventh Circuit found in favor of the Commissioner on similar
issues. Jerome Mirza & Associates, Ltd. v. United States, 882
F.2d 229 (7th Cir. 1989).
Neither the Court of Appeals for the Fifth Circuit's opinion
in Vinson & Elkins, nor the Court of Appeals for the Second
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Circuit's opinion in Wachtell, Lipton produced well-defined
conflicts with the Court of Appeals for the Seventh Circuit's
opinion in Jerome Mirza. By May 19, 1993, the Commissioner had
appealed Citrus Valley, which presented an acknowledged conflict
with the Court of Appeals for the Seventh Circuit's opinion in
Jerome Mirza. Citrus Valley also presented issues similar to
those decided in Vinson & Elkins and Wachtell, Lipton. Under
these circumstances, respondent's decision to await the outcome
on appeal of the lead actuarial cases, including Citrus Valley,
before settling this case was substantially justified. A failure
by the Commissioner or the taxpayers to pursue any of the lead
cases to a definitive conclusion would have defeated the purpose
of the litigation format.
Our opinion in Citrus Valley Estates v. Commissioner, supra,
was affirmed by the Court of Appeals for the Ninth Circuit on
March 8, 1995. The period in which the Commissioner might have
filed a petition for writ of certiorari did not expire until June
7, 1995. Following the Commissioner's decision not to seek
certiorari, a concession letter was sent to petitioner's counsel
on June 14, 1995, which resulted in the aforesaid Settlement
Stipulation filed July 18, 1995.
Respondent's position with respect to actuarial assumptions
in this case was the same as her position in Vinson & Elkins,
Wachtell, Lipton, and Citrus Valley. The Commissioner's position
had merit and was competently presented at trial and argued on
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brief, though ultimately unsuccessful. Having decided not to
apply to the Supreme Court of the United States for certiorari,
respondent moved very promptly following the expiration of the
time for filing a petition for writ of certiorari to send a
letter to petitioner's counsel conceding this case. In this
case, the concession came within a matter of days. From this
Court's firsthand knowledge of the disposition of hundreds of
these actuarial cases, it is clear that respondent has moved
quickly and with dispatch. Under these circumstances, a taxpayer
would be hard pressed to establish that the Commissioner's
litigating position was maintained for an excessive period of
time following her decision to concede the actuarial cases and
hence was not substantially justified.
It is noted that the settlement in Price v. Commissioner,
supra, occurred when the case was called for trial on June 24,
1993. That date was prior to the affirmances in Vinson & Elkins,
Wachtell, Lipton, and Citrus Valley, all of which were decided in
favor of the taxpayers. The decision in Jerome Mirza &
Associates, Ltd. v. United States, supra, favoring the
Commissioner had been on the books since 1989. In Price, we
said:
Under the foregoing circumstances, we think it
clear that had respondent decided to continue
litigating the instant cases to an unsuccessful
conclusion on the substantive issue, she would have
been justified in so doing at least as long as there
was no further definitive action on that issue at the
appellate level. [102 T.C. at 664.]
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A final definitive action at the appellate level in the lead
actuarial cases occurred on June 7, 1995, when the time expired
for filing a petition for writ of certiorari in Citrus Valley.
Thus, our discussion above and Price adequately cover the
additional actions and nonactions which took place in the 2 years
following the date Price was filed, up to the settlement of the
present case.
Respondent's position was substantially justified.
Petitioner's Motion for Award of Reasonable Litigation Costs will
be denied. We need not reach the further question as to the
amount of such costs.
An order denying petitioner's
Motion for Award of Reasonable
Litigation Costs and a decision in
accordance with the settlement
stipulation of the parties will be
entered.