William D. & Elizabeth R. Foote, Petitioner

T.C. Memo. 2013-276 UNITED STATES TAX COURT WILLIAM D. FOOTE AND ELIZABETH R. FOOTE, Petitioners y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 12271-12.

Filed December 9, 2013.

Ps seek reasonable administrative costs pursuant to I.R.C. sec.

7430(f)(2), which were incurred in connection with tax years previously before this Court. Stipulated decisions were entered in all of those prior cases but were silent as to an agreement on reasonable administrative and litigation costs. Ps did not file motions for an award of reasonable administrative and litigation costs before the decisions in those cases became final.

Held: The doctrine of res judicata applies, and Ps are not entitled to an award of reasonable administrative costs under I.R.C. sec. 7430(f)(2).

Joseph E. Mudd, for petitioners.

Louis B. Jack, for respondent.

SERVED DEC -9 2013

MEMORANDUM OPINION

WHERRY, Judge: Petitioners filed a petition seeking administrative costs under section 7430(f)(2).1 The matter is currently before us on respondent's motion for summary judgment under Rule 121, to which petitioners object.

Backaround² This case began in 1996 with an audit of petitioners' 1992 tax return. The revenue agent, Beverly Smith, conducted an initial interview with petitioners. She then concluded, on the basis of her personal observations regarding their standard of living and their reported income, that there was a material possibility that IUnless otherwise noted, all section references are to the Internal Revenue Code of 1986 as amended and in effect for the relevant period. All Rule references are to the Tax Court Rules of Practice and Procedure.

2Because this case is before us on a motion for summary judgment, our recitation of the background is derived from the Court's records in the previous litigation and the filed pleadings, documents, and sworn affidavits of the parties in this case. It does not constitute a finding of facts in the trial setting context. Most of this background is culled from petitioners' opposition because respondent's motion and supporting documents discussed little in the way of the history or facts of the prior deficiency cases. We mention this because the facts, as alleged by petitioners, do not cast respondent in a positive light. These facts, if true, are indicators of intemperate actions by respondent's revenue agent and group manager. However, these facts do not help petitioners because, as discussed infra, the law dictates summary judgment for respondent.

F 3] petitioners had substantially underreported their mcome.

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(cid:16)042 Ms Smith therefore expanded the scope of the audit to include the 1993 through 1996 tax years.

At its zenith, the audit encompassed petitioners' 1992 through 2000.tax years and at least two flowthrough entities.

In 1999 Ms. Smith, through her group, caused to be issued the first 30-day letter and accompanying examination report ^or the tax years 1992 through 1996, proposing total deficiencies of $27,832,527 and penalties and interest computed to December 12, 1999, of $30,029,937, for a f $57 862 464. Petitioners filed a written protest seeking total amount due o administrative review by the Internal Revenue Service (IRS) Appeals Office did not make it to IRS Appeals because the revenue (Appeals).3 This first appeal lled the case for further development. Rather, agent's group manager pu Ms Smith and Ms. Smith's manager held a two-day petitioners'representatives, (cid:16)042 meeting, after which Ms. Smith issued a secon for the 1992-96 tax years of $55,392,886 This letter proposed total deficiencies and interest and penalties of $68,760,731, for a total amount due of $124,153,617.

d 30-day letter in October 2000.

Petitioners again appealed, and Appeals returne 2003 Ms. Smith issued a third 30-day d the file to the Examination Division for further development. In June letter. This letter propose d total deficiencies of $8,685,302 for tax years 1992 3All ÜOllar amOunts are rounded to the nearest dollar unless otherwise noted.

enalties of $10,669,034. Eventually, despite through 19 , w ith interest and p their Herculean e ffort⁴ to resolve these cases wi th the revenue ag ent and her group d four statutory no tices of deficiency, manager or at Appeals, petitioners receive deficiencies and $1,505,632 which determine , 1 d 'n the aggregate, $4 005 096 in tax , , .

' flowthrough entity, FSW Associates, alties. Petitioners in additions to tax and pen d a notice of final partnership a dministrative adjustment LTD (FSW), receive than $13.2 million. Petitioners d FSW's income by more (FPAA), which increase etitioned the Tax Court for redetermination in response to all notices.

timely p dent ultimately submitted stipu .

lated decision Petitioners and respon documents in eac the 1992, 1993, and 1994 tax h of these five cases, an d the Court entered decisions etitioners' case covering according y.

, other three cases ntered on 2 2011. Decision in the FSW case was e were entered on May , 2009. The total of the agree (cid:16)042 d Federal income tax deficiencies, November 16, for all years, was $ 310,877 plus $64,302 in inclu ing all four of petitioners' cases section 6651(a)(1) additions to tax for the 1992 through 1994 tax years.

The .

.tion to summary judgment exhibits rife t at o p tit 4Petitioners attach to their opposi roper beh a the art of the revenue agent. As ns and h tagent refused to cons d stments t o any cred b factual basis or justification.

[* ] stipulated decision ultimately entere d in the FSW case reflected an agreement 1995 as for no change to FSW's partnership . Federal income tax return for the year small fraction of the original propose d fi led The total settlement amount is a . 832 527 of tax deficiencies p $27, , lus interest and penalties o f about $30 million, d $55 392,886 tax deficiencies p , lus interest and penalties tihe intermediate propose , uf about $68.8 million, and even .

leficiencies p lus interest and pena the still later propose d $8 685,302 of tax , lties of about $10.7 mi llion Even the statutory (cid:16)042 ate an excessively large amo unt , notices of deficiency re slightly over $4 million of tax deficiencies an flected in the aggreg dditions to tax and d $1 5 million in a (cid:16)042 lated deficiencies.

d with the ultimate stipu pena ties, when compare The parties made no mention o f administrative or litig . ation costs in any of the stipulate d decision documents.

Petitioners did not file any motion in any o 7430 of these costs, nor did they the cases seeking an award pursuant to section.

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11 of the cases became ate the decisions.

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eren he evenue agent a review to avoid excessive c deficiency.

the rior cases for the 6Petitioners did a pt to ec tions tot an a year after the dedsio had purpose of pursuing a final 90 days after their entry per s ections 7481(a)(1) and 7483 which in all , d on or before May 5, 2011.

the cases occurre nt a letter to the IRS "to preserve any On February 12 2010 petitioners se h * * * [petitioners], i .

.ndividually, or the entity, FSW may have for rights t at recovery o f attorneys' fees as a resu It of the Settlement an d Docket No. 7330-06."

f Administrative - On May 2 2011, petitioners submi ded to this letter. On .tted a letter titled "Request or Fees, Attorneys , Fees and Costs". The IRS never respon 734 183.04 in administrative May 15, 2012, petitioners .

filed a petition seeking $ , this litigation.⁷ Petitioners claime , d inter the amounts in controvérsy and the whatever fees they incur in costs plus lia that they had prevai a ' led with respect to d that respondent's position was no t substantially most significant issues an ustified.

D_isgssjon "Summary judgm ent is intended to expedite litigation and avoid · T C unnecessary and expensive trials." F . nt bears the burden of , 90 678, 681 (1988). A party moving for summary judgme 6(...continue d d had become final, been entere an but the Court rejected these filings.

ate etition seeking review of . 7Petitioners a 1so have pending a separ p .

t to abate interest.

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respondent's denial of their reques [*"] demonstrating that no genume issife .

of material fact exists and that he or she is entitled to judgment as a T.C. 518, 520 (1992), gf'd, 17 F.$d 965 (7th Cir. 1994). Facts are viewed m thT C matter of law.

, 98 light most favorable to the nonmoving party. D , 85 .

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ent has been properly made 812 821 (1985). Where a mo tion for summary judgm nd supported by the moving pa , rty the nonmoving paity "m not rest upon the ay nere allegations or denials" contairied in that party's pleadings but must by facts showing that there is a genuine affidavits or otherwise "set forth specific dispute for trial." Rule 121(d).

Petitioners filed their petition pursuant to se ction 7430(f)(2) seeking dent's examination of the tax administrative costs incurred with respect to respon Res ondent;however, conten ds that ears that eventually led to the prior cases..

p der the doctrine of res ju dicata petitioners are prec un costs 8 We agree with respondent.

The statuté and oùr:caselaw are on all fours luded from seeking these with respondent's position,,an .

, d petitioners argum ents to the contrary are unpersuasive. S_ee T C 85 (1991).

, 97 .

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8Respondent properly raise d the affirmative de .

fense of res judicata in his answer.

The statutory framewor k for an award 430 Section 7430(a) provides: is found inCsectio0n 7AWARDING OF COSTS AND CERTAIN FEES.

ich of administrative and litigation costs (a) In General--In any admini a s n connection with the is brought by or against the Unfund of any tax, interest, or penalty a determination, collection, or te arty may be awarded a judgment or under this title, the prevailing p rt proceeding wh settlement for-- connection i h s c the Internal Revenue Service, an d (2) reasonable litigation costs incurred in with such court proceeding.

connection ful at the administrative eve 1but successfu 1 in the court If a taxpayer is unsuccess sts incurred during both the administrative proceeding, the taxpayer may recoup co and the court procee ing d s if the taxpayer m eets the requireme nts of section 7430.'

Congress left it up to the courts to develop procedures for claiming costs in

th · rocedure for recouping such costs in such a scenario. D (1990) (citing Rules 230 to 233 of title XXII g 9Sec. 7430 requires, i nter alla that the taxpayer be the preva ic 7430 )(1), er exl aust administrative remedies,7430(b)(3), and 7430(c)(4)(A), that the taxcessarily protract the proceedings sec0(c)(4)(D). that the taxpayer no t certain net worth requirements, s that the taxpayer mee .

These Rules describe the requirements within which a [*9} the U.S. Tax Court.

that if the parties agree on a settlement taxpayer must make a claim. They specify h arties must include d administrative and litigation costs, t e p of all issues inclu ing the award of those costs.

Rule 231(a); in the stipulated decision documents .

T C Memo. 199 4-604, 1994 WL 692750, at 9th Cir. 1997). If the parties have not *7, r tettled the reason , 113 F.3d 1087 ( ssues, the taxpayer must able administrative an d litigation cost i f a written opinion determining file a motion for costs within 30 days of service o t that contain findings ice of the pages o f the transcrip the issues in the case or serv Rule 152. Rule 231(a)(2)(A) and (B).

of fact or opinion s tated orally pursuant to ts the taxpayer must also ttled all issues .

but the claim for cos , If the parties have se file a motion along with the stipulation o the prior cases, an f settled issues.

Rule 231(b) and (c).

d decisions in those cases .

. Petitioners did none of these things in became fin al a considerable time ago.

motion for costs filed after dis690 (9th Cir.

al of case f r ack o 1988) C 862 (7th Cir. 1987) (ho sec. 7430 motion for costs enter ng a decision 1so held motions for costs FB had no jurisdiction to he dismisünhen iled afte a stipulatio alack of jurisdiction). We havey hich was silent as to costs, but before the entry o T.C. 708, 711-712 (1990).

at least administrative costs through a court The other avenue to recover

. whole or in part) an awar d for reasonable decision granting or denying (in the Internal Revenue Service shall be administrative costs un der subsection (a) by th the Tax Court .

" Sec. 7430(f)(2).

subject to the fil t of jur s ition foallo s s o review the IRS' rejection of or This express gr d b a prevailing party.

t for administrative costs incurre y nonaction on a reques obstacle to overcome.

Our precedent is .

h e at least one major Petitioners av dent's position that res judicata prevents p etitioners' on all fours with respon recovery. We have h eld "that the doctrine o res j f udicata bars an action for k costs incurred on or after the earliest of "The prevailing party can see f the notice of th e decision (i) the date of the receipt by the taxpaye oAppeals; (ii) the date of the of the Internal Revenue S rvthe date on which the 1st letter of for notice of deficiency; o h ch allows the taxpayer an opport proposed deficiency administrative review in Appeals is sent.

the Internal Revenue Service y .

Sec. 7430(c)(2) (flush language).

' est for administrative f the * * * (IRS) ond to a taxpayer s requ "If the IRS does neonsider that failure to be "a decis on3001.7430-2(c)(6), able administrative costs.

d costs, the taxpayer may p A in. 10 ("IRS non-action slip op. at . may be petitioned un ereaso .

B ,, der section 7430(f)(2)(.]

.C Memo. 2009-146, d an adverse decision that (2) to the extent that the recovery [* L¹] administrative costs under section 743 (f) of such costs could have been pursued in a p rior deficiency, liability, revocation, .

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T C Memo. 2002-49, slip op. at 7 (applying Oga_fson to similar .

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facts), afff'd, 49 Fed. Appx. 446 (4th Cir. 2002).

T C at 86 the parties submitted a , 97 .

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atipulated decision in the taxpayers' favor. The taxpayers, however, made no to Rules 230 through 233, nor did the stipulated motion for costs pursuant decision documents provi de for administrative and litigation costs. E The taxpayers later filed a petition seeking administrative costs under section 7430(f)(2). E The taxpayers sou which was the subject of the prior Tax Court litigation.

g We held that because ght costs associate d with the 1986 tax year for administrative costs " in the prior case, the taxpayers "could have made a c aim "res judicata bars * * * [the taxpayers) from litigating in the present case administrative costs that could have been litigated in the previous case." E at 92.

ld have made their claim for administrative and litigation Petitioners cou costs in their prior Tax Court proceedings.

Because they did not, they are now barred from pursuing th is c laim. Petitioners' argume nts to the contrary--that we should overrule G_usstafso;1or create some sort of equitable exception--are unpersuasive.

Petitioners co ntend that GÈ should not apply " " be made as part . of the decision or ju .

d ment in because section 7430 provides only that an award may : "[T]he statute gives to a case.

Sec. 7430(f)(1). But as we have previously stated h rerogative of specifying how an order d not to the taxpayer, t e p the court, an disposing of a mo .

C clearly articulate tion for litigation costs shou ld be handled." M 994 WL 692750, at *5 We stated further that "[t]his Court has .

the substantive issues as well d its intent to address, in every case, .

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" Id. at *6. Subsequently we sts in a single decision. -- as the issue of litigation co noted:

The Court has an interest in foste t for the judicial ron of its workload. In rocess and accomplishing orderly ispor the judicial process through art the Court seeks to foster resps Rules which are designed to he evenhanded enforcement of ensive determination of every case. secure the just, speedy, and me0xf ts own agenda, is permitted to * * * If a party, in the pursuiablished by this Court, unfairness to disregard the proceduresthe Court's processes occur. others and disruption o .

C Memo. 1997-576, shp op. at 14 (citations M omitted). Thus, while the statute does in exercised our prerog ative in establishing proce "m ", we have deed use the word ay dures that allow a taxpayer to seek [* L³] administrative and litigation costs while fostering respect for the judicial process and ensuring or derly disposition of our workload.

us to overturn Gustkon and hold that section Second, petitioners urge 7 30 creates an excep tion to the doctrine of res judicata. In GÈ, we ismissed a similar argument.

We were "not persuaded by petitioners that the d such as the one provided by section reation of a specific statutory reme y 430(f)(2) does or should preclude the application of common-law doctrines such .

T C at 92. Our reasoning in s res judicata."

, 97 . the doctrine of stare decisis, G_mtafs_n has stood for over 20 years, and given etitioners have not convinced us otherwise.

Third, petitioners ask us to carve out an exception to Gustdson based on the particular facts of their cases. Petitioners allege the following factual bases for such an exception:

(1 they had numerous cases that could have been or were at .

one point consolidated but were sett led at different times, (2) no trials occurred in th had not engaged in any trial preparation, and (4) they put no their cases, (3) ey rayer for administrativ or litigation costs in their petitions.

ction 7430(e). That section normally The first alleged difference ignores se requires the Court (except where it determines in i ts discretion it would not be actions that could have been joined or appropriate) to treat as one proceeding return or returns of a taxpayer that could {*14] consolidated or cases involving a le court proceeding . It also ignores Rules 230 through have been joined in a sing arties to submit a stipulation o f settled issues along with a 233, which allow the p .

ld then have reques ted that the Court treat that motion for costs. Petitioners cou d with the other procee ing d roceeding as joine s for the purposes of resolving the bout judicial economy.

motion, thus addressing petitioners' concerns a the fact that no trial , d alleged factual difference ignores Petitioners secon (cid:16)042 contending that the To the extent petitioners are was held in G_ustafsog either. .

entitlement to administrative and litigation lack of a trial comp t the Court, at its discretion where licates their proving costs, t he Rules allow either party to reques . fide factual disputes, to e onduct an evidentiary hearing. Rule there are bona 232(a)(2).

Petitioners th .

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ird factual difference is that they engaged in n o trial , ation Presumably petitioners prepar believe that because there was no tria and it would be mappropri ate to seek the preparation, they incurred no costs this context. Nonetheless, section 7430 defines reasonable administrative costsart as "reasonable fees paid or incurred for the services of litigation costs in p attorneys in conn ection with the court proceeding .

" Sec. 7430(c)(1)(B)(iii).

[* 5] Surely the negotiations to se ttle the litigation were "in connection with the co rt proceeding".

Petitioners' fourth factual difference is that their petitions in the prior cases .

d d not include prayers for attorney . 's fees and litigation costs.

That is true because Rule 34(b) states: ."A claim for reasona ble litigation or administrative " Thus osts shall not be included in the petition in even though the taxpayers in Gustafson included such a request in their petition, .

(cid:16)042 a deficiency or liability action.

his request had no impact on our holding. Rather, petitioners must follow this ers to make such êequests after ourt's procedures, which generally require taxpay the substantive issues have been resolve .

d Rule 231; _see_also F the time for making such claims .

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T C Memo. 1986-39 ("In general, C is after the substantive issues have been resolved.").

us to exercise equi table owers and decline to p As alleged by petitioners, the actions of Finally, petitioners urge ly the rule of res judicata in this case.

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app t abetted by the group manager, may have been inappropriate, the revenue agen , and we in no way condone inappropri ate or un-called-for actions.

However, those etitioners' lengthy audit and actions, while significantly contributing to p f petitioners inability , .

to substantial lega , 1 bills are not the proximate cause o d of reasonable administrative and litigation costs.

Rather, it was obtain an awar *16] the unfamiliarity of petitioners an follow them. As the Supreme d their advisers with our Rules or their Court noted in reversing a inadvertent failure to Court of Appeals that had attempte d to create an excep tion to the doctrine of res judicata:

tal public interests beyond any The doctrine of res judicata serves va ion of the equities in a particular individual judge's ad hoc determi e of law or equity which sanctions case. There is simply "no principf the salutary principle of r_es t c sos of practice or proce ed f d substantial justice, u p s. It is a rule of fundamental an e forced by hprivate ace w ld be cordially regarded and , 244 U.S. 294, 299 (1917)· 4 401 (1981). Accordmgly, · we F th , 452 U.S. 39 , articular case and will apply the doctrine of decline to weigh the equities of is p t entitled to an award of reason able administrative res judicata. Petitioners are no costs.

The Court has considered all of petitioners' contentions, arguments, requests, and statements. To the extent not discussed herein, the Court concludes that they are moot, irrelevant, or without merit.

To reflect the foregoing, An appropriate order and

1. Decision in p years was e ntered on May 3, 2011. Decisions in petitioners .
4. T C 708, 710 (7th Cir. 1987)).
6. The decisions in a file motions to vac (cid:16)042 ff which might have corrected the 5The IRS no longer has a review sta ision in this case. The IRS mstead 1 some cases, counse and statutory notices of h b its Exammation Div s n exam n t on e o .
11. This section provi des in part: "A proceeding is found in section 7430(f)(2 .
97. T.C. at 93; ge also K o partnership case." G . commissio11eI, .