Tax Court Denies Litigation Costs to Taxpayer; IRS's Position Was Substantially Justified

(Parker Tax Publishing June 2023)

The Tax Court held that a taxpayer was not entitled to recover costs under Code Sec. 7430 after (1) the Tax Court dismissed her petition for review of a collection due process determination for lack of jurisdiction, because her petition was filed after the expiration of the 30-day deadline provided in Code Sec. 6330(d)(1), (2) the Second Circuit vacated and remanded that decision based on the Supreme Court's holding in Boechler, P.C. v. Comm'r, 2022 PTC 112 (S. Ct. 2022), that the 30-day deadline is not jurisdictional and may be equitably tolled, and (3) on remand the IRS conceded her case in full. The Tax Court found that the IRS was substantially justified in its legal position that the court lacked jurisdiction because at the time the petition was filed, the caselaw was clear that the 30-day deadline was jurisdictional and not subject to equitable tolling. Castillo v. Comm'r., 160 T.C. No. 15 (2023).

Background

On November 28, 2016, the IRS issued Josefa Castillo a notice of deficiency for 2014. The notice determined that Castillo had income of $139,274 from payment card and third-party network transactions. Since Castillo reported $11,900, the IRS determined that she had unreported income of approximately $127,374 and a deficiency of $44,427. The IRS also determined that Castillo was liable for a Code Sec. 6662(a) and (b)(2) accuracy-related penalty of $8,885 for an underpayment attributable to a substantial understatement of income tax.

The deficiency notice was mailed to Castillo's last known address. The U.S. Postal Service attempted delivery of the notice once, but the correspondence was unclaimed and returned to the IRS. On April 17, 2017, the IRS assessed the deficiency and the penalty. On February 13, 2018, the IRS issued Castillo a Notice of Federal Tax Lien (NFTL) Filing and Your Right to a Hearing Under Section 6320. On March 2, 2018, Castillo filed a request for a collection due process (CDP) hearing.

At the CDP hearing, Castillo argued that she had not received the deficiency notice and was not liable for the deficiency, interest, or penalty. She argued that the income attributed to her in the deficiency notice was instead attributable to Castillo Seafood, a business she allegedly sold in 2009. The settlement officer informed Castillo that because the notice of deficiency was properly mailed but unclaimed, the underlying liability could not be disputed unless Castillo could demonstrate that she was out of the country during that time. Castillo did not make that showing but maintained that the determination was incorrect.

On December 11, 2018, the IRS issued Castillo a notice of determination for the 2014 tax year, which sustained the filing of the NFTL. It was mailed to Castillo's last known address. The 30-day period for filing a petition with the Tax Court under Code Sec. 6330(d)(1) expired on January 10, 2019. Castillo filed her petition on October 8, 2019. The IRS moved to dismiss Castillo's case for lack of jurisdiction because her petition was not timely filed. The Tax Court granted that motion.

Castillo appealed to the Second Circuit. That case was held in abeyance pending the Supreme Court's decision in Boechler, P.C. v. Comm'r, 2022 PTC 112 (S. Ct. 2022). On April 21, 2022, the Supreme Court decided Boechler, holding that the Code Sec. 6330(d)(1) 30-day deadline to file a petition for review of a CDP determination is nonjurisdictional and subject to equitable tolling. The Second Circuit vacated the Tax Court's order of dismissal in this case and remanded it for further proceedings in accord with the Supreme Court's decision in Boechler. The parties filed a stipulation of settled issues, stating that Castillo was not liable for the unreported income, penalty, or interest determined in the deficiency notice.

Castillo filed a motion for an award of costs under Code Sec. 7430. Code Sec. 7430(a) provides that the prevailing party may be awarded reasonable administrative or litigation costs for any proceedings brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty. To recover costs, the taxpayer must establish that (1) the taxpayer is the prevailing party, (2) he or she did not unreasonably protract the proceedings, (3) the amount of the costs requested is reasonable, and (4) he or she exhausted the administrative remedies available.

The IRS conceded that Castillo satisfied three of the four requirements under Code Sec. 7430. She did not unreasonably protract the proceedings, the amount of the costs requested was reasonable, and she exhausted the administrative remedies available. The parties disagreed as to whether Castillo should be treated as the prevailing party. Under Code Sec. 7430(c)(4)(A)(i), to be the prevailing party Castillo must have substantially prevailed with respect to the amount in controversy or have substantially prevailed with respect to the most significant issue or set of issues presented.

Under an exception provided in Code Sec. 7430(c)(4)(B), a party is not treated as the prevailing party if the government establishes that its position was "substantially justified." The government's position is considered substantially justified if its position was based on supportable interpretations of federal tax statutes and case law. To be substantially justified the government's position must have a reasonable basis in both fact and law. Under Code Sec. 7430(c)(4)(B)(ii), the position of the United States is presumed not to be substantially justified if the IRS did not follow its applicable published guidance in the administrative proceeding. Castillo argued that the IRS's position should be presumed not to be substantially justified because the IRS did not follow guidance provided in the Internal Revenue Manual (IRM).

Analysis

The Tax Court held that the IRS was substantially justified in its legal position that the Tax Court lacked jurisdiction to hear Castillo's case because at the time the petition was filed, the caselaw was clear that the Code Sec. 6330(d)(1) 30-day deadline was jurisdictional and not subject to equitable tolling. For that reason, Castillo was not treated as the prevailing party for purposes of Code Sec. 7430 and the court denied her motion for costs.

The court noted that until the Supreme Court's recent decision in Boechler, it was well established that the 30-day period to file a petition for review of a collection due process was jurisdictional. Before the Supreme Court's decision in Boechler neither the Tax Court nor the federal courts of appeals had held the 30-day period in Code Sec. 6330(d)(1) to be nonjurisdictional. The court concluded that, because Boechler was a matter of first impression for the Supreme Court, the IRS's position was substantially justified.

The court also found that the presumption in Code Sec. 7430(c)(4)(B)(ii) did not arise because the IRM is not "applicable published guidance" within the meaning of the statute. The court noted that Code Sec. 7430(c)(4)(B)(iv) defines "applicable published guidance" exhaustively as "regulations, revenue rulings, revenue procedures, information releases, notices, and announcements, and . . . any of the following which are issued to the taxpayer: private letter rulings, technical advice memoranda, and determination letters." Since the IRM is not included in this list, the court concluded that the presumption did not arise.

For a discussion of recovering litigation or administrative costs, see Parker Tax ¶263,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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