UNITED STATES TAX COURT
GLENN L. WITTSTADT, JR. AND LYNNE M. WITTSTADT, Petitioners v .
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7123-93. Filed August 25, 1997.
Robert G. Cassilly
, for petitioners.
Alan R. Peregoy
, for respondent.
MEMORANDUM OPINION
DAWSON, Judge
: This case was assigned to Special Trial Judge Robert N. Armen, Jr., pursuant to the provisions of section 7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and Transfer Refund) that was received by petitioner from the Maryland State Teachers' Retirement System (the Retirement System) did not qualify for tax-free rollover treatment under section 402(a)(5). In turn, this determination was premised on respondent's ultimate determination that the Transfer Refund was not made "on account of" petitioner's separation from the service of the Baltimore County Public Schools; i.e., petitioner's retirement as a teacher, but rather was made "on account of" petitioner's election to transfer from the Retirement System to the Maryland State Teachers' Pension System (the Pension System). B. The Parties' Pleadings On April 9, 1993, petitioners filed a timely petition (the Petition) in which they contested the deficiencies determined by respondent. In the Petition, which they filed pro se, petitioners alleged, in part, as follows:
The issue in this case was whether my [Transfer
Refund] distribution met the IRS requirements for a tax free roll-over or not * * * .
The December 4, 1992 final appeal decision letter from the local IRS Appeals Division states that [the Transfer Refund] did not [qualify for tax-free rollover treatment] because the distribution WAS NOT received because of "Separation from the job" (retirement) as required; but because I signed an "election form to transfer participation from the old ... retirement fund to the new ... retirement fund".
* * * * * * * Following the June 30, 1989 separation [petitioner's final day of employment] the State had only one, single, required course of action, namely to make the distribution to me on or after July 1, 1989, as requested and contracted for on the effective documents, and that was subsequently carried out. The fact that the amount and nature of the distribution was the result of a choice had nothing to do with when it had to be paid and was, i.e. after retirement as requested and contracted for, thus satisfying the rollover requirement. On June 10, 1993, respondent filed an answer (the Answer) to the Petition. In the Answer, respondent admitted the first two of the above-quoted paragraphs in the Petition and denied the third.
C. Petitioners' Motion for Summary Judgment
On January 31, 1994, petitioners, again acting pro se, filed a motion for summary judgment. In their motion, petitioners argued that the Transfer Refund was made on account of petitioner's retirement and not on account of petitioner's election to transfer from the Retirement System to the Pension System. The penultimate sentence of petitioners' motion stated as follows: "But for his retirement, Mr. Wittstadt would not have elected to receive the lump-sum payment and no such distribution would have been made." Petitioners also alleged that petitioner's election to transfer from the Retirement System to the Pension System was invalid under Maryland State law. On March 23, 1994, a hearing was conducted in Washington, D.C., on petitioners' motion for summary judgment. At that time, the parties indicated that they were attempting to obtain facts and documents from the Maryland State Retirement Agency. Respondent's counsel stated, in part, as follows:
However, contrary to the Court's directive expressed at the prior hearing, no executed stipulations were filed by the parties. In this regard, respondent's counsel acknowledged that information had been obtained from the Maryland State Retirement Agency; respondent's counsel stated that he had prepared stipulations of agreed and unagreed facts, but that petitioners had declined to execute such stipulations. Petitioner confirmed this representation, indicating that he thought such stipulations were irrelevant to his motion.
Respondent's counsel then identified what he considered to be two disputed factual matters: First, the effective date of petitioner's election to transfer from the Retirement System to the Pension System; and second, the reason why the Transfer Refund was paid to petitioner.
Regarding the first disputed factual matter, respondent took the position that the effective date of petitioner's election to transfer from the Retirement System to the Pension System was June 1, 1989, a date that preceded the effective date of petitioner's retirement. In contrast, petitioner took the position that the effective date of his election was July 1, 1989, a date that followed the final day of petitioner's employment.
The second disputed matter involved causation; i.e., what caused the State of Maryland to make the Transfer Refund to petitioner. In this regard, respondent took the position that the Maryland made the Transfer Refund because of petitioner's election to transfer from the Retirement System to the Pension System. In contrast, petitioner took the position that Maryland made the Transfer Refund because of petitioner's retirement.
As previously indicated, petitioner took the position that the effective date of his election to transfer from the Retirement System to the Pension System came after the final day of his employment. Petitioner's position in respect of this issue was consequential for two reasons: First, because it facilitated petitioners' principal argument that the Transfer Refund was made because of petitioner's retirement; and second, because it facilitated petitioners' ancillary argument that the Transfer Refund was not made because of petitioner's election to transfer from the Retirement System to the Pension System because such election was invalid under Maryland State law. At the conclusion of the hearing, the Court denied petitioners' motion. The Court took this action essentially for two reasons: First, and principally, because the record was so incomplete so as to preclude a rational disposition of the case; and second, because factual issues appeared to be in dispute. Near the end of the hearing, the following colloquy took place between the Court and petitioner:
THE COURT: * * * Mr. Wittstadt, at this point, I am not clear what your position is with respect to the stipulation of facts. But when this case was continued last time, and as I understand it from respondent's counsel that there are some documents, the Court does not now have those documents. Without those documents, I couldn't come close--let the Court finish--couldn't come close to ruling in your favor on this motion. A motion for summary judgment requires that there be no genuine material issue of fact in dispute. So I don't have any facts or certainly anywhere near sufficient facts to rule in your favor. Even if you do taxpayer, a Maryland public school teacher, elected to transfer from the Retirement System to the Pension System, effective January 1, 1990, and received thereafter a Transfer Refund. In May 1990, the taxpayer applied for retirement and retired in fact, effective July 1, 1990. Hylton concluded as follows:
Petitioners have shown that petitioner's election to transfer to the Pension System, due to which election he received the Transfer Refund, was related to his retirement planning. In other words, they have demonstrated that the decision to retire was a "link in the chain of causalities" leading to the receipt of the Transfer Refund. [Citation omitted.] However, we view petitioner's separation from service as no more than a " mere link in the chain of causalities" leading to the receipt of the Transfer Refund. [Citation omitted.] Accordingly, we hold that petitioner did not receive the Transfer Refund on account of his retirement. Rather, he received the Transfer Refund because of his election to transfer from the Retirement System to the Pension System, an election that, under Maryland law, lacked the requisite connection to petitioner's separation from service.
In reaching the foregoing conclusion, we relied heavily on
Gunnison v. Commissioner
, 54 T.C. 1766 (1970), affd. 461 F.2d 496 (7th Cir. 1972), where we considered the meaning of the phrase "on account of" in an earlier version of the operative statute and construed it narrowly. Id . at 1773.
Hylton was never appealed, and the decision in that case became final on April 25, 1995. See sec. 7481(a)(1), 7483; cf. Fed. R. App. P. 13(a).
6/5/96 $25,000 7/16/96 25,000 9/10/96 243 10/7/96 286 11/7/96 286 On October 22, 1996, respondent filed a notice of Federal tax lien in the county of petitioners' residence. Also, by notice dated December 25, 1996, respondent reminded petitioners that their next payment pursuant to the installment payment agreement was due on January 8, 1997.
K. The Adler Case on Appeal
On June 21, 1996, the Court of Appeals for the Fourth
Circuit decided Adler v. Commissioner
, 86 F.3d 378, which vacated and remanded our decision in T.C. Memo. 1995-148. In Adler v. Commissioner , the Court of Appeals agreed that the phrase "on account of" requires "a causal connection between the employee's separation from service and the distribution from the qualified plan." 86 F.3d at 380. However, the Court of Appeals construed the phrase "on account of" to mean "incident to" and concluded that the requisite degree of causality required by the operative statute had been satisfied. In so holding, the Court of Appeals stated: "As the purpose of the statute [section 402] is to protect and encourage retirement savings, it is plain that a distribution to an employee that occurs incident to his retirement should be entitled to rollover treatment." 86 F.3d at 381.
On September 10, 1996, the Solicitor General of the United
States decided that a petition for a writ of certiorari would not be filed in respect of Adler v. Commissioner , 86 F.3d 378. Cf.
28 U.S.C. sec. 2101(c)(1994).
L. Reversal and Subsequent Developments
On or about November 8, 1996, and after some prodding by petitioners, respondent filed a motion with the Court of Appeals asking that the Tax Court's Decision entered on January 31, 1996, be reversed on the basis of Adler v. Commissioner , 86 F.3d 378 (4th Cir. 1996). Shortly thereafter, on November 14, 1996, the Court of Appeals issued an order granting respondent's motion and reversing our Decision.
No later than November 22, 1996, respondent's counsel undertook action to suspend any further collection in respect of the May 1996 assessment against petitioners, pending abatement of such assessment and the refund of amounts previously paid. Respondent's counsel specifically advised respondent's problem resolution officer for the Delaware-Maryland district that "Mr. Wittstadt no longer owes the deficiency for 1989" and directed the officer to "take whatever steps [are] necessary to terminate the required payment agreement." Nevertheless, during the fall of 1996, petitioners incurred costs in trying to have collection terminated.
On January 9, 1997, the record in this case was returned by the Court of Appeals and received by this Court. Thereafter, by Order dated January 28, 1997, the Court vacated the Decision entered January 31, 1996, and directed the parties either to furnish an agreed form of decision suitable for entry of decision by the Court or to move for such relief as they thought might be II. Discussion We apply section 7430 as amended by the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec. 6239(a), 102 Stat. 3342, 3743-3746.12
A. Requirements for a Judgment under Section 7430
Under section 7430(a), a judgment for litigation costs incurred in connection with a court proceeding may only be awarded if a taxpayer: (1) Is the "prevailing party"; (2) has exhausted his or her administrative remedies within the IRS; and (3) did not unreasonably protract the court proceeding. Sec. 7430(a), (b)(1), (4). A taxpayer must satisfy each of these three requirements in order to be entitled to a judgment under section 7430. Rule 232(e).
Respondent concedes that petitioners exhausted their administrative remedies within the IRS. Respondent also concedes that petitioners did not unreasonably protract the court proceeding. Accordingly, we must decide whether petitioners qualify as the "prevailing party" in the court proceeding. B. Prevailing Party In order to qualify as the "prevailing party", a taxpayer must establish: (1) The position of the United States in the proceeding was not substantially justified; (2) the taxpayer has substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues presented; and (3) the taxpayer satisfies the applicable net worth requirement. Sec. 7430(c)(4)(A).
Respondent concedes that petitioners substantially prevailed within the meaning of section 7430(c)(4)(A)(ii). Respondent also concedes that petitioners satisfy the applicable net worth requirement. However, respondent contends that the position taken by respondent in the court proceeding was substantially justified.
Petitioners bear the burden of proving that respondent's position in the court proceeding was not substantially justified. Rule 232(e); Dixson Corp. v. Commissioner , 94 T.C. 708, 714-715 (1990); Gantner v. Commissioner , 92 T.C. 192, 197 (1989), affd.
905 F.2d 241 (8th Cir. 1990). Accordingly, we must decide whether petitioners have carried their burden of proving that respondent's position in the court proceeding was not substantially justified.
C. Respondent's Position in the Court Proceeding
Whether respondent's position was not substantially justified is a question of fact. We resolve such issue by the application of a reasonableness standard. See Pierce v. Underwood , 487 U.S. 552, 565 (1988) (construing similar language in the Equal Access to Justice Act (EAJA), 28 U.S.C. sec. 2412 (1988)); see also Maggie Management Co. v. Commissioner , 108 T.C.
, , (June 11, 1997) (slip op. at 18-19); Sokol v.
Commissioner
, 92 T.C. 760, 763 n.7 (1989); Sher v. Commissioner , 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988). The position of the United States that must be examined against the reasonableness standard is the position taken by the Commissioner in the answer to the petition and thereafter. Bertolino v. Commissioner , 930 F.2d 759, 761 (9th Cir. 1991);
Sher v. Commissioner
, 861 F.2d at 134-135; Maggie Management Co.
v. Commissioner , supra (slip op. at 19); see sec. 7430(c)(7)(A).
The fact that the Commissioner eventually loses a case does not, by itself, establish that the Commissioner's position was unreasonable. Estate of Perry v. Commissioner , 931 F.2d 1044, 1046 (5th Cir. 1991); Swanson v. Commissioner , 106 T.C. 76, 94 (1996); Powers v. Commissioner , 100 T.C. 457, 471 (1993).
In the present case, respondent's position in the court proceeding was that petitioner's Transfer Refund did not qualify Third, petitioners contend that respondent was unreasonable in pursuing collection of the assessed deficiencies, at least after the Court of Appeals decided Adler v. Commissioner , 86 F.3d 378 (4th Cir. 1996).
We consider each of petitioners' contentions in turn. E. Congressional Intent Petitioners contend that respondent's position in the court proceeding was not substantially justified because respondent's position "is in conflict with stated Congressional intent." In this regard, petitioners rely on the statement made by the Court of Appeals in reversing Adler v. Commissioner , T.C. Memo. 1995148, that "As the purpose of the statute [section 402] is to protect and encourage retirement savings, it is plain that a distribution to an employee that occurs incident to his retirement should be entitled to rollover treatment." Adler v. Commissioner , 86 F.3d at 381.
Petitioners' contention is tantamount to arguing that respondent's position was unreasonable because respondent lost the case. However, as previously stated, the fact that the Commissioner eventually loses a case does not, by itself, establish that the Commissioner's position was unreasonable. Estate of Perry v. Commissioner , supra ; Swanson v. Commissioner , supra ; Powers v. Commissioner , supra .
Further, we recall that respondent did not lose the present case in this Court. Rather, respondent ultimately lost the case on appeal. Under these circumstances, a taxpayer ordinarily has a heavy burden in contending that respondent's position was unreasonable. The legislative history of section 7430 states that "when a taxpayer loses in the trial court and obtains a reversal of that decision in the appellate court, the appellate court would not normally award attorney's fees to the taxpayer since the trial court, by definition, had found the government's position to be reasonable." H. Rept. 97-404, 15 (1981). See Staff of Joint Comm. on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (J. Comm. Print 1982) 450; 127 Cong. Rec. S-32078 (1981); Auto-Ordnance Corp. v. United States , 14 Cl. Ct. 295, 300 (1988); see also H. Conf. Rept. 97-760, 686-687 (1982). Further, respondent's position was consistent with the holding of this Court as expressed in four cases with similar, if not indistinguishable, facts that had been decided prior to the trial of the present case. Thus, in Hylton v. Commissioner , T.C.
Memo. 1995-27, Brown v. Commissioner
, T.C. Memo. 1995-93, Dorsey v. Commissioner , T.C. Memo. 1995-97, and Adler v. Commissioner , T.C. Memo. 1995-148, this Court held that a Transfer Refund was received not on account of retirement, but rather on account of the taxpayer's election to transfer from the Retirement System to the Pension System. Indeed, the decision in the first of the foregoing cases, Hylton v. Commissioner , supra , was final at the time of trial of the present case.
Finally, in view of the fact that a linchpin for our decision in Hylton v. Commissioner , supra , was Gunnison v.
Commissioner
, 54 T.C. 1766 (1970), affd. 461 F.2d 496 (7th Cir. 1972), a case in which we construed narrowly the phrase "on account of" in an earlier version of the operative statute, we think that respondent's position was reasonable, both at the time that the notice of deficiency was issued in March 1993 and at the time that the Answer was filed in June 1993. See Pierce v. Underwood , 487 U.S. 552, 565 (1988)(the Commissioner's position must have a reasonable basis in law).
In view of the foregoing, we reject petitioners' first contention.
F. Petitioners' Motion for Summary Judgment
Petitioners also contend that respondent was unreasonable in
"refus[ing] to submit the case for decision by way of summary judgment". We disagree.
Petitioners' contention overlooks a number of matters. First, the Court denied petitioners' motion for summary judgment principally because of a record so incomplete that a rational disposition of the case was not possible. Because petitioners were the moving party, petitioners bore responsibility for ensuring that the record provided a basis for their motion. Second, the Court also denied petitioners' motion for summary judgment because genuine issues of material fact appeared to be in dispute. Here we recall that in an effort to more clearly determine this matter, the Court had directed the parties to stipulate facts, and the Court even continued the original hearing on petitioners' motion for that purpose. Respondent's counsel complied with this directive by preparing stipulations of which a representative of the Maryland State Retirement Agency testified and at which numerous exhibits were offered in evidence at trial. Moreover, the Transfer Refund case that led to a published opinion by the Court of Appeals, Adler v. Commissioner , T.C. Memo. 1995-148, revd. 86 F.3d 378 (4th Cir. 1996), was decided by this Court after a trial.
Fifth, the decision in Hylton v. Commissioner
, supra , became final before the trial of the present case. If petitioners regarded their case as presenting nothing other than a pure issue of law, they could have agreed to entry of decision on the basis of Hylton and then appealed. Instead, petitioners went forward at trial on the theory that the Transfer Refund was not made pursuant to Maryland State law, but rather pursuant to an administrative policy that required petitioner to retire in order to receive the Transfer Refund. Petitioners' strategy was obviously to present a theory that might serve to distinguish their case from Hylton , Brown , Dorsey , and Adler and thereby avoid the need to appeal. However, the fact that petitioners' strategy was unsuccessful does not mean that respondent's position was unreasonable.
Finally, we do not think that respondent was under any obligation to move for summary judgment. Indeed, respondent thought that there were genuine issues of material fact. And the reasonableness of respondent's view as to the existence of disputed factual issues is demonstrated, if by no other fact, by III. Conclusion Based on the foregoing, we hold that respondent's position in the court proceeding was not unreasonable through September 1996, but that respondent acted unreasonably thereafter by not