Unpublished Disposition, 852 F.2d 1290 (9th Cir. 1986)

MEMORANDUM^** 

Evelyn Stein appeals the tax court's denial of her motion for award of reasonable litigation costs pursuant to 26 U.S.C. § 7430. Stein contends that the Tax Court erred by failing to consider the Internal Revenue Service's (IRS) pre-petition conduct in determining whether to award litigation costs. We have recently held that the Tax Court must consider pre-petition conduct in determining whether the IRS' conduct was reasonable. Sliwa v. Commissioner, 839 F.2d 602 (9th Cir. 1988). We therefore reverse and, in light of the uncontraverted facts of record, award Stein her reasonable litigation costs.

Stein's difficulties with the IRS began on January 28, 1985 when she received a letter from the IRS stating that she had never filed a tax return for the tax year 1981. Stein responded on February 4, 1985, and explained that she filed a joint return with her former husband, under her married name. She attached a copy of the first page of the income tax return for the year in question and a document showing that her marriage had been dissolved.

Stein next received two more letters from the IRS, dated September 6, 1985, alleging that she failed to file returns for the years 1979 and 1980. The letters stated that since Stein failed to respond to "previous correspondence," it was concluded that she did not intend to file the returns in question or to give a reason for not filing. Aside from the January letter, to which she had responded, Stein had not received any "previous correspondence." As in the previous letter, she was told that she had 30 days to furnish the IRS with an explanation.

On September 16, 1985, Stein responded to the letters. She informed the IRS that she had filed tax returns for 1979 and 1980 and, once again, explained that she had filed joint income tax returns with her former husband. She again attached to each letter a copy of the first page of the income tax return for the year in question and a document attesting to the dissolution of her marriage.

The IRS acknowledged receipt of Stein's letters and stated that the records "have been updated ... and everything seems to be in order." Although Stein's letters of September 16 referred to the 1979 and 1980 tax years, the IRS' response referred to the taxable year of 1984 (a year not previously mentioned in any correspondence by either party). Stein also received a letter dated October 18, 1985, from the IRS which referred to Stein's letter of September 19, 1980, which was actually Stein's letter of September 16, concerning 1980. The letter of October 18 stated that "We are looking into the matter and will answer you more fully in 90 days."

Stein next received a notice of deficiency, dated October 31, 1985. The notice of deficiency was based solely on the IRS' determination that Stein failed to file income tax returns for the years 1979 and 1980 and to report her income from wages.

On November 29, 1985, Stein filed a petition in the Tax Court. The petition asserted that Stein had indeed filed tax returns for 1979 and 1980 and reported her income from wages. Stein alleged that she filed joint income tax returns with her husband for the years 1979 and 1980. She attached a copy of her joint income tax return for each of the years involved.

The IRS filed an answer on January 24, 1986 and denied all allegations of errors in the notice of deficiency and denied for lack of present information petitioner's statement of facts.

On January 24, 1986, Stein's attorney wrote to Mr. Simpson, the attorney who had answered the petition on behalf of the IRS, and requested that a more meaningful answer be filed. The IRS attorney failed to reply to this request. On February 10, 1986, Stein's attorney called the IRS District Counsel's office to ascertain which attorney was handling the case and was told there was no record of the case. He then called Mr. Simpson who was not in and requested that he return the call. No return call was received by Stein's lawyer. Subsequently a call was made to the Appeals Office to inquire whether the case had been sent to that office. Stein's attorney was informed that the Appeals Office had no record of his case.

On about February 18, 1986, Stein's lawyer, once again, called Mr. Simpson's office and, this time, was told that the case was assigned to Ms. Jeffers, a paralegal in the District Counsel's office. Stein's attorney spoke to Ms. Jeffers about his case and requested that she obtain the file so that the case could be resolved.

On March 18, 1986, Ms. Jeffers informed Stein's attorney that she had received the file. Further, she informed him that she had verified that Stein had filed the tax returns in question and agreed that the case should be conceded. Since the parties could not agree on an award of litigation costs, the parties filed a stipulation as to settled issues on June 6, 1986, in which the Commissioner conceded that Stein timely filed income tax returns for 1979 and 1980 and that all income had been reported.

DISCUSSION

Section 7430 provides for the award of "reasonable litigation costs" where the prevailing party "establishes that the position of the United States in a civil proceeding was unreasonable."¹  The tax court determined that Stein had not satisfied this requirement. In so holding, the Tax Court looked only to the IRS's post-petition conduct to determine whether the IRS' position was reasonable.²  Stein argues that the tax court should have looked at both pre and post-petition conduct.

In the case of Sliwa v. Commissioner of IRS, 839 F.2d 602, (9th Cir. 1988), we held that the government's pre-litigation conduct must be considered in determining whether the government's position was "unreasonable" within the meaning of Section 7430. "Congress could not have intended the court to be blind to unreasonable government conduct merely because it occurred prior to an arbitrary demarcation point." Id. at 607. Because the Tax Court applied a standard inconsistent with our later decision in Sliwa, we must reverse.

Where the parties do not dispute the facts on appeal, we may apply the correct legal standard to the facts as found by the Tax Court. See Sliwa, 839 F.2d at 608. The Tax Court has found IRS conduct unreasonable where the Service failed to investigate a taxpayer's claims or reevaluate its own position as new facts came to light. Frish v. Commissioner, 87 T.C. 858 (1986) (IRS' failure to investigate taxpayer's claims or to re-evaluate its own position as new facts came to light is unreasonable).

In the present case Stein supplied the proof of her filing, and the IRS had access to her records through her social security number. The IRS was thus on notice of facts which very clearly contradicted its position long before it conceded it was in error. A check of its own records would have substantiated Stein's explanation. The IRS ignored Stein's replies to its letters and issued a notice of deficiency even though there was no impending deadline of limitations or other governmental necessity. When Stein was finally forced to file a petition, the IRS denied its allegations without a check of IRS records. The record of this case compels a finding that the Government's position in this proceeding was unreasonable. We accordingly reverse and remand the case to the Tax Court for an award of Stein's reasonable litigation expenses, including the expenses of this appeal.

REVERSED AND REMANDED WITH INSTRUCTIONS.