Unpublished Disposition, 874 F.2d 815 (9th Cir. 1986)

No. 87-7246.

United States Court of Appeals, Ninth Circuit.

Before POOLE,^*  BOOCHEVER and BEEZER,^**  Circuit Judges.

MEMORANDUM^*** 

Taxpayers Kim and Leslie Doud appeal from the Tax Court's denial of their petition for litigation expenses as provided for in 26 U.S.C. § 7430. The Tax Court denied the Douds' petition upon finding that: (1) they were not prevailing parties, (2) the requested fees and costs were not reasonable, and (3) they had failed to exhaust their administrative remedies. We conclude that the Douds' failed to prove exhaustion of administrative remedies and affirm.

Tax years 1983 and 1984 are at issue in this appeal.¹  Kim Doud is a Baptist minister. In 1980 he filed a Form 4361 with the IRS, thereby requesting an exemption from self-employment taxes pursuant to 26 U.S.C. § 1402(e). The IRS approved the requested exemption. In tax years 1983 and 1984, Philip P. Storrer, a certified public accountant, prepared the Douds' income tax returns. Storrer apparently neglected to attach the required Form SE to the returns. That form is required in order to claim the exemption from self-employment taxes. The IRS subsequently sent notices of proposed deficiencies ("30-day letters") to the Douds for each tax year.²  Each of the 30 day letters stated that the proposed deficiencies could be challenged by calling or writing the IRS. Attached to each 30-day letter was IRS Publication 5, which indicates the manner in which an appeals conference is to be requested.

Storrer responded to each of the 30-day letters by writing and calling the IRS. Each of his written communications was cryptic and did not clearly identify the taxpayers or the taxpayers' problem with the IRS. The IRS failed to respond to his written or telephonic communications. Accordingly, the IRS automatically issued notices of deficiencies ("90-day letters"). The Douds subsequently filed petitions with the Tax Court seeking redetermination of the deficiencies. Both cases were conceded by the IRS shortly after each petition was filed. The IRS failed to agree to the award of litigation costs under 26 U.S.C. § 7430. This litigation followed.

In order to be eligible for an award of litigation costs for having successfully contested one's tax liability, the taxpayer must, among other things, exhaust administrative remedies within the IRS before commencing litigation. 26 U.S.C. § 7430(b) (1) states:

A judgment for reasonable litigation costs shall not be awarded under subsection (a) unless the court determines that the prevailing party has exhausted the administrative remedies available to such party within the Internal Revenue Service.

The IRS has promulgated regulations that outline the circumstances in which a taxpayer will be considered to have exhausted available administrative remedies.³  26 C.F.R. Sec. 301.7430-1(b) (i) requires that a taxpayer participate in an appeals conference in order to exhaust administrative remedies. However, if an appeals conference was requested but not granted, the taxpayer will have exhausted his administrative remedies. 26 C.F.R. Secs. 301.7430-1(b) (ii), 601.105 and 601.106. In this case the taxpayers assessed deficiencies did not exceed $2500.00, thus, no written request for an appeals conference was necessary. 26 C.F.R. Sec. 601.105. However, a taxpayer must at least have made an oral request for such a conference in order to exhaust his administrative remedies. Id.

The record is clear that none of Storrer's written communications with the IRS requested an appeals conference. Storrer submitted an affidavit with the Tax Court which states that he orally requested an appeals conference for each tax year. The Tax Court failed to credit that evidence and found that the Douds failed to carry their burden of proof on the issue of exhaustion. We agree. We review the Tax Court's findings of fact under the clearly erroneous standard. Sliwa v. Commissioner, 839 F.2d 602, 605 (9th Cir. 1988). A taxpayer has the burden of proving entitlement to any section of the tax code. Id. at 609.

Storrer's declaration states that when he received each of the thirty-day notices he first contacted the IRS by telephone. In each of those telephone conversations he states that he informed the IRS that an error had occurred and that the IRS should correct the error. He further states that in both calls he alternatively requested an appeals conference. The phone call regarding tax year 1983 lasted three minutes and Storrer made no contemporaneous notes of that conversation. The placing of that phone call is documented in the record. Other than Storrer's affidavit, there is no documentation of the phone call regarding tax year 1984. These are the only instances in which an appeals conference was allegedly requested.

The Tax Court carefully considered the evidence, applied the correct legal standards to that evidence, and concluded that petitioners failed to carry their burden of proving that they had requested an appeals conference. Given the less than clear and unhelpful contents of Storrer's written communications with the IRS, the brevity of the phone call regarding tax year 1983, and the absence of proof of the phone call regarding tax year 1984, we uphold the Tax Court's finding that the petitioners failed to carry their burden of proving that they exhausted their administrative remedies. For the foregoing reason the decision of the Tax Court denying the request for attorney's fees is affirmed.

AFFIRMED.

BOOCHEVER, Circuit Judge, dissenting.

I believe that the Douds exhausted their administrative remedies and thus are not barred from receiving litigation expenses. Under 26 C.F.R. Sec. 601.105 a written request for an appeals conference was not required because the assessed deficiencies did not exceed $2,500.00. The Douds' CPA, Mr. Storrer, telephoned the IRS twice and informed the answering clerk that the 30-day letter was in error. The Tax Court judge found that Storrer telephoned the IRS "at the phone number indicated at the top of the letter" and "informed respondent's representative that petitioner [the Douds] had filed a Form 4361 electing to be exempt from self-employment taxes, and that respondent (IRS) had approved the form". Storrer requested that the IRS make the correction, and if not, to send the case to appeals. The tax court memorandum decision does not indicate disbelief of Storrer's statement that he asked the IRS to review and correct its records and that the case be referred to an appeals officer. Moreover, there is no indication that the judge disbelieved Storrer's statement that the IRS representative stated that the case would be reviewed.

There is no dispute that the telephone conversation occurred with the representative at the number specified in the 30-day letter. The telephone calls were confirmed by a copy of Storrer's telephone bill. If the agent had any question as to the taxpayer's identity or the specific notice involved, the most elementary inquiry would have secured the answer.

It should also be noted that the number displayed at the top of the 30-day notice is not the number for the IRS switchboard, it is the number for a particular "exam tax assistant". It is not unreasonable for a taxpayer to believe that the IRS representative answering the "exam tax assistant" telephone number would make necessary inquiries to become familiar with the case. Moreover, this assumption is consistent with the IRS' policy to investigate cases to obtain additional facts before sending a notice of deficiency.¹  See Rogers v. Commissioner, Para. 87,373 PH Memo TC 1865, 1869 (1987).

The telephone conversation should have been all that was required for exhaustion purposes in a simple minor matter of this nature. Nevertheless, Storrer wrote the IRS on March 27, 1985 advising the IRS that the Douds were exempt from self-employment tax. The letter enclosed copies of the Form 4361 and the IRS letter approving it. The IRS does not require the taxpayer to submit a copy of the 30-day letter with correspondence requesting an appeals conference. The IRS merely states that including a copy of the letter would be helpful.²  With the information Storrer provided, the IRS could have checked and corrected the Douds' file. If not, at the very least, it could have requested additional information if it believed that was necessary.

When Storrer received no response he sent a certified letter on June 18, 1985 prior to the issuance of the notice of deficiency. The letter expressed concern over respondent's failure to acknowledge his prior letter and referred to the earlier requests for abatement.

The burden had certainly shifted to the IRS to remedy the incorrect assessment. Instead of responding to the letters or the telephone call, the notice of deficiency was issued nine days after Storrer's certified letter. Again, Storrer telephoned the IRS at the number provided in the 30-day letter and advised the agent of the Douds' exemption. As there was no response, the Douds had to secure counsel and file a petition for abatement of the deficiency.

After all this had occurred, the Douds received a 30-day letter regarding their 1984 tax return, again based on the claimed exemption from self-employment tax. This time, Storrer wrote a letter to the IRS referring to the service as "Ceasar" [sic] and to God as the "Boss." I do not think Storrer was justified in assuming that the agency had a sense of humor. Consequently, I agree that the letter of May 5, 1986 did not serve to exhaust administrative remedies.

Storrer, however, additionally telephoned the center at the number designated in the 30-day letter and "again informed respondent of the error." Tax Court Memorandum Sur.Order. He purportedly requested that the 1984 case be processed with the 1983 case and was assured that the IRS representative would look into the matter.

Storrer also telephoned the IRS attorney handling the 1983 case advising her of the new 30-day letter for 1984, and of his telephone call to the Service Center concerning it. The attorney stated it was not her case. Although it should have been a simple matter for her to check in her office and secure the withdrawal of the 1984 letter, she apparently took no action. I believe that at this point the taxpayers had adequately exhausted their administrative remedies for the 1984 assessment. Storrer, nevertheless, followed up his conversation with the attorney by writing her on May 14, 1986 urging correction of the unreasonable position.

In enacting section 7430, Congress indicated that permitting fee awards in tax cases when the Government acts unreasonably "will deter abusive actions or overreaching by the Internal Revenue Service and will enable individual taxpayers to vindicate their rights regardless of their economic circumstances". H.R.Rep. No. 97-404, 97th Cong., 1st Sess. at 11 (1982). Congress also expressed its concern about the tax court's caseload. By requiring taxpayers to show that they exhausted their administrative remedies to recover litigation costs, Congress hoped to prevent a large increase in the tax court's case load. H.R.Rep. No. 404 97th Cong. 1st Sess. at 11 (1982).

Although the Douds' attempts to settle their tax problem without litigating, were not perfectly executed, they were consistent with congressional intent. Because the IRS does not require taxpayers to submit a copy of the 30-day letter when requesting an appeals conference, the taxpayer's failure to refer to the 30-day letter is not grounds for holding that administrative remedies have not been exhausted.

If the IRS had exercised one particle of the care and effort exerted by the Douds this entire proceeding would have been avoided. The IRS regulations contemplate oral communications as being adequate in matters involving less than $2,500.00. 26 C.F.R. 601.105. Taxpayers should be able to resolve such matters as the simple error involved here by calling the number specified. The purpose of the exhaustion requirement obviously is to afford a means of settling disputes without the expense and inefficiency of court proceedings. Here, there was ample information furnished the Service to refer the matter to the appeals office for settlement rather than issuing a notice of deficiency.

Because I believe that the exhaustion requirements were met, I shall briefly address the other requisites for awarding attorneys fees, namely whether the Douds were prevailing parties as defined by section 7430(c) (2) and if so the amount of reasonable litigation costs as defined by section 7430(c) (1). Because this circuit has held that pre-litigation conduct may be considered in determining the reasonableness of the government's position at trial, Sliwa v. Commissioner, 839 F.2d 602, 605 (9th Cir. 1988), I have no difficulty in determining that the Douds prevailed because the position of the United States was not "substantially justified" as required by section 7430 of the Code. See Pierce v. Underwood, 108 S. Ct. 2541, 2546-49 (1988); Kali v. Brown, 854 F.2d 329, 332 (9th Cir. 1988). I would remand for a determination of the reasonable fees and costs incurred as defined in the applicable statutes.