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Harrison v. Commissioner of Internal Revenue

decided: August 15, 1988.

THOMAS C. HARRISON AND RITA HARRISON, PETITIONERS-APPELLANTS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT-APPELLEE



On Appeal from the United States Tax Court. No. 17252-84 -- William M. Fay, Judge.

Harlington Wood, Jr., Richard D. Cudahy, and Kenneth F. Ripple, Circuit Judges.

Author: Wood

HARLINGTON WOOD, JR., Circuit Judge.

Petitioners-appellants, Thomas C. Harrison and Rita Harrison (the Harrisons), filed a petition in the United States Tax Court in order to contest the purported deficiency set forth in a notice of deficiency issued by respondent-appellee, Internal Revenue Service (IRS), prior to completion of an audit. When the audit was eventually concluded, the IRS conceded that there was no deficiency due from the Harrisons. The Harrisons then sought an award of litigation costs pursuant to section 7430 of the Internal Revenue Code, 26 U.S.C. ยง 7430. The Tax Court denied their motion. The Harrisons have appealed that denial.

I. FACTUAL BACKGROUND

During 1980, Thomas Harrison was a limited partner in Triangle Village Associates, Ltd. (Triangle), a New Jersey limited real estate partnership. On their 1980 income tax return the Harrisons reported a net loss in the amount of $47,278, representing Thomas Harrison's distributive share of the loss from the partnership. The Harrisons also claimed an investment tax credit from Triangle in the amount of $35.

The IRS conducted an examination of Triangle's partnership tax return for the calendar years 1979, 1980, and 1981. The IRS informed the Harrisons that it was auditing Triangle's 1980 tax return, and that therefore the Harrisons' tax return for 1980 was also placed under examination.

As of April, 1984, the IRS had not yet completed its audit of Triangle's partnership returns. Accordingly, on April 2, the IRS sent to the Harrisons a consent form and requested that they execute it promptly in order to extend the statute of limitations on the 1980 tax return. Absent the consent, the statute was due to expire on April 15, 1984. On April 4, the Harrisons executed and mailed the consent to the IRS. The IRS, unfortunately, never received the document. Thus, on April 11, faced with the imminent expiration of the statute of limitations, the IRS issued a notice of deficiency to the Harrisons.*fn1 The notice informed the Harrisons that they owed an additional $25,347 in tax for the year 1980 because the IRS was disallowing the investment tax credit and the loss deduction claimed from Triangle's activities. The notice informed the Harrisons that

you have not substantiated that the entity was engaged in an activity entered into for profit or that deductible expenses were incurred by the entity in excess of its income. Furthermore, you have failed to establish any basis in the entity which would permit you to deduct an otherwise distributable loss.

On June 6, the Harrisons timely filed a petition in the Tax Court seeking relief from the entire deficiency assessed for 1980. The IRS filed an answer generally denying the Harrisons' allegations.

On November 28, the IRS concluded the audit of Triangle's partnership return. It issued a "no-change" letter for the calendar year 1980 which indicated that the return was accepted as filed and that no deficiency was found.

On December 17, the Harrisons' attorney contacted the IRS's counsel to advise counsel that the IRS had determined that no deficiency existed. This communication was the first between the parties since the notice of deficiency was issued. The IRS's district counsel agreed to concede the government's case against taxpayers subject to verification. During this conversation the district counsel and the Harrisons' attorney agreed to report the case as a "probable settlement" on the Tax Court's trial status report.

During the following month the district counsel verified the status of Triangle's audit and obtained a copy of the letter confirming the completion of the partnership audit without adjustment to its return. The parties then filed a stipulation with the Tax Court in which the IRS conceded the deficiency in full.

Following the IRS's concession, the Harrisons moved for litigation costs under section 7430 of the Internal Revenue Code. After holding a hearing, the Tax Court denied the Harrisons' motion on May ...


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