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Award of litigation costs to taxpayer.

Under IRC Section 7430, a tax payer who prevails against the Service in a court proceeding may recover costs of litigation. In order to qualify for this relief, a taxpayer must prove, among other things, that the Service's position was not "substantially justified." A recent Tax Court case, Powers v. Commissioner, provides an example of a Service position that is not substantially justified.

In Powers, the Service issued a deficiency notice to the taxpayer determining that he was entitled to no deductions greater than $9,000 except for several charitable contributions. This assessment was made prior to the review or examination of any of the taxpayer's records. Up to the expiration of the statute (and an additional three-year extension) the Service made no attempt to contact the taxpayer nor did the Service seek to audit his returns or examine his books and records.

The Tax Court stated that the Service had no basis for believing that the tax returns for the years in question were not correct. The Service argued that there was a basis in law for the notice of deficiency because it is presumed the taxpayer has the burden of proving entitlement to deductions. The Service also argued that disallowing the deduction was reasonable in fact because there was no substantiation in the administrative file when the notice of deficiency was issued.

The Tax Court agreed with the taxpayer, stating that the Service lacked a reasonable basis in both fact and law because the Service had no knowledge about the case when the assessment was made, nor did the Service make any efforts to obtain the necessary information from the taxpayer. The Tax Court held that the Service could only prevail if it had some reasonable basis for the position it took. Since in this case the Service's position was not founded on facts or evidence, this basis was lacking. Further, the Service did not seek any evidence during the three years allowed to assess tax or during the three additional years consented to by the taxpayer. Though the deficiency notice was held valid, the standard for determining a substantially justified position was violated.

In the past, taxpayers who hesitated or refused to extend the statutory time for assessment found themselves subject to immediate assessment of additional tax and penalties. However, Powers v. Commissioner could cause this Internal Revenue procedure to be an antiquated tactic. Unless previous examination was conducted, the Service may find their position held substantially unjustified and could be held responsible for the taxpayer's litigation costs. (Powers v Commissioner, 100 TC 30) Fringe Benefit Air Travel

For tax purposes, an employee's personal flights on an employer-provided noncommercial aircraft should be valued by using the Service's valuation formula. A flight's value is figured by multiplying the Standard Industry Fare Level (SIFL) mileage rate by an aircraft-assigned constant value (these constants vary with the weight of the aircraft and the employee's status as a controlling or noncontrolling employee) and adding a terminal charge. Due to space limitations here, it is not possible to publish an exhaustive list of aircraft constants, but such a list is readily available from the IRS.

The following are the current SIFL mileage rates and terminal charges for flights taken in 1993:
 SIFL Mileage Rates $ per Mile
 Up to 500 Miles .1675
 501-1500 Miles .1277
 Over 1500 Miles .1228
 Terminal Charge $30.62

(Rev Rul 93-35)
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Title Annotation:Tax Talk
Author:Green, Gary L., Jr.
Publication:The National Public Accountant
Date:Oct 1, 1993
Previous Article:State taxation of former residents' pension - the source tax.
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