Johnson, et al v. CIR

United States Court of Appeals
for the Fifth Circuit

No. 20-60054

Paul Edwin Johnson; Susan H. Johnson,

Petitioners—Appellants,

versus

Commissioner of Internal Revenue,

Respondent—Appellee.

Appeal from a Decision of the
United States Tax Court
No. 14429-18

Before Smith, Willett, and Duncan, Circuit Judges.
Jerry E. Smith, Circuit Judge:
Paul and Susan Johnson petitioned the Tax Court for review of an IRS
notice of deficiency assessing them about $51,000 in taxes, penalties, and
interest. After the dispute was resolved in their favor, the Johnsons moved
for costs under 26 U.S.C. § 7430. The Tax Court denied the motion, and we
affirm.
I.
On their 2015 tax return, the Johnsons claimed $186,981 of income—
of which $41,827 was taxable—from individual retirement accounts
United States Court of Appeals
Fifth Circuit
FILED
August 24, 2020

Lyle W. Cayce
Clerk
Case: 20-60054 Document: 00515538451 Page: 1 Date Filed: 08/24/2020

No. 20-60054
2
(“IRAs”), pensions, and annuities. Included in that $186,981 figure were
$141,793 in non-taxable IRA distributions and $45,188 of pension and annu-
ity income. The $141,793 distribution related to the Johnsons’ rolling over
an IRA from one institution to another. Ultimately, $141,233 was rolled over
after accounting for $560 in account-closing fees.
The third-party documentation reported to the IRS told a different
story. Specifically, the IRS received notice of three income streams: (1) Riv-
ersource Life Insurance reported that the Johnsons received a $141,793 dis-
tribution, all of which was taxable; (2) Northern Trust recorded that it paid
the Johnsons $45,187, of which $44,826 was taxable; and (3) Equity Trust
Company detailed that it made a $20,000 taxable distribution. Equity Trust
also documented a non-taxable rollover contribution of $141,233.
The IRS mailed the Johnsons a letter, informing them that their 2015
return did not reconcile with the third-party information the IRS had re-
ceived. Specifically, the letter referenced (1) the $141,793 distribution from
Riversource, (2) the $20,000 payment from Equity Trust, and (3) a $106
divided from Proshares Ultra Bloomberg Crude Oil. The letter explained
that “[y]our trustee did not verify the amount claimed on your Form 1040 as
a rollover to your [IRA]. If you made a partial rollover of the income in ques-
tion, please provide a signed explanation in your response to this notice.”
A veritable “Battle of the Letters” followed. The Johnsons re-
sponded by asking for copies of the IRS’s documentation and stating that
they already claimed the $141,793 rollover on their return. The IRS answered
by asking the Johnsons—if they were claiming the $141,793 as a rollover—to
send a “Form 5498 with the amount in box 2 or similar documentation.”
The Johnsons never provided the requested support.
Despite a series of twenty-four letters and phone calls, the IRS and the
Johnsons were unable to reconcile their differences. As a result, t he IRS pro-
Case: 20-60054 Document: 00515538451 Page: 2 Date Filed: 08/24/2020

No. 20-60054
3
vided the Johnsons with a summary of proposed changes to their 2015 return,
which suggested an additional payment of $51,333 to cover the applicable
taxes, penalties, and interest.
1
The Johnsons maintained that the IRS was
improperly double counting a single IRA rollover and that they could not pro-
vide documentation to support a second distribution that had never occurred.
At an impasse, the IRS mailed the Johnsons a notice of deficiency,
detailing the IRS’s determination that they owed the additional amount
reflected in the summary of proposed changes. The Johnsons filed a petition
in the Tax Court, explaining that they had closed out several accounts in an
IRA before rolling them over to a different IRA. They clarified that the
amount rolled over was about $500 less than the amount initially distributed
to account for “fees related to closing out the accounts.” They posited that
the $500 difference might explain the IRS’s mistaken assumption that they
received two separate distributions of about $141,000.
The Commissioner responded by (1) admitting to sending the notice
of deficiency and (2) denying, “for lack of sufficient knowledge or informa-
tion,” the Johnsons’ contention that the deficiency determination was incor-
rect. Ultimately, after its Office of Appeals reviewed the case, the IRS and
the Johnsons agreed to a stipulated decision that the Johnsons owed no addi-
tional taxes or penalties for 2015. Shortly thereafter, the Tax Court rechar-
acterized the stipulated decision as a “Stipulation of Settled Issues” and
ordered the Johnsons to move for any fees and litigation costs within three
weeks.
Two weeks later, the Johnsons moved for thousands of dollars in
costs. Of the amount sought, only $71 represented out-of-pocket expenses

1
The IRS also sent the Johnsons a publication detailing their rights to challenge the
IRS’s determinations.
Case: 20-60054 Document: 00515538451 Page: 3 Date Filed: 08/24/2020

No. 20-60054
4
(namely filing fees and postage). The Johnsons supplemented their motion,
asking for almost twice as much as before. But, again, only $71 related to out-
of-pocket costs.
The Commissioner opposed the motion on three grounds. First, the
Johnsons had not exhausted all administrative remedies before petitioning
the Tax Court, as required by the Internal Revenue Code (“IRC”). Second,
the Commissioner’s position in the litigation was “substantially justified.”
And third, most of the costs the Johnsons sought did not constitute “rea-
sonable litigation costs” under the IRC.
The Tax Court agreed with the Commissioner, denied the motion,
and entered judgment consistent with the stipulation. The court initially
observed that “[t]he majority of the expenses that [the] Johnson[s] claim[ed]
d[id] not constitute ‘reasonable litigation costs’ as Congress defined that
term in [the IRC].” Consequently, the court limited its analysis to only the
$71 related to filing fees and postage.
As for those expenses, the court found that the IRS’s position was
substantially justified.
2
Specifically, the court concluded that the Commis-
sioner was entitled to seek clarification on whether the Johnsons (1) received
$20,000 from Equity Trust, (2) rolled over the full amount of the IRA dis-
tribution from Riversource, and (3) completed any such rollover within the
IRC’s sixty-day window.
The Commissioner, according to the court, was “not required to con-
cede the adjustments until he [ ] received, and [ ] had a chance to review,
sufficient substantiation” from the Johnsons regarding the disputed transac-
tions. And because that documentation never came, the IRS’s position was

2
Accordingly, the Tax Court did not consider whether the Johnsons had exhausted
the available administrative remedies.
Case: 20-60054 Document: 00515538451 Page: 4 Date Filed: 08/24/2020

No. 20-60054
5
substantially justified, and the Johnsons were not entitled to costs. After un-
successfully moving for reconsideration, the Johnsons appeal pro se.
II.
“We review the [Tax Court’s] denial of a request for litigation costs
for abuse of discretion.” Estate of Cervin v. Comm’r, 111 F.3d 1252, 1256 (5th
Cir. 1997). “Thus, we reverse only if we have a definite and firm conviction
that an error of judgment was committed.” Nalle v. Comm’r, 55 F.3d 189,
191 (5th Cir. 1995) (quotation marks omitted).
In a tax case, a prevailing party may be awarded “reasonable adminis-
trative costs” and “reasonable litigation costs.” 26 U.S.C. § 7430(a). A
party “prevails” if it (1) “substantially prevail[s] with respect to the amount
in controversy” or (2) “substantially prevail[s] with respect to the most sig-
nificant issue or set of issues presented.”
3
“A party shall not be treated as
the prevailing party,” however, “if the United States establishes that the
position of the United States in the proceeding was substantially justified.”
Id. § 7430(c)(4)(B)(i).
“The IRS has the burden of establishing that its position was sub-
stantially justified.” Estate of Baird v. Comm’r, 416 F.3d 442, 446 (5th Cir.
2005). “A position is substantially justified when it is justified to a degree
that could satisfy a reasonable person.” Ragan v. Comm’r, 135 F.3d 329, 334
(5th Cir. 1998) (quotation marks omitted). In this context, “the ‘position of

3
26 U.S.C. § 7430(c)(4)(A)(i). The prevailing party must also show that the
party’s net worth does not exceed $2 million. See id. § 7430(c)(4)(A)(ii) (stating that a
prevailing party must meet “the requirements of the 1st sentence of section 2412(d)(1)(B)
of title 28, United States Code”); 28 U.S.C. § 2412(d)(1)(B) (outlining the process by
which a “party” must seek an award for “fees and other expenses”); id. § 2412(d)(2)(B)
(defining “party,” most relevantly, as “an individual whose net worth did not exceed
$2,000,000 at the time the civil action was filed”).
Case: 20-60054 Document: 00515538451 Page: 5 Date Filed: 08/24/2020

No. 20-60054
6
the United States’ is the position taken by the IRS in the Tax Court.”
4

When determining “whether the IRS has satisfied its burden . . . , the
court examines the facts and legal precedents available at the time the IRS
took its position.” Baird, 416 F.3d at 446–47. To evaluate a position’s rea-
sonableness, “we consider all the facts and circumstances surrounding the
dispute.” Nalle, 55 F.3d at 191. “A significant factor in determining wheth-
er” the IRS’s position “is substantially justified . . . is whether . . . the tax-
payer has presented all relevant information under the taxpayer’s control and
relevant legal arguments supporting the taxpayer’s position . . . .” 26 C.F.R.
§ 301.7430-5(d)(1). “Of course, the ultimate failure of the government’s
legal position does not necessarily mean that it was not substantially justified.
It is, however, a factor to be considered.” Lennox v. Comm’r, 998 F.2d 244,
248 (5th Cir. 1993).
We must define the boundaries of the IRS’s “position.” Baird,
416 F.3d at 447. The Johnsons posit that, because the Commissioner admit-
ted to some of their factual allegations, the IRS’s position was that it had
made a mistake. “[I]t is that mistake,” the Johnsons aver, “that the Commis-
sioner must show to be substantially justified.” And because the Tax Court
did not base its “substantially justified” determination on the IRS’s having
erred, the Johnsons reason that the court abused its discretion.
That characterization of the IRS’s position is belied by the record.
When the Commissioner answered the Johnsons’ petition, he did not con-
cede that the IRS had made a mistake but, instead, denied the bulk of the

4
Baird, 416 F.3d at 446; see also 26 U.S.C. § 7430(c)(7)(A) (“The term ‘position
of the United States’ means . . . the position taken by the United States in a judicial
proceeding to which subsection (a) applies.”); Nalle, 55 F.3d at 191 (“[T]he question is
whether the Commissioner acted unreasonably—that is, whether she knew or should have
known that her position was invalid at the onset of the litigation.”).
Case: 20-60054 Document: 00515538451 Page: 6 Date Filed: 08/24/2020

No. 20-60054
7
Johnsons’ allegations “for lack of sufficient knowledge or information.” To
the contrary, the Commissioner admitted only (1) that the IRS corrected the
Johnsons’ 2015 return to show about $141,000 in additional income and
(2) that the correction was based on information it had received from third
parties.
The Commissioner maintains that the IRS’s position was sub-
stantially justified given the available information. The record plainly reflects
a discrepancy between the Johnsons’ return and the IRS’s third-party mate-
rial. Relevantly, the IRS had documents showing, inter alia, that (1) the
$141,793 distribution from Riversource was taxable (not non-taxable as the
Johnsons claimed), (2) $3,000 more of the $45,187 payment from Northern
Trust was taxable than the Johnsons suggested, and (3) $20,000 of taxable
pension income from Equity Trust had not been included in the return.
Moreover, when the Commissioner answered, the IRS had not re-
ceived any substantiating documents from the Johnsons. That was true even
though the IRS provided the Johnsons with the relevant contact information
so that they could follow up with the proper third parties directly.
5
It was not
until this case was reviewed by the Office for Appeals—after the IRS had
issued its notice of deficiency and the Commissioner had answered the
petition—that the IRS connected the Riversource distribution with the con-
tribution to the Equity Trust IRA.
Because the Johnsons failed to provide “any documents, records, or
other objective evidence” supporting that they had properly rolled over their
IRA, the Tax Court reasoned that “the Commissioner [wa]s not required to
concede the adjustments until he [ ] received and had reasonable time to

5
The IRS informed the Johnsons that it was unable to send copies of the documents
that they had requested, because the IRS had received the information electronically.
Case: 20-60054 Document: 00515538451 Page: 7 Date Filed: 08/24/2020

No. 20-60054
8
review, sufficient substantiation for the matter in question.” Given the avail-
able facts, the Tax Court did not abuse its discretion by concluding that the
IRS’s position was substantially justified.
6

* * * * *
Because § 7430’s requirements are conjunctive, we need not consider
whether the Johnsons exhausted the available administrative remedies or
whether their requested fees are reasonable.
7
The order of the Tax Court is
AFFIRMED.

6
See, e.g., Sher v. Comm’r, 861 F.2d 131, 135 (5th Cir. 1988) (holding that the
Commissioner’s position was substantially justified because, based on the information
available, she “had no reason to believe the information upon which she was relying was
erroneous”); Harrison v. Comm’r, 854 F.2d 263, 265 (7th Cir. 1988) (“The IRS took the
position of conceding the case as soon as it received and verified information demonstrating
that that was the proper course. This was a reasonable position.”).
7
See 26 U.S.C. § 7430(a) (providing that prevailing parties may recover “reasona-
ble administrative costs” and “reasonable litigation costs”); id. § 7430(b)(1) (mandating
prevailing party have exhausted administrative remedies); id. § 7430(b)(3) (requiring costs
be denied where the prevailing party protracted the proceedings); id. § 7430(c)(1) (defining
“[r]easonable litigation costs”); id. § 7430(c)(4)(B)(i) (outlining “substantially justified”
exception).
Case: 20-60054 Document: 00515538451 Page: 8 Date Filed: 08/24/2020