My patient readers will remember my blogpost “Smiling ‘Til It Hurts”, 4/19/12, recounting Judge Kroupa’s docudrama Lee Storey and William Storey, 2012 T. C. Memo. 115, filed 4/19/12.

Well, Bill departed this life thereafter, I hope smiling ‘til the end, but Lee, having won in Tax Court, wants her legal and administrative costs and fees, so Judge Kroupa is back at it in Lee Storey and William Storey, Deceased, 2013 T. C. Memo. 59, filed 2/25/13.

When Bill and Lee’s counsel told Judge Kroupa that Bill had departed this vale of tears, counsel didn’t bother to say if an estate proceeding had, or will be, commenced. Thus the changed caption, although Tax Court frowns upon dead people appearing without an executor or administrator having been duly appointed. Practice tip– Get your executor or administrator on deck, or if not yet official, state that proceedings to appoint have been commenced.

Well, having won last April, Lee was in good shape, except she bypassed Appeals, even though Appeals gave her a shot in the 30-day letter. But Lee wanted no part of Appeals.

Judge Kroupa: “It is unclear exactly why petitioners chose to forgo the Appeals process. Petitioner’s affidavit reflects that she believed respondent [IRS] was intransigent in his position with respect to the film activity. Her affidavit also reflects that she believed that if she did not wage a major counter-attack at the administrative level, she would face ‘a life sentence of IRS audits.’ It appears that petitioners elected to bypass Appeals as part of their litigation strategy. This does not relieve them of the requirement to exhaust all available administrative remedies before filing the petition if they wish to preserve their right to seek litigation costs. See Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48, 62 (2001), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003).” 2013 T. C. Memo. 58, at p. 7, footnote 8.

Section 7430 says that not only must you win, but you must exhaust administrative remedies, that is, go up the chain-of-command (as we used to say).

And the issue in Lee’s case, the Section 183 business-vs-hobby calculus, is fact-specific, with a cruise through nine factors, no one of which is controlling and all of which must be weighed, considered, and balanced.

Judge Kroupa: “Notwithstanding our conclusion regarding the merits, respondent presented facts supporting his position that petitioner’s primary objective in conducting her film activity was not to make a profit. And respondent’s arguments with respect to this highly fact-intensive issue were reasonable. Although we did not ultimately agree with respondent’s legal conclusion, respondent has persuaded us that his position had a reasonable basis in fact and law. We hold, therefore, that respondent’s administrative position regarding the for-profit issue was substantially justified and that petitioner is not entitled to an award of administrative costs under section 7430.” 2013 T. C. Memo. 59, at p. 11.

So Lee is out on legal fees because she didn’t exhaust her administrative remedies, and out on administrative fees because IRS was substantially justified.

End of Storey.