Long-suffering readers of this, my blog, will remember the sad tale of Lisa Laflamme, Florida real estate person, who put her retirement contribution on the wrong line of her return, and was rescued from a Section 6662 chop by Judge Vasquez, as more particularly bounded and described in my blogpost “Whose Line Is It, Anyway?”, 2/8/12.

Today’s sermonette focuses upon another misplaced entry, but here the taxpayer is seeing double. This is the tale of Robert S. McQuate and Linda S. McQuate, 2014 T. C. Memo. 165, filed 8/14/14, as told by Judge Ruwe. Or rather, it’s partly the tale of Rob Mac and Lin Mac, but also the tale of their attorney, whom I shall hereinafter designate as Max.

Rob Mac and Lin Mac had an S Corp that performed consulting services. For the year at issue, the Sub S consulted with A, a partnership in which the Macs were partners, and got paid $59K, which turned up on the S Corp’s 1120S in the right place. But the Macs reported neither gain nor loss from A.

When, two years later, A finally sent the Macs a K-1 for the year at issue, it showed a guaranteed payment and an ordinary loss, which netted out to a $900 loss, and the Macs filed a 1040X with the revised numbers timely, asking for a refund.

Three years later, but still timely, IRS dropped a FPAA on A, and cut the Macs’ ordinary loss by two-thirds. The Macs and the A tax matterer did not petition the FPAA.

IRS hits the Macs with a deficiency of $15K. The Macs claim they picked up the right numbers on their original 1040, and didn’t remember, when they filed the 1040X, that the numbers A’s accountant put on the K-1 were wrong, because the Macs gave at the office, having picked up the right number years before.

Well, the Macs get a SNOD, petition, and with a quick exchange of 1040, 1120-S and 1040X (with the ledger from the Sub S showing the right payment), the deficiency gets erased.

So why am I telling you this? Because Max wants $27K in legal and administrative costs and fees, and the Macs file a Section 7430 petition in support thereof.

Max wants costs for years other than the one at issue, and that’s a nonstarter. “Petitioners ask that we award costs incurred with respect to taxable years that are not before the Court. To do so would exceed our jurisdiction and on this record would be inappropriate.” 2014 T. C. Memo. 165, at p. 4, footnote 2.

You can see this is off to a bad start, and it doesn’t improve. “Petitioners’ counsel did not provide a detailed schedule of the litigation and administrative costs incurred with respect to the [year at issue] Petitioners concede the reasonableness of respondent’s litigation position.” 2014 T. C. Memo. 165, at p. 5 (Footnote omitted, but Judge Ruwe therefore blows off the litigation fees).

So we’re left with administrative costs. And justification. Was the IRS justified, that is, would a reasonable person conclude that, as the moment the SNOD issued, the IRS was right based upon what information it had at the moment? That later information was provided, and that IRS thereupon folded, does not mean that IRS wasn’t justified.

Not until IRS got the ledger and the 1120-S could IRS have figured out that the Macs gave at the office. Max bombarded IRS with correspondence before then, and Judge Ruwe summarizes it. All Max told IRS was about other years and a non-receipt of a refund on the 1040X; Max never mentioned the year at issue until post-petition.

So no go.

Incidentally, “Respondent argues that the attorney’s fees are unreasonable. We need not address this issue since we have determined that respondent’s administrative position was substantially justified.” 2014 T. C. Memo. 165, at p. 11, footnote 5.

Takeaway- The time to win a Section 7430 is at examination. I know that this was a very tough case, because the K-1 came long enough after the year at issue so that memories were obscured, and the FPAA was a distraction. Again, keep good billing records. And litigation and administrative fee cases are very, very tough to win.