THOMAS C. HARRISON AND RITA HARRISON, PETITIONERS V. COMMISSIONER
OF INTERNAL REVENUE

   No. 88-947

   In the Supreme Court of the United States

   October Term, 1988

   On Petition for a Writ of Certiorari to the United States Court of
Appeals for the Seventh Circuit

   Memorandum for the Respondent in Opposition

   Petitioners contend that the courts below erred in denying their
request for attorneys' fees under Section 7430 of the Internal Revenue
Code.  /1/

   1. During 1980, petitioner Thomas Harrison was a limited partner in
Triangle Village Associates, Ltd. (Triangle), a New Jersey limited
partnership.  On their 1980 joint federal income tax return,
petitioners reported a net loss in the amount off $47,278,
representing Thomas Harrison's distributive share of the loss claimed
by the partnership.  Petitioners also claimed an investment tax credit
from Triangle in the amount of $35.  Pet. App. A2.

   The Internal Revenue Service (IRS) conducted an examination of
Triangle's partnership tax returns for the calendar years 1979, 1980,
and 1981.  The IRS informed petitioners that it was auditing
Triangle's 1980 tax return, and that, consequently, petitioners'
income tax return for 1980 was also under examination.  The statute of
limitations for assessment of tax liability for 1980 was scheduled to
expire on April 15, 1984, but it became apparent that the IRS would
not complete its audit of Triangle's partnership returns by that date.
 /2/ Accordingly, on April 2, 1984, the IRS sent to petitioners a form
containing a consent to an extension of the statute of limitations for
their 1980 tax liability and requested that they promptly execute the
consent.  On April 4, 1984, petitioners executed and mailed the
consent to the IRS, but the IRS never received the document.  Faced
with the imminent expiration of the statute of limitations, the IRS
issued a notice of deficiency to petitioners on April 11, 1984,
asserting that petitioners 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.  Pet. App.
A2-A3.

   On June 6, 1984, petitioners timely filed a petition in the Tax
Court seeking relief from the deficiency determined for 1980.  The IRS
filed an answer generally denying petitioners' allegations.  On
November 28, 1984, the IRS concluded the audit of Triangle's
partnership returns.  It issued a "no-change" letter for the calendar
year 1980, which indicated that the return for that year was accepted
as filed and that no deficiency was found.  Pet. App. A3.

   On December 17, 1984, petitioners' attorney contacted the IRS's
counsel to advise him of the "no change" determination made with
respect to Triangle.  This communication as the first between the
parties since the notice of deficiency was issued.  The IRS's District
Counsel thereupon agreed to concede the case against petitioners,
subject to verification.  During this conversation, counsel agreed to
report the case as a "probable settlement" on the Tax Court's trial
satus report.  During the following month, the IRS's counsel verified
the status of Triangle's audit.  The parties then filed a stipulation
with the Tax Court in which the IRS conceded the deficiency in full.
Pet. App. A3.

   2. Petitioners thereafter moved for an award of attorneys' fees and
costs under Section 7430 of the Code.  Petitioners contended that the
administrative conduct of the IRS in issuing the notice of deficiency
solely to avoid the imminent expiration of the statute of limitations
was unreasonable.  The Tax Court denied the motion (Pet. App. B1-B14).
 The court explained that under the pre-1986 version of Section 7430
applicable to this case, the relevant inquiry is into "the
reasonableness of (the IRS's) position during the litigation, that is
to say, from the time of the filing of the petition in this Court"
(Pet. App. B9 (emphasis in original)).  Because the IRS promptly
conceded the case after learning of the no-change letter, the court
found that its litigating position was reasonable (id. at B11-B14).
The court also stated that, even if petitioners were correct that the
IRS's administrative position was relevant, "we do not find the
issuance of the notice of deficiency unreasonable" (id. at B10 n.5).

   The court of appeals affirmed (Pet. App. A1-A9).  The court
acknowledged that the courts of appeals have disagreed on whether the
reasonableness inquiry under pre-1986 Section 7430 extends to the
IRS's administrative position or instead is limited to the IRS's
litigating position in court, as the Tax Court held (id. at A5 n.3).
The Seventh Circuit found it unnecessary to reach that issue, however,
because it determined that both the IRS's litigating and
administrative positions were reasonable (id. at A5-A8 & n.3).  The
court concluded that "the government acted reasonably in attempting to
preserve its right to conduct a full investigation before making a
final determination on whether it should allow (petitioner's)
deductions" (id. at A7-A8).

   3. Petitioners argue that they are entitled to attorneys' fees
because the IRS acted unreasonably is issuing the notice of
deficiency.  They contend that certiorari is warranted here to resolve
a conflict in the circuits concerning whether the term "position of
the United States" in the pre-1986 version of Section 7430 extends to
the IRS's administrative position.  This contention is plainly without
merit.  First, the issue is not even presented because, as both courts
below found, both the IRS's administrative position and its litigating
positions were reasonable in this case.  Moreover, the conflict
asserted by petitioners is of little continuing importance because
Congress amended Section 7430 to resolve the conflict for cases
commenced after December 31, 1985.  Indeed, this Court recently denied
certiorari in a case where, unlike here, the court of appeals actually
addressed the question of the correct interpretation of the pre-1986
version of Section 7430.  Saul v. United States, No. 87-1676 (June 30,
1988).  There is no more reason for the Court to grant review here
than there was in Saul.

   a. As we noted in our brief in Saul, petitioners are correct in
stating (Pet. 19-28) that there exists a conflict among the circuits
in interpreting Section 7430(c)(2)(A)(i) of the Code, as applicable to
cases commenced before December 31, 1985 -- specifically, whether the
claimant can "establish() that the position of the United States in
the civil proceeding was unreasonable" by reference to the IRS's
administrative position as well as to its litigating position.  This
conflict was resolved by Congress, however, in Section 1551(e) of the
Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2753, which
amended Section 7430 of the Code to provide an express definition of
the phrase "position of the United States" that includes specified
administrative actions by the IRS.  /3/ That definition was made
applicable to cases commenced after December 31, 1985 (Section
1551(h), 100 Stat. 2753).  Subsequently, Congress again amended
Section 7430 to define the "position of the United States" by
specifying different administrative actions of the IRS that are to be
covered, effective for proceedings commenced after November 10, 1988.
Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647,
Section 6239, 102 Stat. 3745-3746.  /4/ Thus, the question presented
in this case concerns a statute that is relevant only to a dwindling
number of cases commenced prior to 1986, and there is no reason for
this Court to consider it.  /5/

   b. In any event, the court of appeals correctly held that the
question presented by petitioners to this Court need not be resolved
in this case because both the litigating and the administrative
positions of the IRS were reasonable.  When the IRS did not receive a
copy of petitioners' consent to extend the statute of limitations to
permit completion of the partnership audit, it was faced with the
choice of issuing a protective notice of deficiency or forever
forgoing the ability to assess a deficiency in petitioners' 1980 tax
liability.  It was reasonable for the IRS to seek to preserve its
ability to conduct a full investigation before making a final
determination on whether it should allow the deduction and credit
claimed by petitioners through their partnership.  Indeed, the Tax
Court has specifically recognized the reasonableness of issuing a
protective notice of deficiency when the statute of limitations is
about to expire.  Wasie v. Commissioner, 86 T.C. 962, 969 (1986);
Chaum v. Commissioner, 69 T.C. 156, 160-164 (1977);  see also Luhring
v. Glotzbach, 304 F. 2d 560, 565 (4th Cir. 1962).  /6/

   It is therefore respectfully submitted that the petition for a writ
of certiorari should be denied.

   WILLIAM C. BRYSON

      Acting Solicitor General

   FEBRUARY 1989

   /1/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Code or
I.R.C.).

   /2/ Congress has attempted to address this problem by prescribing
special procedural requirements for examination of partnership
returns.  See I.R.C. Sections 6221-6233.  These special procedures,
however, are applicable only for partnership taxable years commencing
after September 3, 1982, and hence did not apply in this case.  See
Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248,
Section 407(a)(1), (3), 96 Stat. 670-671 (1982).

   /3/ After the 1986 amendment, Section 7430(c)(4) provided as
follows:

         Position of United States -- The term "position of the United
      States" includes --

         (A) the position taken by the United States in the civil
      proceeding, and

         (B) any administrative action or inaction by the District
      Counsel of the Internal Revenue Service (and all subsequent
      administrative action or inaction) upon which such proceeding is
      based.

   /4/ Section 7430(c)(7) of the Code, as amended in 1988, now
provides:

         Position of United States -- The term "position of the United
      States" means --

         (A) the position taken by the United States in the judicial
      proceeding to which subsection (a) applies, and

         (B) the position taken in an administrative proceeding to
      which subsection (a) applies as of the earlier of --

         (i) the date of the receipt by the taxpayer of the notice of
      the decision of the Internal Revenue Service Office of Appeals,
      or

         (ii) the date of the notice of deficiency.

   /5/ Petitioners assert (Pet. 31-33) that the 1988 version of
Section 7430 is ambiguous and therefore suggest that the Court should
grant certiorari here lest the "statute * * * continue to be mired in
uncertainty" (Pet. 33).  Whether or not petitioners' speculation about
the clarity of the recent amendment proves to be accurate, this case
does not involve the present version of Section 7430 and provides no
occasion to construe it.

   /6/ Contrary to petitioners' contention (Pet. 24-25), Weiss v.
Commissioner, 850 F.2d 111 (2d Cir. 1988), and Powell v. Commissioner,
91 T.C. No. 43 (Sept. 26, 1988), do not cast any doubt on the
correctness of these decisions.  Neither of those cases involved a
protective notice of deficiency issued to prevent the expiration of
the statute of limitations on assessments pending completion of an
audit.