NOT FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ROBERT C. M.; et al.,          )
    Petitioners - Appellants,  )    No. 04-74846
  V.                           )    IRS No. 4036-03
COMMISSIONER OF INTERNAL       )
REVENUE,                       )    MEMORANDUM*
      Respondent - Appellee.   )
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Appeal from a Decision of the
Internal Revenue Service

Argued and Submitted November 16, 2006
San Francisco, California

Before: KLEINFELD and THOMAS, Circuit Judges, and LEIGHTON**, District Judge.

The IRS assessed a tax deficiency of $164,765 upon the Appellants for tax years 1999-2000. After negotiations in which the IRS acknowledged key errors were made in calculating that figure, a settlement was reached in which the deficiency was reduced to $44,535. The Appellants petitioned for reasonable litigation costs under 26 U.S.C. § 7430, but were denied by the Tax Court. Because we find that the Tax Court abused its discretion in finding that the position of the IRS was “substantially justified” we reverse the Tax Court and grant the Appellants’ petition.

The IRS bears the burden of proving that its position in the proceedings below was “substantially justified.”1 In the settlement negotiations, the IRS admitted that it made errors in applying its own code and regulations. The Tax Court’s finding that the IRS was excused because its own regulations were “complex” was an abuse of discretion.

The settlement resulted in a net reduction in the deficiency by 73%. Thus the Appellants “substantially prevailed” with respect to the total amount in controversy.2 Under IRS regulations, the Appellants are excused from further exhaustion of remedies.3

We remand to the Tax Court for an award to the Appellants of $31,078.28, their reasonable litigation costs under the Internal Revenue Code.4

PETITION GRANTED. The decision of the Tax Court is REVERSED and REMANDED.

* This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir. R. 36-3.

** The Honorable Ronald B. Leighton, United States District Judge for the Western District of Washington, sitting by designation.

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1 26 USCS § 7430(c)(4)(B).

2 See 26 USCS § 7430(c)(4)(A)(i).

3 See CFR § 301.7430-1(g) example 5.

4 See 26 USCS § 7430.