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May 31, 1985


Richard P. Conaboy, United States District Judge.

The opinion of the court was delivered by: CONABOY

Presently before the Court is Plaintiffs' motion for litigation costs filed pursuant to 26 U.S.C. § 7430. The appropriate briefs and memoranda have been filed and the matter is now ripe for our decision.


 This matter stems from termination assessments made against the Plaintiffs by the Internal Revenue Service for the amount of $ 54,577.94 each. After the termination assessments were made the Plaintiffs sought administrative review of the assessments with the Internal Revenue Service. The assessments were sustained by the Appellate Division on May 5, 1984 and thereafter, on May 11, 1983, the matter was filed in this Court.

 The termination assessments were prompted by information obtained from the Pennsylvania State Police.

 Commencing on January 30, 1983 legal wiretaps were placed by the Pennsylvania State Police on the residential telephone of Joseph Marranca at 107 Jean Street, Exeter, Pennsylvania, and the residential telephone of his brother Charles Marranca at 106 Jean Street, Exeter, Pennsylvania. These wiretaps revealed that the taxpayers were involved in accepting "layoff" bets on various sporting events (particularly football and basketball games), and further revealed the extent of the betting activity for the particular days on which the wiretaps were monitored. Based upon information received from the wiretaps and additional surveillance, search warrants were issued for the premises of the taxpayers and executed on February 23, 1983.

 During the course of the searches, the State Police, in conjunction with various local police, seized approximately $ 58,000 in cash.

 Based on its assessment and analysis of the wiretap and search and seizure information obtained by the State Police, the Internal Revenue Service concluded that the taxpayers were operating as "bankers" in an illegal wagering operation for a period beginning at least as early as 1982 and ending at the time of the State Police raids on February 23, 1983. "Bankers" in such an operation are the people who control the illegal wagering operations. They make all payouts, pay commissions owed to betting pool sellers, and are literally the owners-operators of the betting business. Based upon the aforesaid information, the Service determined that average daily receipts of $ 11,400.00 were taken over the telephone of Charles Marranca and average daily receipts of $ 3,497.00 were taken over the telephone of Joseph Marranca. These average daily receipts were then combined and multiplied by 53 days to determine a gross income from gambling for the two Plaintiffs of $ 789,852.00. [see Gerardo v. Commissioner, 552 F.2d 549 (3d Cir. 1977)] The Internal Revenue Service then utilized a factor of 30% as a profit margin for the illegal wagering operation, resulting in an estimated net profit of $ 236,956.00. [see Shades Ridge Holding Co. v. Commissioner, 1964 T.C. Memo 275, 23 TCM 1665 (1964) aff'd sub. nom. Fiorella v. Commissioner, 361 F.2d 326 (5th Cir. 1966)] This amount was then split equally between the Plaintiffs, again based on the wiretap information which indicated that the Plaintiffs were in the habit of splitting the profits from the enterprise equally.

 Based upon this information, the Service made termination assessments against the Plaintiffs on March 7, 1983 for income taxes for the period of January 1, 1983 through and including February 23, 1983.

 On February 29, 1984, this Court issued an Opinion and Order remanding the matter to the Commissioner of Internal Revenue. In our Opinion we noted that Commissioner was reasonable in making the assessment, but that, the taxpayers sustained their burden of showing that the amount of the assessment was not appropriate under the facts presented to this Court. We felt that the Commissioner should be given the opportunity to review the appropriate evidence concerning the type of profit margin that generally attaches to a sports gambling operation such as that carried by the Marrancas, and concluded that the appropriate action was to remand the matter to the Commissioner for further review of the amount of the assessments. The matter was eventually settled by agreement to pay tax on a 7% profit margin rather than 30%.


 Title 26 of the Code, § 7430, provides that in the case of any civil proceeding brought in a court of the United States in connection with the refund of any tax "the prevailing party may be awarded a judgment for reasonable litigation costs incurred in such proceeding." Id. § 7430 (a). The Code states that "reasonable litigation costs" include, inter alia, "reasonable fees paid or incurred for the services of attorneys in connection with the civil proceeding." Id. § 7430(c)(1)(A)(iv).

 In order to collect reasonable litigation costs under 26 U.S.C. § 7430, the party seeking such costs must have prevailed in the underlying action. Here, the United States does not agree that the Plaintiffs are the prevailing parties and thus the Court must determine that issue pursuant to 26 U.S.C. § 7430(c)(2)(B). In making this determination we look to 26 U.S.C. § 7430(c)(2)(A), which provides as follows:

In general -- the term "prevailing party" means any party to any proceeding described in ...

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