Chairman Johnson and Members of the Subcommittee, my name is Jeff Jaeger and I'm here to talk about some IRS tactics used on my family's business that I consider to be extremely unfair treatment that makes honest taxpayers angry at government and those who created the system.

My company, Rutherford Hill Winery, is in the fine wine business in California's Napa Valley. We consider ourselves a small business, and although it may sound glamorous, it's very hard to make a profit in it. Profits become simply impossible when we must spend $85,000 in attorneys fees to beat an insupportable IRS tax assessment, and then are denied the recovery of $70,000 of those fees in Tax Court.

We've been audited by the IRS before, several times. We have never lost a dime to the IRS when we've been audited because our tax accounting systems are sound. In our recent Tax Court case, the IRS conceded every single item they had assessed against us, but we still lost big money on the attorneys fees because of the coercive and deceptive practices of the IRS.

The main tax issue in our Tax Court case was about our single pool, LIFO inventory valuation method. It's the same method we had used from our beginning, 15 years earlier, the same method used by many of our competitors (including a sister winery that cleared an IRS audit the same year with an identical LIFO situation), and a method that reflects income as well as any other inventory valuation method there is for our type of business. According to tax law, the choice of the LIFO method is the taxpayer's. The IRS agent assigned to our case liked another pooling method and wanted to force her choice on us. Her approach was not only novel, but it created serious disagreement within the Service. However, she was allowed to send us the equivalent of a deficiency assessment notice. In saying this, I recognize that the Internal Revenue Code gives the Commissioner broad authority to change a taxpayer's accounting method if it does not clearly reflect income, but the Code does not permit the Commissioner to order a change simply because an IRS agent thinks a different method might reflect income more clearly. That, however, is exactly what the IRS was trying to do here.

Partway into our preparation of the Tax Court case, two issues unrelated to the LIFO issue were conceded to us by the IRS, but not before we'd spent serious money to defend them.

It has now become clear that the IRS never intended to litigate our case at all. The agent on our case and her IRS cohorts were trying to force a different inventory valuation method on use, one that was neither accurate nor practical. The agents were using the IRS's current protective shield against recourse to try to intimidate us into submission, even with an unwinable tax case, knowing it would cost us dearly to defend ourselves. This is government gamesmanship at its worst. It was-the agent's hope, and the hope of her cohorts, to pick on a few wineries, get them to concede, then use those concessions as they'd use a Tax Court case, to coerce other wineries to change methods to those preferred by the agents. It's only natural that the IRS would not want to pick on too many wineries at once for fear the wineries could join together and better defend themselves. Instead, the agents used the old "divide and conquer" technique, even without a legally supportable test case.

The fact we now know that the IRS wouldn't, in fact couldn't possible have gone to trial with our case, does not mean that we knew their intentions earlier. We had to assume there would be a trial and we had to prepare for it. That preparation was extensive and expensive. We now feel like someone who's been held up by a man with an unloaded gun. Not only were we robbed, but we were deceived as well.

Our case may sound as though we were an unlucky taxpayer, singled out as a guinea pig by the IRS in its effort to create government-favored retroactive tax law. While the practice of allowing the IRS to get pro-government court opinions, after the fact, is always unfair to tax planners, that's not what happened to us, and not why I'm here today. The IRS was far more sneaky than that in our case. For use, the IRS proposed a tax adjustment it could not possibly substantiate. Its proposed changes were so seriously flawed, it knew it could not dare go to trial. Knowing there would be no trial, the IRS attorneys made no real trial preparation, but kept up a pretense that they were ready for trial. The sole reason the IRS attorneys kept the case alive was their hope that we might concede enough to give the Service an appearance of victory, which it could then use to coerce concessions from other taxpayers.

Because present law makes the recovery of attorneys fees virtually impossible in Tax Court cases, no matter how ridiculous the Service's case, IRS agents and attorneys had no fear of proceeding with their "mission impossible" case against us. They faced no prospect of losing money, no consequent exposure of their bureaucratic bungling and chicanery, no risk at all proceeding with their extortion plan against us, because in the end they would be accountable to no one. It was a no lose proposition for them. It was a no-win proposition for us.

With the law the way it is now written, we decided that pursuing an appeal to get our attorneys fees would likely be throwing good money after bad. It is never easy to get an appellate court to reverse a Tax Court decision. And when the Tax Court reads the law to say that the position of the IRS is "substantially justified" in virtually all instances -- no matter how far fetched and unfounded the IRS's legal theory may be -- then the taxpayer stands no chance at all of getting reimbursement for attorneys fees. We thought it better to bring the case here, to this Committee, in the hope that Congress would be more inclined to see that justice in done for the taxpayer when the IRS proceeds in bad faith.

Currently, the Congress is searching for a way to deal with the unfairness of the American legal system where winners must now shoulder their own legal expenses even though they win their cases. To extend that search for fairness to legal actions involving the government is only logical and just. The opinion in our Tax Court case denying us attorneys fees is not only another nail in the coffin of justice, it's also a masterpiece of bureaucratic doubletalk. The Service was well served, but justice surely wasn't.

On behalf of small businesses, nationwide, my hope is for a change that would award attorneys fees to a Petitioner in Tax Court any time the IRS answers the Petition, reaches no settlement with the taxpayer, then fails to take the case to trial. Furthermore, I hope Congress will seriously consider establishing a presumption, if not a rule, that attorneys fees will be awarded to a taxpayer any time that taxpayer wins its Tax Court case.