                        T.C. Memo. 2006-258



                      UNITED STATES TAX COURT



                    L.S. VINES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12763-04.                Filed November 30, 2006.



     David D. Aughtry, for petitioner.

     Monica D. Armstrong, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   The instant matter is before the Court on

petitioner’s motion for reimbursement of litigation costs,

including attorney’s fees pursuant to section 7430 and Rule 231.

The issues in dispute are:   (1) Whether petitioner meets the net

worth requirements of section 7430(c)(4)(A)(ii); (2) whether

petitioner has properly substantiated his claimed litigation
                                - 2 -

costs and attorney’s fees; (3) whether petitioner’s claimed

litigation costs and attorney’s fees are reasonable; (4) and

whether respondent’s position in the instant case was

substantially justified.    Unless otherwise indicated, all section

references are to the Internal Revenue Code in effect for the

year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

     The parties have not requested a hearing on the instant

motion.    Consequently, we base our decision on the parties’

submissions and the record.    The underlying facts of the instant

case are set forth in detail in Vines v. Commissioner, 126 T.C.

279 (2006) (Vines I), and we incorporate by reference the

portions of Vines I that are relevant to our disposition of the

instant motion.    The following is a summary of the factual and

procedural background of the instant case.

                              Background

     At the time of filing the petition, petitioner resided in

Birmingham, Alabama.    Petitioner is an attorney who practiced

personal injury law in Birmingham, Alabama, for approximately 34

years.    During 1999, petitioner settled a class action lawsuit

and received approximately one-half of his compensation for

settling the class action suit during the taxable year 1999 and

the other half during the taxable year 2000.    Petitioner reported

net profits of $18,520,775 and $16,966,055 from his law practice
                                 - 3 -

on line 29 of Schedule C, Profit or Loss From Business, of his

Forms 1040, U.S. Individual Income Tax Return, for taxable years

1999 and 2000, respectively.

     During the fall of 1999, petitioner decided to begin a new

career as a securities trader.    Petitioner established brokerage

accounts with DLJdirect and Ameritrade, deposited $5 million in

each of those accounts, and became engaged in the trade or

business of trading securities on January 28, 2000.1

     Petitioner used margin borrowing as part of his securities

trading strategy.    On April 14, 2000, DLJdirect forced the

liquidation of petitioner’s entire account because petitioner

failed to cover a margin call after technology stocks declined

sharply during early April 2000.    As of April 14, 2000,

petitioner’s net trading losses totaled $25,196,151.54.

     Petitioner relied on certified public accountants to advise

him on Federal tax matters and to prepare his Federal tax

returns.    J. Wray Pearce (Mr. Pearce), a certified public

accountant with over 30 years of experience, had served as

petitioner’s business and personal accountant for more than 13

years and was very familiar with petitioner’s securities trading

business.




     1
      The parties stipulated this fact based on the volume and
frequency of petitioner’s trading.
                                - 4 -

     On April 13, 2000, Mr. Pearce met with petitioner to obtain

his signature on Form 4868, Application for Automatic Extension

of Time to File U.S. Individual Income Tax Return, for taxable

year 1999.   On April 17, 2000, petitioner timely filed Form 4868,

requesting an extension until August 15, 2000, to file his return

for taxable year 1999.   A section 475(f) election was not

enclosed with the Form 4868, however, because Mr. Pearce did not

know about the availability of section 475(f) or any Internal

Revenue Service (IRS) revenue procedure related to securities

traders.

     On or about June 4, 2000, Dr. James G. Sullivan (Dr.

Sullivan), a friend of petitioner, visited petitioner at his

home.   Petitioner told Dr. Sullivan that he had suffered

significant losses during the first quarter of the 2000 taxable

year and that, consequently, his DLJdirect account had been

liquidated on April 14, 2000.   Dr. Sullivan knew several

professional “day traders” and informed petitioner that he might

be able to deduct his securities trading losses as ordinary

losses.

     On June 6, 2000, petitioner spoke with another accountant,

Charles E. Sellers (Mr. Sellers), regarding the possibility of

deducting his securities trading losses as ordinary losses.    Mr.

Sellers also was unaware of section 475(f) and the mark-to-market

election available to securities traders.   Petitioner retrieved
                               - 5 -

the citation of section 475(f) from Dr. Sullivan and relayed it

to Mr. Sellers.

     Mr. Sellers informed petitioner that, according to Rev.

Proc. 99-17, 1999-1 C.B. 503, in order for a section 475(f)

election to be effective for the 2000 taxable year, petitioner

had to file the election by April 17, 2000, the due date for his

1999 tax return.   Mr. Sellers then informed petitioner that he

should qualify for an extension of time within which to make the

section 475(f) election under section 301.9100-3, Proced. &

Admin. Regs. (section 9100 relief).

     Petitioner hired the Washington, D.C., law firm of Caplin &

Drysdale to prepare and file the section 475(f) election and

request for section 9100 relief.   On July 21, 2000, Caplin &

Drysdale, on behalf of petitioner, submitted to respondent a

“Taxpayer Election of Mark to Market Accounting Under Section

475(f)” (section 475(f) election), along with a six-page letter

outlining the reasons petitioner should qualify for section 9100

relief.   The letter also stated that petitioner would file a

formal private letter ruling request.   Also enclosed with the

section 475(f) election and the six-page letter was a

“protective” Form 3115, Application for Change in Accounting

Method.   The Form 3115 stated that petitioner intended to adopt

an accounting method for his new securities-trading business, not
                               - 6 -

change an accounting method for an existing business, and

therefore a section 481(a) adjustment was not necessary.

     Caplin & Drysdale advised petitioner that he had bound

himself to adopt the mark-to-market method of accounting for his

trading business by filing the section 475(f) election and

requesting section 9100 relief on July 21, 2000.   On that basis,

Caplin & Drysdale and Mr. Sellers advised petitioner that he

could resume his securities trading activities without adversely

affecting his request for section 9100 relief.   Petitioner

resumed his trading activities on July 26, 2000.

     Between the date that petitioner should have filed his

section 475(f) election, April 17, 2000, and the date petitioner

actually filed his section 475(f) election, July 21, 2000,

petitioner:   (1) Did not purchase any publicly traded stock; (2)

did not sell any publicly traded stock; and (3) had no gain or

loss from the disposition of any publicly traded stock.    Thus,

petitioner’s losses on July 21, 2000, were exactly the same as

they were on April 17, 2000.

     On October 27, 2000, Caplin & Drysdale submitted to

respondent on behalf of petitioner a formal private letter ruling

request seeking section 9100 relief for his 2000 section 475(f)

election (section 9100 relief request).

     On December 5, 2001, respondent denied petitioner’s section

9100 relief request in Priv. Ltr. Rul. 129057-00 (200209053),
                               - 7 -

stating in pertinent part that an accounting adjustment under

section 481(a) was necessary and that, because petitioner’s

circumstances were not unusual or compelling, it was unnecessary

to consider whether petitioner acted reasonably and in good faith

under section 301.9100-3(b), Proced. & Admin. Regs.

     Petitioner timely petitioned this Court contending that he

should be entitled to an extension of time to file his section

475(f) election pursuant to section 301.9100-3, Proced. & Admin.

Regs., because he acted reasonably and in good faith and the

interests of the Government would not be prejudiced.

Respondent’s contentions in Vines I were consistent with

respondent’s conclusions in Priv. Ltr. Rul. 129057-00.

     The interpretation of section 301.9100-3, Proced. & Admin.

Regs., and the parties’ arguments regarding section 9100 relief

presented an issue of first impression in this Court.

Interpreting section 301.9100-3, Proced. & Admin. Regs., we held

that petitioner was entitled to an extension of time to file his

section 475(f) election because he acted reasonably and in good

faith and the interests of the Government would not be

prejudiced.   See Vines v. Commissioner, 126 T.C. at 298-299.    On

June 12, 2006, petitioner filed the instant motion for

reimbursement of litigation costs and attorney’s fees totaling

$428,835.
                                - 8 -

                             Discussion

       Section 7430(a) provides that a taxpayer may recover

litigation costs incurred in a court proceeding brought against

the United States in connection with the determination of a tax

or penalty.    Litigation costs may be awarded pursuant to section

7430 if the taxpayer is (1) the prevailing party, (2) exhausted

available administrative remedies, (3) did not unreasonably

protract the court proceedings, and (4) claimed reasonable

administrative and litigation costs.      Sec. 7430(a), (b)(1), (3),

(c).    The requirements of section 7430 are conjunctive, and

failure to satisfy any one of the requirements precludes an award

of costs.    Minahan v. Commissioner, 88 T.C. 492, 497 (1987).

       To be the prevailing party (1) the taxpayer must

substantially prevail with respect to either the amount in

controversy or the most significant issue, or set of issues,

presented, and (2) at the time the petition in the case was

filed, the taxpayer must meet the net worth requirements of 28

U.S.C. sec. 2412(d)(2)(B).    Sec. 7430(c)(4)(A).   The taxpayer

will not be treated as the prevailing party, however, if the

Commissioner establishes that the Commissioner’s position was

substantially justified.    Sec. 7430(c)(4)(B); see also Pierce v.

Underwood, 487 U.S. 552, 565 (1988).

       Respondent concedes that petitioner exhausted all

administrative remedies and did not unreasonably protract the
                                 - 9 -

court proceedings.     Respondent contends, however:   (1) Petitioner

has failed to establish that he meets the net worth requirements

of 28 U.S.C. sec. 2412(d)(2)(B); (2) petitioner’s claimed

attorney’s fees are not reasonable; (3) petitioner has failed to

substantiate his litigation costs; and (4) petitioner should not

be treated as the prevailing party because respondent’s position

was substantially justified.     Respondent also contends that

petitioner is not entitled to recover litigation costs and

attorney’s fees because petitioner recovered approximately $2.5

million in damages from his former accountant, Mr. Pearce, who

failed to advise petitioner of the section 475(f) election.

Respondent contends that an award of costs and fees in the

instant case is tantamount to an award of punitive damages

against respondent because the $2.5 million that petitioner

recovered from Mr. Pearce far exceeds the litigation costs and

fees sought by petitioner.2    Because we hold, for reasons stated

below, that respondent’s position was substantially justified, we

do not need to address the other issues remaining with respect to

the instant motion.3


     2
      We note that, in 2003, petitioner settled his claim against
Mr. Pearce for failing to advise petitioner about the
availability of the sec. 475(f) election for approximately $2.5
million. Petitioner also settled a claim against one of the
brokerage houses that liquidated petitioner’s trading account for
$1.75 million.
     3
      Although we do not decide whether petitioner meets the $2
                                                   (continued...)
                               - 10 -

     The Commissioner’s position is substantially justified if,

on the basis of all the facts and circumstances and legal

precedent, the Commissioner acted reasonably.     Pierce v.

Underwood, supra; Sher v. Commissioner, 89 T.C. 79, 84 (1987),

affd. 861 F.2d 131 (5th Cir. 1988).     In other words, the

Commissioner’s position must have a reasonable basis in both law

and fact.    Pierce v. Underwood, supra.   A position is

substantially justified if the position is “justified to a degree

that could satisfy a reasonable person”.     Id. at 565.   The

Commissioner’s position may be incorrect but still be

substantially justified if “‘a reasonable person could think it

correct’”.    Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443



     3
      (...continued)
million net worth limitation of 28 U.S.C. sec. 2412(d)(2)(B), we
note that, while petitioner incurred an approximate $26 million
loss in April 2000, he also received approximately $35 million in
taxable years 1999 and 2000 resulting in a net gain of almost $9
million for those taxable years. In his affidavit, petitioner
listed assets totaling $3,074,552, but claims that his net worth
when he filed the petition on July 21, 2004, was a negative
$575,844 after subtracting a $3,692,356 tax liability, which
petitioner computed based on our Opinion in Vines I on May 11,
2006. We also note that respondent contends that petitioner used
the wrong method to value certain assets listed in petitioner’s
affidavit. If we were to consider these issues, we would require
further evidence, and possibly a hearing, in order to decide
whether petitioner meets the $2 million net worth limitation of
28 U.S.C. sec. 2412(d)(2)(B).

     We also note that petitioner has not shown that he qualifies
for the higher $7 million net worth limitation under 28 U.S.C.
sec. 2412(d)(2)(B) because petitioner presented no evidence that,
on the date he filed his petition, he was the owner of an
unincorporated business.
                              - 11 -

(1997) (quoting Pierce v. Underwood, supra at 566 n.2).    The fact

that the Commissioner eventually loses does not establish that

his position was unreasonable.   Estate of Perry v. Commissioner,

931 F.2d 1044, 1046 (5th Cir. 1991).

     The relevant inquiry is “whether * * * [the Commissioner]

knew or should have known that * * * [his] position was invalid

at the onset”.   Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.

1995), affg. T.C. Memo. 1994-182.   Generally, the Commissioner’s

position is considered substantially justified when an issue is

one of first impression.   See TKB Intl. Inc. v. United States,

995 F.2d 1460, 1468 (9th Cir. 1993); Estate of Wall v.

Commissioner, 102 T.C. 391, 394 (1994).

     Relying on our decision in Zinniel v. Commissioner, 89 T.C.

357 (1987), petitioner contends that respondent’s position cannot

be considered substantially justified because section 475(g)

commands the Secretary to issue regulations for implementing the

mark-to-market election under section 475(f) and therefore Rev.

Proc. 99-17, 1999-1 C.B. 503, is invalid.   Regarding Rev. Proc.

99-17, supra, we note that respondent can reasonably rely upon a

revenue procedure until it is revoked or held invalid.    Cf.

Rauenhorst v. Commissioner, 119 T.C. 157, 170 (2002) (holding

that the Commissioner is bound to follow revenue rulings and we
                              - 12 -

treat those rulings as concessions in cases before us).4

Nonetheless, in Vines I, we did not decide the issue of the

validity of Rev. Proc. 99-17, supra, and we need not do so now.5

     Petitioner also contends that, despite being an issue of

first impression, respondent’s position cannot be considered

substantially justified because respondent “ignored” the language

of section 301.9100-3, Proced. & Admin. Regs., which commands

relief where the taxpayer acts reasonably and in good faith and

the interests of the Government will not be prejudiced.    We

disagree.   As we noted in Vines v. Commissioner, 126 T.C. at 289:

“the interpretation of section 301.9100-3, Proced. & Admin.

Regs., and the parties’ arguments regarding section 9100 relief

create an issue of first impression in this Court.”   Although we

disagreed with respondent’s interpretation of the regulation and

whether relief was warranted under the facts of the instant case,


     4
      Indeed, there is a rebuttable presumption that the
Commissioner’s position is not substantially justified if the
Commissioner fails to follow his own applicable published
guidance, including: Regulations, revenue rulings, and revenue
procedures. Sec. 7430(c)(4)(B)(ii), (iv). In the instant case
respondent relied upon Rev. Proc. 99-17, 1999-1 C.B. 503.
Respondent also relied upon respondent’s interpretation of sec.
301.9100-3, Proced. & Admin. Regs. In Vines I, we however,
disagreed with respondent’s interpretation of that regulation in
deciding an issue of first impression before this Court.
     5
      We note that the taxpayer in Zinniel v. Commissioner, 89
T.C. 357 (1987) also filed a motion for litigation costs and
attorney’s fees, which we denied. See Zinniel v. Commissioner,
883 F.2d 1350 (7th Cir. 1989), affg. an order of this Court
denying the taxpayer’s motion for litigation costs and attorney’s
fees.
                             - 13 -

respondent believed that a section 481 adjustment was necessary

and that petitioner’s circumstances were not unusual or

compelling because petitioner’s reliance on his accountant did

not actually cause petitioner to miss the deadline for filing the

section 475(f) mark-to-market election.    The record indicates

that respondent came to those conclusions after much deliberation

and consultation within the IRS and not in a thoughtless or

reckless manner as petitioner argues.   Based on the lack of

guidance available at the time, we cannot say that it should have

been “obvious” to respondent from the onset of the litigation

that respondent’s position was in error.    See Nalle v.

Commissioner, supra at 192 (citing Sher v. Commissioner, 861 F.2d

131, 135 (5th Cir. 1988), affg. 89 T.C. 79, 84 (1987)).

Accordingly, petitioner’s motion will be denied.

     To reflect the foregoing,


                                          An appropriate order will

                                  be issued.
