                        T.C. Memo. 1996-91



                      UNITED STATES TAX COURT



                 MARY LEE SHARER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 22562-92, 13219-93.      Filed February 29, 1996.


     Roderick L. MacKenzie, for petitioner.

     Kathryn K. Vetter, for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   These cases were assigned to Special Trial

Judge D. Irvin Couvillion pursuant to section 7443A(b)(4)1 and

Rules 180, 181, and 183.   The Court agrees with, and adopts, the

Opinion of the Special Trial Judge, which is set forth below.

1
     Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 2 -



                OPINION OF THE SPECIAL TRIAL JUDGE

     COUVILLION, Special Trial Judge:     These cases are before the

Court on petitioner's motions for award of litigation and

administrative costs pursuant to section 7430 and Rule 231.

Neither party requested a hearing, and the Court concludes that a

hearing is not necessary for the proper disposition of these

motions.   Rule 232(a)(3).   These cases were consolidated for

purposes of trial, briefing, and opinion.    Rule 141(a).


                             Background

     The motions for administrative and litigation costs involve

petitioner's 1988 and 1989 tax years.2    In the notice of

deficiency for 1988, respondent determined a deficiency in income

tax of $26,691 and additions to tax under sections 6651(a)(1),

6653(a)(1), and 6661 in the amounts of $6,665, $1,353, and

$6,673, respectively.   In the notice of deficiency for 1989,

respondent determined a deficiency in income tax of $12,399 and

an accuracy-related penalty of $2,480 under section 6662(a).


2
     Petitioner also has before the Court a motion for litigation
and administrative costs in docket No. 25899-91 involving her
1986 and 1987 tax years. That case was tried, and the opinion of
the Court is reported as T.C. Memo. 1994-453. Several of the
issues litigated in petitioner's 1986 and 1987 tax case are the
same as or similar to the issues involving petitioner's 1988 tax
year. Where necessary, therefore, the Court here relies on the
findings of the Court in T.C. Memo. 1994-453 (involving tax years
1986 and 1987) as such findings relate to the merits of
petitioner's motion for 1988.
                               - 3 -


     Petitioner filed separate petitions for each of the notices

of deficiency.   At the time the petitions were filed, and during

the years at issue, petitioner's legal residence was Sacramento,

California.

     The subject cases did not proceed to trial.   The parties

filed separate stipulations of settlement for each docketed case.

For tax year 1988, the parties stipulated that petitioner had a

deficiency in tax of $544 and an addition to tax under section

6653(a)(1) of $27, and no additions to tax under sections

6651(a)(1) and 6661.   For tax year 1989, the parties stipulated

that petitioner had a deficiency in tax of $150 and a penalty of

$30 under section 6662(a).   No decisions have been entered as a

result of petitioner's motions for administrative and litigation

costs.   Rules 231(a)(2)(C), 232(f).

     Petitioner is an accountant.   In 1975, she married Michael

Sharer (Mr. Sharer), and one child, Derek, was born of the

marriage in 1986.   Petitioner's marriage to Mr. Sharer was a

stormy one; however, neither she nor Mr. Sharer filed for divorce

or legal separation.   The Court in Sharer v. Commissioner, T.C.

Memo. 1994-453 (involving petitioner's 1986 and 1987 tax years),

found that petitioner and Mr. Sharer were not living together but

were maintaining separate households beginning in early 1986.

The same factual situation existed during 1988 until Mr. Sharer's

death on June 8, 1988.
                                 - 4 -


     Mr. Sharer was a certified public accountant who, beginning

in 1980, operated an accounting practice, Sharer Accountancy

(business), as a sole proprietorship.    In 1986, petitioner began

helping her husband with his business.    Petitioner had authority

to write checks on the accounts of the business.    During 1986,

1987, and 1988, petitioner and Mr. Sharer wrote checks to

petitioner on the business accounts which were annotated as

"spousal wages".

     During 1986, 1987, and 1988, petitioner and Mr. Sharer also

shared a joint personal checking account, into which petitioner

deposited her "spousal wages", and Mr. Sharer deposited his draw

from the business.   Petitioner also shared a joint checking

account with her mother, Mary McDonald.

     After Mr. Sharer's death, petitioner worked as an

independent contractor for the Maynard & McDonald partnership

(M & M) and Gold Country Financial, Inc. (Gold Country).      M & M

and Gold Country were in the business of preparing tax returns,

providing assistance to clients in tax-related matters, and

providing accounting services.    Petitioner's father, Bill

McDonald, was a partner in M & M.    Respondent's Information

Returns Master File Transcript did not show that either M & M or

Gold Country filed Forms 1099 or W-2 with the Internal Revenue

Service indicating wages or other compensation paid to

petitioner.   However, petitioner reported Schedule C gross
                                - 5 -


receipts of $7,160 on her 1989 return.3    In addition, Gold

Country paid petitioner an automobile allowance during each of

the years at issue (1988 and 1989).     This automobile allowance

was determined by respondent to constitute income for the 2 years

in question.

     By letter dated November 16, 1990, the Internal Revenue

Service (IRS) informed petitioner that her 1986, 1987, and 1988

income tax returns had been selected for examination.     In the

letter, an audit appointment was scheduled for December 12, 1990,

and attached to the letter was an Information Document Request

(IDR), requesting that petitioner provide certain information,

which included bank records and information on nontaxable sources

of income.    Petitioner did not provide the requested information

to the IRS.

     On January 17, 1991, the IRS sent another letter and a

second IDR, this time to petitioner's attorney.     Petitioner again

did not provide the requested records.     As a result, the IRS

summonsed petitioner's bank for information.     The IRS was unable

to get copies of all of petitioner's bank records, such as copies

of all checks deposited and all checks written.

     A notice of deficiency for 1988 was issued on August 11,

1992.   In that notice, respondent determined net income


3
     Petitioner listed the name of her Schedule C business as
"Mary Lee Sharer".
                                 - 6 -


adjustments totaling $83,845.    Consistent with the determinations

in the notice of deficiency for 1986 and 1987, respondent

determined that, for 1988, petitioner was required, under

California's community property law, to include in her income

one-half of the net income, or $40,415, of Sharer Accountancy,

her late husband's accounting proprietorship.    Other adjustments

totaled $25,205, which included automobile allowances paid to

petitioner by Gold Country, unaccounted and unexplained deposits

to petitioner's bank accounts, and personal expenses of

petitioner paid by a third party.    Respondent also determined

that $20,000 petitioner received from a law firm during 1988, as

well as a State income tax refund of $1,312, constituted gross

income.   All of these adjustments, except for the $40,415 from

Sharer Accountancy, were based upon bank records and information

provided to respondent by payors.

     Petitioner filed her petition on October 9, 1992, contesting

the deficiency notice for 1988.    On December 10, 1992, respondent

filed an answer.   On September 27, 1993, an Appeals Officer of

respondent mailed a letter to petitioner's attorney setting out

the issues and inviting the attorney to submit evidence in

support of petitioner's case, noting that the case was calendared

for trial on January 24, 1994.    Respondent also suggested that

petitioner sign a Stipulation to be Bound by the finding of the

Court for tax years 1986 and 1987 with respect to the issue of
                                - 7 -


the community income from Sharer Accountancy and all other issues

related thereto.   Neither petitioner nor her attorney responded

to this letter, nor were any additional documents submitted to

respondent.   However, because of the pending case involving

petitioner's 1986 and 1987 tax years, the parties agreed to

continue generally the trial of this case.

     On September 8, 1994, the opinion in petitioner's 1986 and

1987 case was rendered.   See Sharer v. Commissioner, T.C. Memo.

1994-453.   This Court found that petitioner and Mr. Sharer were

living separate and apart during 1986 and 1987, and that the net

income from Sharer Accountancy was Mr. Sharer's separate income

and was not community income.   The Court also found that

petitioner had to include in income a portion of the amounts paid

to her as "spousal wages".   The Court found that the remainder of

the payments represented repayment of loans made by petitioner to

Mr. Sharer, and such payments were not income.

     On October 20, 1994,4 the same Appeals Officer contacted

petitioner's attorney again to see if the 1988 tax year could be

settled in light of the Court's opinion for the 1986 and 1987 tax

years.   By letter dated November 2, 1994, petitioner's attorney

4
     From this point on, it appears from the record of both cases
that all correspondence and communications between the parties
dealt with both years 1988 and 1989. The issues considered by
the parties in subsequent correspondence related to either year
or both years. As discussed later in this opinion, the petition
challenging respondent's determinations for the 1989 tax year was
filed on June 24, 1993.
                                 - 8 -


provided some documentation to respondent.     The record does not

indicate what information was enclosed with this letter.     By

letter dated January 10, 1995, petitioner's attorney provided

further documentation to respondent.     Again, the record does not

indicate what information was provided in this letter.     This

letter, however, indicated petitioner's inability to locate

documentation justifying the "auto expense", one of the

adjustments in the notice of deficiency that respondent

determined was taxable income.

     On March 3, 1995, respondent sent a letter to petitioner's

attorney summarizing the issues in the 1988 and 1989 cases.       In

the letter, respondent conceded the 1988 $40,415 community

property income adjustment as a result of the opinion in Sharer

v. Commissioner, supra.   Respondent also conceded part of the

1988 $25,205 adjustment for additional earned income but

requested additional documentation as to the other parts of this

adjustment and the $20,000 adjustment for a payment received by

petitioner from a law firm during 1988.     Petitioner claimed that

the $20,000 payment was a personal injury settlement, which was

not taxable under section 104(a)(2).     Respondent requested

further information on this item because some of respondent's

documentation indicated that petitioner's claim included taxable

as well as nontaxable elements.    Finally, respondent conceded the

adjustment for the State income refund, and also allowed
                                - 9 -


petitioner itemized deductions in excess of those allowed in the

notice of deficiency.

     On March 19, 1995, petitioner's attorney provided more

information to respondent in response to the March 3, 1995,

letter.   Based on this documentation, respondent, in a letter

dated March 22, 1995, conceded additional income adjustments and

the substantial understatement penalty under section 6661.    In

the same letter, respondent sent copies of a proposed stipulation

settlement.

     By letter dated March 29, 1995, respondent's Appeals Officer

confirmed by letter to petitioner's attorney a basis for

settlement of the case for 1988 and included an audit statement

reflecting the settlement and a decision to be filed with the

Court.    The decision was signed by the parties and filed with the

Court as a Stipulation of Settlement in view of petitioner's

simultaneous filing of the motion for litigation costs.    Rule

231(c).

     With respect to the 1989 tax year, petitioner was first

informed by letter dated December 8, 1992, that her 1989 return

would be examined.   Attached to that letter was an IDR requesting

petitioner to provide certain information that included bank

records and information on nontaxable income.   On December 18,

1992, the IRS agent assigned to the case met with petitioner's

attorney to discuss some of the issues in the case.   However,
                                - 10 -


none of the requested documents was provided to the agent.     The

agent then summonsed petitioner's bank records on January 7,

1993.   On February 3, 1993, petitioner's attorney sent a letter

to the agent indicating that a response from petitioner was

enclosed with the letter.     The record, however, does not include

petitioner's response.

     On April 7, 1993, respondent issued a notice of deficiency

for petitioner's 1989 tax year.     Based on information derived

from bank records and information obtained from audits of related

taxpayers, respondent determined net income adjustments totaling

$35,403.     By far, the largest adjustment was additional income

totaling $42,831, which consisted essentially of the same kind of

items as generated the $25,205 adjustment for petitioner's 1988

tax year.5    Other adjustments included $150 taxable Social


5
     Specifically, the items consisted of:
          $ 3,000   Automobile allowance paid to petitioner by
                    Gold Country
            9,580   Checks from petitioner's mother deposited
                    in petitioner's checking account
              800   A deposit of currency in petitioner's
               checking account
           25,258   Deposited into petitioner's M & B Investment
                    Club account
            3,904   Adjustment for personal living expenses
            7,449   Amount received for sale of the Sharer
                    Accountancy client list
          $49,991   TOTAL

     Since petitioner had reported $7,160 of the above items as
Schedule C trade or business income, the $42,831 adjustment
represented net unreported income.
                                - 11 -


Security income, computational adjustments for self-employment

tax and the earned income credit, an allowance for additional

itemized deductions, and imposition of the accuracy-related

penalty under section 6662(a).

     Petitioner filed her petition on June 24, 1993.    Respondent

filed an answer on August 17, 1993.

     On September 10, 1993, the same IRS Appeals Officer

considering petitioner's 1988 tax year mailed a letter to

petitioner's attorney suggesting a conference for settlement of

the case for 1989, without trial, or to submit additional

evidence to support petitioner's case.    Petitioner did not

respond to this letter, nor was any additional documentation

provided.

     On October 20, 1994, the Appeals Officer mailed another

letter to petitioner renewing the offer to discuss the issues for

both the 1988 and 1989 cases.    The letter noted this Court's

opinion in Sharer v. Commissioner, T.C. Memo. 1994-453 (with

respect to petitioner's 1986 and 1987 tax years).    Petitioner's

attorney responded to this letter on November 2, 1994, and

provided some information regarding the 1989 year.     The record is

unclear, however, as to what information was actually sent to

respondent.   On November 22, 1994, the Appeals Officer responded

to the November 2, 1994, letter from petitioner's attorney

acknowledging receipt of the information.
                              - 12 -


     By letter dated January 10, 1995, petitioner's attorney

provided to respondent additional information and statements from

petitioner.

     On March 3, 1995, the Appeals Officer sent a letter to

petitioner conceding some adjustments, contesting others, and

requesting additional information about bank deposits.    More

specifically, the letter stated, in pertinent part, that

respondent would concede $7,444 of the $7,449 adjustment for

payments from Hoffelt, et al., for the Sharer accountancy client

list, that respondent would concede the adjustment of $3,904

personal living expenses paid in cash, and that petitioner would

concede that the auto allowance of $3,000 from Gold Country was

includable in income.   Furthermore, the Appeals Officer requested

additional information about $9,580 in checks written to

petitioner by Mary McDonald and $25,258 in funds deposited into

petitioner's investment account.

     By letter dated March 19, 1995, petitioner's attorney

provided an affidavit from Mary McDonald with respect to the

$9,580 in checks written by her to petitioner and the $25,258

deposited into petitioner's investment account.

     By letter dated March 22, 1995, the Appeals Officer conceded

all of the income items except the $3,000 auto allowance that

petitioner conceded was income.    Respondent also conceded the

$150 Social Security adjustment.    Petitioner conceded the
                               - 13 -


accuracy-related penalty under section 6662(a) and the

computational adjustments.   All issues for 1989, therefore, had

been settled.

     In the same letter, the Appeals Officer enclosed decision

documents and audit statements that would close the case for

1989.   These documents were signed by petitioner and forwarded to

respondent in a letter dated March 31, 1995.     The stipulated

decision was then filed by this Court as a Stipulation of

Settlement in view of petitioner's simultaneous filing of the

motion for litigation costs.   Rule 231(c).

     A taxpayer who substantially prevails in an administrative

or court proceeding may be awarded a judgment for reasonable

costs incurred in such proceedings.     Sec. 7430(a)(1) and (2).   A

judgment may be awarded under section 7430 if a taxpayer (1) was

the "prevailing party"; (2) exhausted the administrative remedies

available to the taxpayer within the Internal Revenue Service;

and (3) did not unreasonably protract the proceedings.     Sec.

7430(a), (b)(1), (b)(4).   A taxpayer must satisfy each of these

three requirements to be entitled to a judgment under section

7430.   Respondent concedes that petitioner exhausted the

administrative remedies available.      The Court is left to decide

(1) whether petitioner was the prevailing party, and (2) whether

petitioner did not unreasonably protract the proceedings.
                              - 14 -


     To qualify as the "prevailing party", the taxpayer must

establish that (1) the position of the United States in the

proceeding was not substantially justified; (2) the taxpayer

substantially prevailed with respect to the amount in controversy

or with respect to the most significant issue or set of issues

presented; and (3) the taxpayer satisfies the applicable net

worth requirements.   Sec. 7430(c)(4)(A).   Respondent concedes

that petitioner meets the second and third criteria listed above.

Respondent argues, however, that the position taken in both

proceedings was substantially justified.    Rule 232(e); Dixson

Corp. v. Commissioner, 94 T.C. 708, 714-715 (1990); Gantner v.

Commissioner, 92 T.C. 192, 197 (1989), affd. 905 F.2d 241 (8th

Cir. 1990).   Accordingly, the Court must decide, with respect to

both cases, whether "the position of the United States in the

proceeding was not substantially justified."    Gantner v.

Commissioner, 905 F.2d at 245.

     In deciding this issue, the Court must first identify the

point in time at which the United States is considered to have

taken a position and then decide whether the position taken from

that point forward was not substantially justified.    The "not

substantially justified" standard is applied as of the separate

dates that respondent took a position in the administrative

proceeding as distinguished from the proceeding in this Court.

Sec. 7430(c)(7)(A) and (B); Han v. Commissioner, T.C. Memo. 1993-
                                - 15 -


386.   For purposes of the administrative proceedings, respondent

took a position on August 11, 1992, and April 7, 1993, the dates

the notices of deficiency for tax years 1988 and 1989,

respectively, were issued.    Sec. 7430(c)(7)(B).   For purposes of

the proceeding in this Court, respondent took positions for the

1988 and 1989 tax years on December 11, 1992, and August 18,

1993, respectively, the dates respondent filed the answer in each

of the cases.    See Huffman v. Commissioner, 978 F.2d 1139, 1143-

1147 (9th Cir. 1992), affg. in part, revg. in part on other

grounds, and remanding T.C. Memo. 1991-144.

       Whether respondent's position was not substantially

justified turns on a finding of reasonableness, based upon all

the facts and circumstances, as well as the legal precedents

relating to the case.     Pierce v. Underwood, 487 U.S. 552 (1988);

Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131

(5th Cir. 1988).    A position is substantially justified if the

position is "justified to a degree that could satisfy a

reasonable person."     Pierce v. Underwood, supra at 565; Powers v.

Commissioner, 100 T.C. 457, 470-471 (1993).    A position that

merely possesses enough merit to avoid sanctions for

frivolousness will not satisfy this standard; rather, it must

have a "reasonable basis both in law and fact".     Pierce v.

Underwood, supra at 564-565.
                                - 16 -


     The Court must "consider the basis for respondent's legal

position and the manner in which the position was maintained".

Wasie v. Commissioner, 86 T.C. 962, 969 (1986).     The fact that

respondent eventually loses or concedes the case does not

establish an unreasonable position.      Sokol v. Commissioner, 92

T.C. 760, 767 (1989); Baker v. Commissioner, 83 T.C. 822, 828

(1984), vacated on other issues 787 F.2d 637 (D.C. Cir. 1986).

The reasonableness of respondent's position and conduct

necessarily requires considering what respondent knew at the

time.    Cf. Rutana v. Commissioner, 88 T.C. 1329, 1334 (1987);

DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).     The taxpayer

has the burden of establishing that respondent's position was

unreasonable.    Rule 232(e).

     At all relevant times, respondent's position in both of

petitioner's cases was that, using the bank deposits method,

respondent properly calculated, in the notices of deficiency,

petitioner's income tax for 1988 and 1989.       Petitioner argues

that respondent's position was not reasonable as a matter of law

or fact.    As a matter of law, petitioner argues that respondent's

use of the bank deposits method, an indirect method in

determining petitioner's taxable income, was not reasonable.

        This Court has long held that the bank deposits method of

determining taxable income is reasonable when, as in the present

case, taxpayers fail to maintain, or submit for examination by
                              - 17 -


the Commissioner, complete and adequate books and accounts for

their income-producing activities.     DiLeo v. Commissioner, 96

T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

     Prior to respondent's issuance of the notices of

deficiencies for 1988 and 1989, respondent sent letters to

petitioner requesting she provide information described in the

IDR's accompanying the letters.   Petitioner did not present any

of these records for either year at issue.    As a result, it was

necessary, and reasonable, for respondent to use the bank

deposits method in determining petitioner's income for 1988 and

1989.   The Court notes that respondent's determinations were not

based upon information petitioner voluntarily submitted, but

rather upon information obtained from summonses on banks and

information from payors reported to the IRS.    Accordingly, we

reject petitioner's argument that respondent's use of the bank

deposits method was unreasonable as a matter of law.

     In deciding whether petitioner is entitled to administrative

costs, the Court takes into account the information available to

respondent from the date the notices of deficiency were mailed.

The notice of deficiency for 1988 was mailed on August 11, 1992.

The notice of deficiency for 1989 was mailed on April 7, 1993.

With respect to both years, between the time that the notices of

deficiency were mailed and the time respondent's answers were

filed, petitioner provided no records or pertinent documentation
                               - 18 -


to respondent.   Accordingly, respondent was substantially

justified, in fact and in law, in taking and maintaining the

positions determined in the notices of deficiency.    Petitioner's

motions with respect to administrative costs are, therefore,

denied for both years at issue.

     With respect to litigation costs, the Court must look to the

information available to respondent at the time the answers were

filed and from that point forward.

     Respondent's answer in the 1988 case was filed on

December 10, 1992.   On September 27, 1993, respondent mailed a

letter to petitioner requesting that she submit evidence in

support of her position.    Petitioner did not respond to this

letter.   After the decision was rendered in Sharer v.

Commissioner, T.C. Memo. 1994-453, on September 8, 1994,

respondent contacted petitioner again to see if the 1988 case

could be settled and, as to those issues common to the 1986,

1987, and 1988 tax years, respondent agreed to abide by the

Court's opinion that dealt with petitioner's 1986 and 1987 years.

Petitioner sent respondent some documentation with a letter dated

November 2, 1994, and further documentation with a letter dated

January 10, 1995.    Although the information provided in these

letters is not shown in the record, it is evident from the

language in the several letters between the parties that

petitioner was moving in the direction toward providing
                              - 19 -


information that respondent had long sought.     By letter dated

March 3, 1995, respondent conceded several of the adjustments in

the notice of deficiency.   In the same letter, respondent asked

for additional documentation with respect to the adjustment for

earned income.   After receiving the additional information from

petitioner on March 19, 1995, respondent conceded, 3 days later,

more of the income adjustments and the substantial understatement

penalty.   As a result, a settlement was reached by the parties.

     The record of the case clearly shows that respondent's

litigation position was reasonable.     It is apparent from the

record that petitioner provided very little in the way of

documentation until such time as the case progressed toward an

ultimate trial date.   The correspondence in the record does not

indicate or show any unreasonableness on the part of respondent's

Appeals Officer, nor does the correspondence from petitioner's

attorney to the Appeals Officer indicate or express any

frustration or complaints about respondent's positions or

requests for additional information.     Based on this record,

therefore, this Court holds that petitioner is not entitled to

litigation costs for the 1988 case.

     With respect to petitioner's 1989 tax case, the

correspondence described above with respect to the 1988 tax case

also dealt with the 1989 tax year.     For the same reasons
                              - 20 -


described above, the Court holds that petitioner is not entitled

to litigation costs for the 1989 case.

     As the Court has decided that respondent's position was

substantially justified in both the administrative and Court

proceedings for both years, it is not necessary for the Court to

decide whether petitioner unreasonably protracted the proceedings

and the amount of petitioner's administrative and litigation

costs.   Petitioner's motions, therefore, will be denied.



                                         Appropriate orders and

                                    decisions will be entered.
