                          T.C. Memo. 2011-136



                        UNITED STATES TAX COURT



         ARTHUR DALTON, JR. AND BEVERLY DALTON, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23510-06L.               Filed June 20, 2011.



     Ralph A. Dyer, for petitioners.

     Erika B. Cormier, for respondent.



                          MEMORANDUM OPINION


     WELLS, Judge:     This case is before the Court on petitioners’

motion for recovery of reasonable litigation and administrative

costs, filed pursuant to section 7430 and Rule 231.1    Petitioners


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the time petitioners filed
their petition or incurred their litigation costs, as
                                                   (continued...)
                               - 2 -

seek to recover litigation and administrative costs of $55,580

incurred in contesting respondent’s rejection of their offer-in-

compromise because of an alleged nominee interest in a trust.     We

must decide:   (1) Whether petitioners’ motion is deficient on its

face; (2) whether respondent has shown that his position was

substantially justified; (3) whether petitioners are entitled to

litigation and administrative costs claimed; and (4) whether the

attorney’s fees and other costs that petitioners seek to recover

are reasonable.   Neither party requested an evidentiary hearing,

and we conclude that a hearing is not necessary for the proper

disposition of petitioners’ motion.    See Rule 232(a)(2).

                            Background

     The merits of the underlying case were decided in our prior

opinions in this case, Dalton v. Commissioner, T.C. Memo. 2008-

165 (Dalton I), and Dalton v. Commissioner, 135 T.C. 393 (2010)

(Dalton II).   The findings of fact set forth in those opinions

are incorporated herein by reference.    We restate below only

those findings that are relevant to the issues presented by

petitioners’ motion for litigation and administrative costs.

     The central issue in the underlying case was whether

respondent’s Appeals Office abused its discretion when it

determined that petitioners held a “nominee” interest in certain


     1
      (...continued)
appropriate, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
                                - 3 -

real estate held in trust (the Poland property).   During the

proceedings before the Internal Revenue Service (IRS) Appeals

Office, petitioners (hereinafter referred to individually as Mr.

Dalton Jr. and Mrs. Dalton Jr.) sought to establish that they

were entitled to an offer-in-compromise on the basis of financial

hardship.    The IRS Appeals Office obtained from the IRS Office of

Chief Counsel an advisory opinion on the applicability of alter

ego or nominee principles of ownership to petitioners’ situation.

In that opinion, the IRS Office of Chief Counsel considered

various factors derived from Federal caselaw and concluded that a

nominee relationship did exist between petitioners and the trust.

The advisory opinion was silent on the issue of whether

petitioners had an interest in the trust under State law.

     On October 24, 2006, the IRS Appeals Office issued to each

petitioner a separate Notice of Determination Concerning

Collection Action(s) Under Section 6320 and/or 6330 (initial

notice of determination).   Petitioners each received the initial

notice of determination on or about October 31, 2006.   It stated

that the Appeals Office had rejected petitioners’ collection

alternative, and attachments to the notice explained that the IRS

had determined that petitioners had a nominee interest in the

trust and that any collection alternative would have to

incorporate the equity petitioners had in the property owned by

the trust.
                               - 4 -

     On November 16, 2006, petitioners filed a timely petition in

this Court seeking judicial review of the proposed levy action.

Respondent filed a motion for summary judgment, which we denied

in our opinion in Dalton I.   In that opinion, we noted that

recent caselaw has made it clear that the primary factor that

must be considered in deciding whether a nominee relationship

exists is whether such a relationship exists under State law.

Because the record was silent as to whether a nominee

relationship existed under Maine law, we remanded the case to the

IRS Appeals Office to consider whether a nominee interest existed

under State law.

     On remand, the Appeals Office requested another advisory

opinion from the IRS Office of Chief Counsel.   The Office of

Chief Counsel provided an advisory opinion, which summarily

concluded that Maine “does not have a properly developed body of

law regarding nominee ownership.”   It then proceeded to conduct a

Federal factors analysis.   The advisory opinion concluded that,

under the Federal factors analysis, petitioners had a nominee

interest in the trust property.   On December 1, 2008, the Appeals

Office mailed each petitioner a Supplemental Notice of

Determination Concerning Collection Action(s) under Section 6320

and/or 6330 (supplemental notice of determination).   The

supplemental notice of determination concluded that Maine law was

silent on the issue of whether petitioners had a nominee interest
                                  - 5 -

in the property, and it reaffirmed the conclusion that

petitioners had a nominee interest under Federal factors.

       After the IRS issued its supplemental notice of

determination, petitioners filed a motion for partial summary

judgment in this Court.    In our Opinion in Dalton II, we granted

petitioners’ motion for summary judgment.     We held that the IRS

Appeals Office abused its discretion when it sustained the levy

action on the basis of its determination that petitioners had a

nominee interest in the trust property.      Dalton II, 135 T.C. at

423.    We held that Maine law was not silent on the issue of

whether a nominee interest existed and that, pursuant to Maine

law, petitioners had no such interest in the trust property.       Id.

at 407-415.    We further concluded that, even under a Federal

factors analysis, petitioners did not have a nominee interest in

the trust.    Id. at 415-423.

                                Discussion

       Section 7430(a) provides that the prevailing party in any

administrative or court proceeding may be awarded a judgment for

(1) reasonable administrative costs incurred in connection with

such an administrative proceeding within the IRS, and (2)

reasonable litigation costs incurred in connection with such a

court proceeding.    Corson v. Commissioner, 123 T.C. 202, 205

(2004); Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 436

(1997).    In addition to being the prevailing party, to receive an
                               - 6 -

award of reasonable litigation costs a taxpayer must have

exhausted all administrative remedies and must not have

unreasonably protracted the court proceeding.   Sec. 7430(b)(1),

(3); Corson v. Commissioner, supra at 205.    We do not award costs

unless a taxpayer satisfies all of the section 7430 requirements.

Corson v. Commissioner, supra at 205-206; Minahan v.

Commissioner, 88 T.C. 492, 497 (1987).

     A taxpayer is the prevailing party if:   (1) The taxpayer

substantially prevailed with respect to the amount in controversy

or the most significant issue or set of issues; (2) the taxpayer

meets the net worth requirements of 28 U.S.C. sec. 2412(d)(2)(B)

(2006); and (3) the Commissioner’s position in the court

proceeding was not substantially justified.   Sec. 7430(c)(4)(A)

and (B)(i); see also sec. 301.7430-5(a), Proced. & Admin. Regs.

The Commissioner bears the burden of proving that his position

was substantially justified.   Sec. 7430(c)(4)(B)(i); Corson v.

Commissioner, supra at 206.

     Respondent concedes that petitioners substantially prevailed

with respect to the amount in controversy and the most

significant issue presented, exhausted all administrative

remedies, did not unreasonably protract the proceedings, and meet

the net worth requirements of 28 U.S.C. sec. 2412(d)(2)(B).

However, respondent contends that petitioners’ motion is

deficient on its face because it fails to allege that
                               - 7 -

respondent’s position was not substantially justified, and

respondent contends that his position was substantially

justified.   Respondent also contends that if we hold that

petitioners are entitled to litigation and administrative costs,

petitioners are not entitled to the amount claimed.

I.   Whether Petitioners’ Motion Is Deficient on Its Face

     We first consider respondent’s contention that petitioners’

motion is deficient on its face.   Respondent directs our

attention to 28 U.S.C. sec. 2412(d)(1)(B), which provides:

     A party seeking an award of fees and other expenses shall,
     within thirty days of final judgment in the action, submit
     to the court an application for fees and other expenses
     which shows that the party is a prevailing party and is
     eligible to receive an award under this subsection, and the
     amount sought, including an itemized statement from any
     attorney or expert witness representing or appearing in
     behalf of the party stating the actual time expended and the
     rate at which fees and other expenses were computed. The
     party shall also allege that the position of the United
     States was not substantially justified. Whether or not the
     position of the United States was substantially justified
     shall be determined on the basis of the record (including
     the record with respect to the action or failure to act by
     the agency upon which the civil action is based) which is
     made in the civil action for which fees and other expenses
     are sought.

Respondent contends that, because petitioners’ motion made no

allegation that respondent’s position was not substantially

justified, it is invalid on its face.   We disagree.

     Petitioners seek an award of litigation and administrative

costs pursuant to section 7430, which does not require taxpayers

to meet all the requirements of 28 U.S.C. section 2412.     Section
                                - 8 -

7430(c)(4)(A)(ii) requires that the moving party meet the

requirements of the first sentence of 28 U.S.C. section

2412(d)(1)(B) and the net worth limitations of 28 U.S.C. sec.

2412(d)(2)(B).   The full text of section 7430(c)(4)(A) provides:

          (A) In general.--The term “prevailing party” means any
     party in any proceeding to which subsection (a) applies
     (other than the United States or any creditor of the
     taxpayer involved)--

                 (i) which--

                      (I) has substantially prevailed with respect
                 to the amount in controversy, or

                      (II) has substantially prevailed with respect
                 to the most significant issue or set of issues
                 presented, and

               (ii) which meets the requirements of the 1st
          sentence of section 2412(d)(1)(B) of title 28, United
          States Code (as in effect on October 22, 1986) except
          to the extent differing procedures are established by
          rule of court and meets the requirements of section
          2412(d)(2)(B) of such title 28 (as so in effect).

Nothing in section 7430 requires that the moving party satisfy

the other requirements of 28 U.S.C. sec. 2412(d)(1)(B), including

the requirement that the moving party allege that the

Government’s position was not substantially justified.    Rather,

section 7430(c)(4)(B)(i) makes it clear that the Commissioner

bears the burden of proving that his position was substantially

justified.2   Corson v. Commissioner, 123 T.C. at 206.


     2
      Before amendment in 1996 by the Taxpayer Bill of Rights 2,
Pub. L. 104-168, sec. 701, 110 Stat. 1463, the taxpayer bore the
burden of proving that the Commissioner’s position was not
                                                    (continued...)
                               - 9 -

      The Tax Court has set forth in Rule 231(b) the required

contents of a motion for litigation and administrative costs.

Petitioners’ motion meticulously complied with those

requirements.   On the basis of the foregoing, we hold that

petitioners’ motion is not deficient on its face because

petitioners failed to allege that respondent’s position was not

substantially justified.

II.   Whether Respondent Has Shown That His Position Was
      Substantially Justified

      We next consider whether respondent has shown that his

position was substantially justified.   For purposes of deciding a

motion for reasonable administrative costs, an administrative

proceeding is a procedure or action before the IRS, sec.



      2
      (...continued)
substantially justified. The House report accompanying the
amendment explained the purpose of shifting the burden to the IRS
as follows: “The Committee believes that it is appropriate for
the IRS to demonstrate that it was substantially justified in
maintaining its position when the taxpayer substantially
prevails”. H. Rept. 104-506, at 36 (1996), 1996-3 C.B. 49, 84.
As we noted in Fla. Country Clubs, Inc. v. Commissioner, 122 T.C.
73, 79 (2004), affd. 404 F.3d 1291 (11th Cir. 2005):

           Congress amended section 7430(c)(4) in TBOR 2 to shift
      to the Government the burden of establishing that its
      position was substantially justified. Congress shifted the
      burden by amending section 7430(c)(4)(B) to provide that a
      taxpayer cannot be a prevailing party if the Government
      demonstrates that its position was substantially justified.
      In doing so, it eliminated any direct reference to the
      “position of the United States” in section 7430(c)(4)(A).
      In its current form, therefore, the language of section
      7430(c)(4)(A) only requires that the taxpayer show that he
      or she substantially prevailed. * * * [Fn. ref. omitted.]
                              - 10 -

7430(c)(5), and the “position of the United States” in an

administrative proceeding refers to the position taken by the IRS

as of the earlier of (i) the date the taxpayer receives the

notice of decision of the IRS Appeals Office, or (ii) the date of

the notice of deficiency, sec. 7430(c)(7)(B); Rathbun v.

Commissioner, 125 T.C. 7, 12-13 (2005); see also sec.

301.7430-3(a), (c), Proced. & Admin. Regs.   In the instant case,

the Government first took a position in the administrative

proceeding when Appeals Office issued the notice of determination

dated October 24, 2006, which petitioners received on or about

October 31, 2006.   See sec. 7430(c)(7)(B)(i); Owen v.

Commissioner, T.C. Memo. 2005-115.

     A court proceeding, for purposes of section 7430, means any

civil action brought in a court of the United States, including

this Court, sec. 7430(c)(6), and the “position of the United

States” in a court proceeding is the position taken by the IRS in

a judicial proceeding to which section 7430(a) applies, sec.

7430(c)(7)(A).   In the instant case, respondent’s initial

litigation position is that taken in his answer to petitioner’s

petition.   Sec. 7430(c)(7)(A); see Huffman v. Commissioner, 978

F.2d 1139, 1148 (9th Cir. 1992), affg. in part, revg. in part and

remanding T.C. Memo. 1991-144.

     We may consider the Commissioner’s administrative and

litigation positions together if the Commissioner maintains the
                                - 11 -

same position throughout the administrative and litigation

process.     Huffman v. Commissioner, supra at 1144-1147; Maggie

Mgmt. Co. v. Commissioner, 108 T.C. at 442.    In the instant case,

respondent concedes that he has maintained the same position

since issuing the initial notice of determination on October 24,

2006.   Respondent’s position in that notice of determination was

that petitioners held a nominee interest in the trust property.

Accordingly, our inquiry will be limited to the question of

whether respondent has shown that that position was substantially

justified.

     The Commissioner’s position is substantially justified if it

has a reasonable basis in both fact and law and is justified to a

degree that could satisfy a reasonable person.     Corson v.

Commissioner, supra at 206; Maggie Mgmt. Co. v. Commissioner,

supra at 443.    The reasonableness of the Commissioner’s position

is determined on the basis of the available facts that formed the

basis for the position, as well as the controlling law.        Maggie

Mgmt. Co. v. Commissioner, supra at 443; DeVenney v.

Commissioner, 85 T.C. 927, 930 (1985).    A position that was

reasonable when established may become unreasonable in the light

of changed circumstances.    See sec. 301.7430-5(c)(2), Proced. &

Admin. Regs.    A significant factor in determining whether the

Commissioner acted reasonably as of a given date is whether, on

or before that date, the taxpayer presented all relevant
                               - 12 -

information under the taxpayer’s control.    Corson v.

Commissioner, supra at 206-207; sec. 301.7430-5(c)(1), Proced. &

Admin. Regs.    Respondent does not contend, and the record does

not suggest, that petitioners failed to present all relevant

evidence before the Appeals Office issued the initial notice of

determination.    The record shows that no new relevant facts

emerged during the proceedings in this Court or during the

Appeals Office hearing on remand.

       Respondent contends that his position was substantially

justified because it had a reasonable basis in the facts and the

law.    In Dalton II, we held that the Appeals Office had abused

its discretion when it refused to consider petitioners’ offer-in-

compromise on the basis of its conclusion that petitioners had a

nominee interest in the trust property.    The question of whether

an abuse of discretion has occurred requires an inquiry into

whether the discretion was exercised “without sound basis in fact

or law.”    See Murphy v. Commissioner, 125 T.C. 301, 308 (2005),

affd. 469 F.3d 27 (1st Cir. 2006); Freije v. Commissioner, 125

T.C. 14, 23 (2005).

       The standard we apply for purposes of deciding whether the

Commissioner’s position is substantially justified uses similar

language:    “The Commissioner’s position is substantially

justified if it has a reasonable basis in both fact and law and

is justified to a degree that could satisfy a reasonable person.”
                               - 13 -

Corson v. Commissioner, supra at 206; see also Maggie Mgmt. Co.

v. Commissioner, supra at 443.    However, we are not required to

hold that the Commissioner’s position lacked substantial

justification in all cases where the Commissioner abused his

discretion.    See Rowe v. Commissioner, T.C. Memo. 2002-136; Mid-

Del Therapeutic Ctr., Inc. v. Commissioner, T.C. Memo. 2000-383,

affd. 30 Fed. Appx. 889 (10th Cir. 2002); Mauerman v.

Commissioner, T.C. Memo. 1995-237.      For example, we have held

that the Commissioner generally is not subject to an award of

litigation costs under section 7430 if the case is one of first

impression, even where we hold that the Commissioner abused his

discretion in the underlying case.      See Rowe v. Commissioner,

supra; Mid-Del Therapeutic Ctr., Inc. v. Commissioner, supra.       We

must consider the facts and circumstances of the particular case.

See Rowe v. Commissioner, supra; Mid-Del Therapeutic Ctr., Inc.

v. Commissioner, supra.

     Although Dalton I was decided on the administrative record,

the parties’ constructions of the documents in that record were

different.    As we noted in our opinion in Dalton I, in their

motions “the parties [appeared] to advance conflicting views with

respect to the contours of the proper record for review and which

party is attempting to exceed the bounds of the record.”     In our

opinion in Dalton I we adopted a construction of the

administrative record that was closer to the construction
                               - 14 -

advanced by petitioners.    After setting forth our construction of

the administrative record, we examined the Appeals Office’s

application of law, and we concluded that the Appeals Office had

failed to apply the correct law because it did not apply State

law.    Accordingly, we remanded the case to the Appeals Office,

directing it to apply Maine law to determine whether petitioners

had a nominee interest in the trust property.

       However, on remand, when the Appeals Office requested an

advisory opinion from the Office of Chief Counsel, the opinion

from the Office of Chief Counsel gave only cursory treatment to

Maine law, summarily concluding that Maine law is silent with

regard to the nominee doctrine.    In our Opinion in Dalton II, we

rejected respondent’s legal position, concluding that Maine law

is not undeveloped on the issue of nominee interest and that

under Maine law petitioners did not have a nominee interest in

the trust property.    Dalton II, 135 T.C. at 407-415.   We also

concluded that, even using the Federal factors analysis,

petitioners did not have an interest in the trust property.        Id.

at 415-423.    We therefore held that respondent’s Appeals Office

had abused its discretion when it concluded that petitioners did

have a nominee interest in the trust property.    Id. at 423.

       When we decide that the Commissioner’s Appeals Office has

abused its discretion, we are holding that its conclusion is

“without sound basis in fact or law.”    See Murphy v.
                               - 15 -

Commissioner, supra at 308; Freije v. Commissioner, supra at 23.

However, in his objection to the instant motion, respondent

contends that his position was substantially justified because it

had a reasonable basis in the facts and the law.

     Respondent appears to misunderstand the standard for

“substantially justified” and our holding in Dalton II.

Respondent contends that his position was substantially justified

because it was reasonable for him to conclude that Maine law was

undeveloped.   However, our holding in Dalton II went further than

simply holding that petitioners had no interest in the trust

property under Maine law; we also held that petitioners would

have no interest in the trust property even if Federal law

applied.   See Dalton II, 135 T.C. at 416-423.

     Moreover, in our opinions in both Dalton I and Dalton II we

disagreed with respondent’s construction of documents in the

administrative record.   See id. at 394-400.     In some particulars,

the Appeals Office’s findings appeared to exceed the facts that

were established by those documents.    It appears that respondent

still has not accepted our construction of the administrative

record.    During the hearing on remand, in his motion for summary

judgment in Dalton II, and in his opposition to petitioners’

motion now before the Court, respondent advanced proposed

findings of fact in conflict with our opinion in Dalton I.     For

example, respondent continued to contend that during 1983
                              - 16 -

petitioners exchanged lots 3 and 4 with Mr. Dalton Jr.’s father

(Mr. Dalton Sr.) for no consideration despite the fact that we

had found, in Dalton I, that Mr. Dalton Sr. assumed the mortgage

on lot 3.   Respondent continued to insist that when Mrs. Dalton

Jr. cosigned a mortgage on lots 3 and 4 with Mr. Dalton Sr.

during 1993, she was treating those lots as her property, despite

the fact that we had found that she did so only at the request of

the bank because of the bank’s concern about Mr. Dalton Sr.’s

advanced age.   Respondent continued to assert that because there

was no written lease evidencing a rental agreement between

petitioners and Mr. Dalton Sr., they were living on the Poland

property and treating it as their own, despite the fact that we

had found petitioners paid rent on the Poland property pursuant

to an oral agreement.

     In some cases, the Appeals Office’s findings were simply

unsupported by the documents in the record.   Because we were

reviewing the Appeals Office’s determination for abuse of

discretion, by disagreeing with its construction of documents in

the administrative record we were concluding that respondent’s

construction of those documents, i.e., his basis in fact, was not

reasonable.

     Accordingly, we reject respondent’s contention that his

position was substantially justified because it had a reasonable

basis in the facts and the law.   However, as noted above, our
                              - 17 -

inquiry does not end here.   Respondent’s position may still be

substantially justified if, examining all the facts and

circumstances, we find other facts that make his position

substantially justified.   See Rowe v. Commissioner, T.C. Memo.

2002-136; Mid-Del Therapeutic Ctr., Inc. v. Commissioner, T.C.

Memo. 2000-383.   However, the instant case did not involve an

issue of first impression, and we do not find any other facts or

circumstances that would make respondent’s position substantially

justified.

     Accordingly, on the basis of the foregoing, we conclude that

respondent’s position was not substantially justified and that,

therefore, petitioners were the prevailing party.

III. Whether Petitioners Are Entitled to Litigation and
     Administrative Costs in the Amounts Claimed

     In an affidavit attached to their motion for award of

litigation and administrative costs, petitioners claim that they

are entitled to costs dating back to 1999.     Respondent contends

that petitioners are not entitled to costs incurred before

October 31, 2006, the date on which petitioners received the

initial notice of determination and began to prepare their

petition for filing in this Court.     We agree with respondent.

     Section 7430(a) permits a taxpayer to recover reasonable

administrative costs incurred in connection with an

administrative proceeding.   Pursuant to section 301.7430-3(a)(4),

Proced. & Admin. Regs., an “administrative proceeding” does not
                               - 18 -

include proceedings in connection with collection actions; i.e.,

any action taken by the IRS to collect a tax.     Sec. 301.7430-

3(b), Proced. & Admin. Regs.   Because the instant case involves a

collection action, petitioners are not permitted to recover costs

incurred in connection with the collection due process hearing.

See id.; sec. 301.7430-3(d), Example (5), Proced. & Admin. Regs.

Moreover, before petitioners received the Appeals Office’s

initial notice of determination on October 31, 2006, the IRS had

not taken a position.   See sec. 7430(c)(7); Fla. Country Clubs,

Inc. v. Commissioner, 122 T.C. 73 (2004), affd. 404 F.3d 1291

(11th Cir. 2005).   Accordingly, we deny petitioners’ claim for

costs incurred in connection with their collection due process

hearing before the Appeals Office issued its initial notice of

determination.

     Respondent contends that the fees petitioners’ attorney

charged them for reviewing the initial notice of determination

also constitute administrative costs, not litigation costs, and

that therefore those fees are subject to the limitation described

in section 301.7430-4(b)(3), Proced. & Admin. Regs.     Fees

incurred before filing a petition in the Tax Court are considered

litigation costs if those fees are “incurred in connection with

the preparation and filing of a petition”.     Sec. 301.7430-

4(c)(3)(i), Proced. & Admin. Regs.      The regulations provide two

examples to illustrate the distinction between administrative and
                              - 19 -

litigation costs when the taxpayer is filing a petition with this

Court:

          Example (1). Taxpayer A receives a notice of proposed
     deficiency (30-day letter). A files a request for and is
     granted an Appeals office conference. At the conference no
     agreement is reached on the tax matters at issue. The
     Internal Revenue Service then issues a notice of deficiency.
     Upon receiving the notice of deficiency, A discontinues A’s
     administrative efforts and files a petition with the Tax
     Court. A’s costs incurred in connection with the
     preparation and filing of a petition with the Tax Court are
     litigation costs and not reasonable administrative costs.
     Furthermore, A’s costs incurred before the administrative
     proceeding date (date of the notice of deficiency as set
     forth in § 301.7430-3(c)(3)), are not reasonable
     administrative costs.

          Example (2). Assume the same facts as in Example 1
     except that after A receives the notice of deficiency, A
     recontacts Appeals. Again, A’s costs incurred before the
     administrative proceeding date, the date of the notice of
     deficiency as set forth in § 301.7430-3(c)(3), are not
     reasonable administrative costs. A’s costs incurred in
     recontacting and working with Appeals after the issuance of
     the notice of deficiency, and up to and including the time
     of filing of the petition, are reasonable administrative
     costs. A’s costs incurred in connection with the filing of
     a petition with the Tax Court are not reasonable
     administrative costs because those costs are litigation
     costs. Similarly, A’s costs incurred after the filing of
     the petition are not reasonable administrative costs, as
     those are litigation costs.

Sec. 301.7430-4(c)(4), Proced. & Admin. Regs.   As those examples

make clear, a taxpayer begins incurring litigation costs as soon

as the taxpayer “discontinues” the taxpayer’s administrative

efforts.   We must therefore decide at what time petitioners

discontinued their administrative efforts.

     Petitioners never recontacted the Appeals Office after they

received the initial notice of determination.   On October 31 and
                               - 20 -

November 1, 2006, petitioners’ attorney reviewed the notice of

determination from the IRS, wrote a “file memo” for his clients,

and had a telephone conference with his clients.   After that

telephone conference petitioners’ attorney began researching and

drafting the petition.   Although it is unclear from the record at

exactly what time petitioners decided to discontinue their

administrative efforts and file a petition in the Tax Court, the

record shows that they had made that decision by November 1,

2006, when they had their first conversation about the issue with

their attorney.   The regulations make it clear that a taxpayer

can decide to discontinue administrative efforts “Upon receiving

the notice of deficiency”; i.e., without incurring any further

administrative costs.    See sec. 301.7430-4(c)(4), Example (1),

Proced. & Admin. Regs.   Because petitioners never recontacted the

Appeals Office and almost immediately directed their attorney to

begin preparing a petition to file in this Court, we conclude

that petitioners began incurring litigation costs as soon as they

received the initial notice of determination.   We therefore

reject respondent’s argument that some of those costs were

administrative.

IV.   Whether the Attorney Fees and Other Costs That
      Petitioners Seek To Recover Are Reasonable in Amount

      Respondent concedes that if the Court decides that

petitioners are the prevailing party, the litigation costs they

claim beginning on November 2, 2006, are reasonable at the
                              - 21 -

claimed rate of $150 per hour.   As explained above, we also hold

that petitioners are entitled to litigation costs for fees

incurred on October 31 and November 1, 2006.   However, we note

that petitioners’ attorney made several typographical or

mathematical errors when computing the proper amount of

attorney’s fees.   After correcting for those errors, we hold that

petitioners are entitled to an award for litigation costs of

$45,248.11, which includes $45,015 in attorney’s fees and $233.11

in filing, printing, and mailing costs.

     In reaching these holdings, we have considered all the

parties’ arguments, and, to the extent not addressed herein, we

conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                          An appropriate order and

                                    decision will be entered.
