                          T.C. Memo. 1995-569



                       UNITED STATES TAX COURT



         GABRIEL GUTIERREZ AND CONNIE GUTIERREZ, Petitioners
           v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 648-93.                   Filed November 29, 1995.



     Gabriel Gutierrez, pro se.

     Derek B. Matta, for respondent.



                          MEMORANDUM OPINION

     PARR, Judge:    This matter is before the Court on

petitioners' motion filed July 11, 1995, and supplemental motion

filed October 23, 1995, for administrative and litigation costs,

pursuant to section 7430 and Rule 231.1    At the time of filing of

     1
        All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
                                                   (continued...)
                              - 2 -

the petition herein, petitioners resided in Austin, Texas.

References to petitioner are to Gabriel Gutierrez.

     The determinations by respondent that gave rise to the

present case primarily involved unreported gross receipts from

petitioner's law practice and additions to tax for fraud.    Before

trial respondent conceded that petitioner was not liable for

fraud for tax year 1988, and that Mrs. Gutierrez was not liable

for fraud for any of the years in issue.   After concessions by

both parties and before trial, the correct deficiencies for each

of the years in issue, 1985 through 1988, were stipulated.     The

only issues for trial were the additions to tax for fraud for

1986 and 1987, as to petitioner, and/or negligence as to

petitioners for all of the years in issue, and additions for

substantial understatement for tax years 1986 through 1988.

     In our opinion filed June 12, 1995, Gutierrez v.

Commissioner, T.C. Memo. 1995-252, we accepted the stipulated

deficiencies and held that petitioner was not liable for the

fraud addition for any of the years in issue.   We held both

petitioners liable for the additions for negligence and

substantial understatement for tax years 1986 and 1987, but not

for 1988.

     Petitioners request this Court to award them reasonable

administrative and litigation costs in the amount of $39,675.68.

     1
      (...continued)
and Procedure, unless otherwise indicated.
                               - 3 -

     In general, section 7430(a) allows a taxpayer who is a

prevailing party in a civil tax proceeding to recover reasonable

administrative and litigation costs incurred in such proceeding.

A taxpayer bears the burden of proving that he or she is entitled

to the claimed costs.   Rule 232(e); Rutana v. Commissioner, 88

T.C. 1329, 1332 (1987).   To achieve this end, petitioners must

demonstrate (1) that they have exhausted the administrative

remedies available to them within the Internal Revenue Service

(IRS), section 7430(b)(1); (2) that they are the prevailing

party, section 7430(a); and (3) that they did not unreasonably

protract the proceedings, section 7430(b)(4).

     A prevailing party is one who (1) establishes that

respondent's position was not substantially justified; (2)

substantially prevailed with respect to the amount in

controversy, or with respect to the most significant issue or set

of issues presented; and (3) has a net worth which does not

exceed $2 million at the time the civil tax proceeding commences.

Sec. 7430(c)(4).

     Respondent agrees that the moving parties have substantially

prevailed, that they meet the net worth requirements, and that

the moving parties exhausted available administrative remedies.

Respondent does not agree that her position was not substantially

justified.   Respondent agrees that petitioners did not

unreasonably protract the Court proceeding, but contends that

they did unreasonably protract the administrative proceeding by
                               - 4 -

delaying the production of relevant information until after the

Appeals Division had issued the notice of deficiency.   Respondent

was unable to either admit or deny that the costs claimed were

reasonable, for lack of specific information.

      Petitioner argues that our finding of no fraud and the

computation of tax and additions to tax "which is minimal in

comparison to the notice of deficiency" indicates that respondent

was not substantially justified in her determinations in this

case.   We disagree.

      A position is substantially justified if the position is

"justified to a degree that could satisfy a reasonable person".

Pierce v. Underwood, 487 U.S. 552, 565 (1988).   Additionally, the

position must have a reasonable basis both in law and in fact.

Id.   Petitioners have not demonstrated that respondent's position

was not substantially justified.   They have not proved that

respondent's position lacked a reasonable basis in law or fact at

the time the notice of deficiency was issued or the answer was

filed, in light of the information then available to respondent.

      First, we do not agree with petitioners' calculation of the

total amount of taxes and additions to tax due in accordance with

our opinion, which they now assert is $10,604.   Respondent

originally determined income tax deficiencies totaling $112,463

plus additions to tax, including the fraud addition.    Petitioners

stipulated total deficiencies in the amount of $65,934.   In

addition, we found them liable for the negligence and substantial
                                - 5 -

understatement additions for 1986 and 1987, the years of the

largest deficiencies.

     Despite their stipulations, petitioners now claim in their

computation for entry of decision under Rule 155 they are not

liable for the taxes and additions determined by the Court for

1986 and 1987, because the notice of deficiency was issued more

than 3 years after they filed their income tax returns.    They

claim they do not fall within section 6501(e)(1)(A)(i) which

provides a 6-year statute of limitations if the taxpayer omits

from gross income more than 25 percent.   Although they raised

this affirmative defense in their petition (which respondent

denied in the answer), they did not mention it as an issue in

their opening statement at trial, on opening brief or reply

brief, or in their motion for reconsideration of our opinion.

Respondent, and the Court, had every reason to believe this

argument had been waived.

     More importantly, par. 64 of the stipulation states:    "The

petitioners agree that they are liable for deficiencies in tax in

the amounts of $3,250.00, $38,268.00, $17,071.00, and $7,345.00

for tax years 1985, 1986, 1987, and 1988, respectively."

(Emphasis added.)

     Rule 91(e) provides that a stipulation shall be treated, to

the extent of its terms, as a conclusive admission by the parties

to the stipulation, unless otherwise permitted by the Court, or

agreed upon by those parties.   The Court will not permit a party
                                - 6 -

to a stipulation to qualify, change, or contradict a stipulation

in whole or in part, except that it may do so where justice

requires.   Id.   Petitioners' stipulation as to their liability is

unqualified and unambiguous.   Petitioner is an attorney, and he

knows how to write qualifying language if that is his intention.

The amounts agreed to were the result of compromises by both

sides, and it would be a grave injustice to respondent if we were

now to permit petitioners to read a statute of limitations

exception into this stipulation.

     Second, we found that petitioner was not guilty of fraud,

but was irresponsible in his recordkeeping and breach of ethics

in commingling funds in his escrow account.   We also found that

he underreported his income in all four of the years in issue,

although the underreporting for two of the years was not caused

by petitioner but by an error made by his accountant.    We found

that petitioner's judgment was clouded by his severe alcoholism

during the years in issue, and that he did not have a fraudulent

intent; however, such a finding turned on the credibility of

petitioner's testimony and that of other witnesses.   In view of

the substantial underpayments to which petitioner has agreed and

the badges of fraud that were present (consistent underreporting,

poor recordkeeping, and commingling of funds), we believe

respondent was substantially justified in bringing the case to

trial.   It was not unreasonable for respondent to put

petitioner's credibility before the finder of fact.
                                 - 7 -

     Consequently, petitioners are not a prevailing party as

defined in section 7430(c)(4).    As a result of this holding, we

need not address the question of whether petitioner has satisfied

     the other requirements of section 7430.2      Petitioners are

not entitled to an award for reasonable administrative and

litigation costs.

     To reflect the foregoing,



                                           An order denying

                                 petitioners' motions will be

                                 issued.




     2
        We note, however, that petitioner's affidavit in support
of costs claimed is woefully inadequate. It simply lists total
amounts paid to various persons, without listing the dates,
number of hours spent, the hourly rate charged, or the specific
work performed by these individuals. Therefore, the request does
not meet the requirements of Rule 231(d).
