                  T.C. Summary Opinion 2003-54



                      UNITED STATES TAX COURT



                ALLEN R. KRAWCZYK, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3202-01S.             Filed May 15, 2003.


     Allen R. Krawczyk, pro se.

     Russell F. Kurdys, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.    The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.   All references to

section 7430 are to that section as in effect at the time the

petition was filed.   Unless otherwise indicated, all other

section references are to the Internal Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     This case is before the Court on petitioner’s motion for

award of litigation costs pursuant to section 7430.    After

concessions,1 the issue for decision is whether petitioner is a

“prevailing party” that may be awarded a judgment for reasonable

litigation costs incurred in connection with this court

proceeding.   As explained in further detail below, we hold that

respondent’s position was substantially justified, and,

therefore, we shall deny petitioner’s motion for award of

litigation costs.

Background

     Petitioner filed a Federal income tax return for the 1999

taxable year (1999 tax return).    He claimed head-of-household

filing status, the earned income credit, and two dependency

exemption deductions.

     In April 2000, respondent began an examination of

petitioner’s 1999 tax return by requesting documentation from

petitioner to verify the claimed filing status, dependency

exemption deductions, and earned income credit.    Respondent then




     1
        Respondent concedes that petitioner has substantially
prevailed with respect to the amount in controversy or has
substantially prevailed with respect to the most significant
issue or set of issues presented.
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sent petitioner a so-called 30-day letter dated September 13,

2000, proposing adjustments to petitioner’s 1999 tax return.

     In a letter dated September 27, 2000, petitioner sent

respondent copies of several utility bills, Social Security cards

for himself and his two children, and two letters from a school

stating that the children resided with petitioner.

     Respondent responded by issuing a notice of deficiency dated

December 11, 2000, stating in part:

          We have received your correspondence on October
     11, 2002, in regard to the examination of your 1999 tax
     return.

          After reviewing the correspondence you submitted,
     we have determined that additional information is
     necessary to resolve the issues. Please see the
     enclosed explanations listing the adjusted items. In
     order for us to reconsider the proposed adjustment, you
     must submit the documentation explained on the
     attachments.

Petitioner did not submit any of the requested documentation.

Without the benefit of additional information from petitioner,

respondent determined a deficiency in petitioner’s Federal income

tax of $4,354 for the 1999 taxable year.

     Petitioner filed a petition on March 5, 2001, and an amended

petition on May 4, 2001.   At the time of filing the petition,

petitioner resided in Johnstown, Pennsylvania.

     From June 2001 to February 2002, respondent’s Pittsburgh

Appeals Office sent petitioner six letters seeking information

regarding his case.   Respondent’s counsel also sent petitioner
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two letters, one dated February 12, 2002, and another dated April

5, 2002.     Petitioner did not respond to any of these letters.

Beginning in November 2001, petitioner suffered from anxiety and

depression.

     By notice dated August 23, 2002, this case was set for trial

at a Pittsburgh, Pennsylvania, trial session scheduled to

commence November 18, 2002.2    Petitioner brought with him

information regarding his 1999 tax return.     On November 18, 2002,

the parties filed a stipulation and stipulation of settled

issues, which resolved all issues in petitioner’s favor.3

     On November 18, 2002, petitioner filed a motion for award of

litigation costs.    Petitioner seeks an award of $448,010.78.

Respondent contends that petitioner is not the prevailing party

within the meaning of section 7430(c)(4) because, while the

stipulation and stipulation of settled issues resolved all issues

in petitioner’s favor, respondent’s position was substantially

justified.    In addition, respondent contends that petitioner did

not exhaust administrative remedies and that petitioner

unreasonably protracted the proceedings.

     2
        Because of petitioner’s failure to appear at the calendar
call, respondent filed a motion to dismiss for lack of
prosecution. Upon petitioner’s subsequent appearance, we denied
respondent’s motion to dismiss.
     3
        While the documents were initially titled stipulation and
decision, the Court changed the designation when it became
apparent that petitioner intended to make a claim for litigation
costs.
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     Neither party has requested a hearing, and we conclude that

a hearing is not necessary.   Rule 232(a)(2).   Accordingly, we

decide petitioner’s motion on the basis of the motion,

respondent’s notice of objection, petitioner’s response, and

exhibits submitted by both parties.

Discussion

     Subject to certain limitations, the prevailing party in any

court proceeding may be awarded a judgment for reasonable

litigation costs incurred in connection with such court

proceeding.   Sec. 7430(a)(2).   The prevailing party must exhaust

the administrative remedies available to it within the Internal

Revenue Service, and the prevailing party must not have

unreasonably protracted any portion of the administrative or

court proceeding.   See sec. 7430(b)(1), (3).

     The term “prevailing party” means “any party * * * 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”.    Sec.

7430(c)(4)(A)(i).   And in the case of an individual taxpayer, the

term also means any party which had a net worth that did not

exceed $2,000,000 at the time the civil tax case proceeding was

commenced.    Sec. 7430(c)(4)(A)(ii) (referring to 28 U.S.C. sec.

2412(d)(1)(B) and (2)(B)(2000)).    However, a party shall not be

treated as the prevailing party if the Commissioner can establish
                                 - 6 -

that his position was substantially justified.    Sec.

7430(c)(4)(B).

     Respondent contends that petitioner is not the prevailing

party within the meaning of section 7430(c)(4) because, while the

stipulation and stipulation of settled issues resolved all issues

in petitioner’s favor, respondent’s position was substantially

justified.4    The Commissioner’s position is substantially

justified if, based on all of the facts and circumstances and the

legal precedents relating to the case, the Commissioner acted

reasonably.     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).   In other words, to be substantially justified, the

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

and fact.     Pierce v. Underwood, supra; Rickel v. Commissioner,

900 F.2d 655, 665 (3d Cir. 1990), affg. in part and revg. in part

on other grounds 92 T.C. 510 (1989).     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

(construing similar language in the Equal Access to Justice Act).

Thus, the Commissioner’s position may be incorrect but

nevertheless be substantially justified “‘if a reasonable person


     4
        As discussed above, respondent also contends that
petitioner did not exhaust administrative remedies and that
petitioner unreasonably protracted the proceedings. As a result
of our conclusion herein, we need not address respondent’s
additional contentions.
                                 - 7 -

could think it correct’”.     Maggie Mgmt. Co. v. Commissioner, 108

T.C. 430, 443 (1997) (quoting Pierce v. Underwood, supra at 566

n.2).

     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.    We look to whether the

Commissioner’s position was reasonable, in light of and subject

to the available facts and circumstances at the time that the

Commissioner took his position.     Maggie Mgmt. Co. v.

Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C.

927, 930 (1985).

     The fact that the Commissioner eventually concedes, or even

loses, a case does not establish that his position was

unreasonable.    Estate of Perry v. Commissioner, 931 F.2d 1044,

1046 (5th Cir. 1991); Sokol v. Commissioner, 92 T.C. 760, 767

(1989).   However, the Commissioner’s concession does remain a

factor to be considered.     Powers v. Commissioner, 100 T.C. 457,

471 (1993), affd. in part, revd. in part and remanded on another

issue 43 F.3d 172 (5th Cir. 1995).

     As relevant herein, the position of the United States that

must be examined against the substantial justification standard

with respect to the recovery of litigation costs is the position

taken by the Commissioner in the answer to the petition.      Sher v.
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Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988); see sec.

7430(c)(7)(A).    In the present case, respondent did not file an

answer to the petition,5 but we note that respondent’s position

was essentially the same in the administrative and litigation

proceedings.6    More specifically, respondent’s position was that

petitioner was not entitled to the head-of-household filing

status, the earned income credit, and two dependency exemption

deductions.

     Considering all the facts and circumstances, respondent did

not know and could not have known that his position was invalid

after the petition was filed.    Petitioner’s marital status and

the amount of support he provided to his children for the 1999

taxable year were unknown to respondent.    See secs. 2(b), 32,

151, 152.   On at least eight separate occasions, respondent

requested that petitioner provide documents to substantiate such



     5
        Rule 175(b) provides generally that no answer is required
where a petition is filed pursuant to sec. 7463.
     6
        The motion filed by petitioner seeks only the recovery of
litigation costs and not that of reasonable administrative costs.
If petitioner had sought to recover such costs, then we would
review the Commissioner’s position as of the date of the notice
of deficiency to determine whether he was substantially justified
with respect to the recovery of administrative costs. See sec.
7430(c)(7)(B). In the present case, respondent received
information from petitioner in a letter dated Sept. 27, 2000,
before the issuance of the notice of deficiency dated Dec. 11,
2000. However, the information provided by petitioner was
insufficient to invalidate respondent’s position. Accordingly,
petitioner would not be entitled to recovery of reasonable
administrative costs.
                               - 9 -

information.   Petitioner declined to respond.    The documents

provided by petitioner in a letter dated September 27, 2000,

while helpful, did not invalidate respondent’s position.     More

documentation was necessary for petitioner to establish that he

was entitled to the claimed filing status, deductions, and

credit.   We note that, when petitioner did bring the necessary

documents on November 18, 2002, the case was quickly resolved.

     We hold that petitioner is not entitled to an award for

litigation costs because respondent’s position was substantially

justified.   In so holding, we have carefully considered the

remaining arguments made by the parties, and to the extent not

discussed above, we consider those arguments to be without merit.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     In order to reflect the foregoing,



                                            An appropriate order and

                                       decision will be entered.
