                          T.C. Memo. 1998-249



                        UNITED STATES TAX COURT



    EARL M. HASBROUCK AND DONNA M. HASBROUCK, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10964-96.                         Filed July 7, 1998.



     Earl M. Hasbrouck and Donna M. Hasbrouck, pro sese.

     Joan S. Dennett, for respondent.


                MEMORANDUM FINDINGS OF FACT AND OPINION

     CARLUZZO, Special Trial Judge:     This case was assigned

pursuant to section 7443A(b)(3) of the Internal Revenue Code, as

amended and in effect when the petition was filed, and Rules 180,

181, and 182.    Unless otherwise indicated, section references are

to the Internal Revenue Code, as amended and in effect for the
                               - 2 -


relevant period.   Rule references are to the Tax Court Rules of

Practice and Procedure.

     This case is before the Court on petitioners’ motion for

litigation and administrative costs pursuant to section 74301 and

Rule 231.

     In a notice of deficiency issued on February 29, 1996,

respondent determined deficiencies in petitioners’ 1990, 1992,

and 1994 Federal income taxes in the amounts of $307, $818, and

$1,215, respectively.

     The petition was filed on May 31, 1996, and on July 26,

1996, respondent's answer was filed.   On November 27, 1996, a

stipulated decision was entered in which the parties agreed there

were no deficiencies in Federal income taxes for any of the years

in issue.   Petitioners thereafter filed the motion here under

consideration seeking an award of litigation and administrative

costs in the amount of $7,775.81 (of which $4,006.39 is

attributable to their own time).   The stipulated decision

was vacated and filed as a Stipulation of Settled Issues on

December 16, 1996.   Respondent's response to the motion was



     1
       References to sec. 7430 are to that section as amended by
sec. 1551 of the Tax Reform Act of 1986, Pub. L. 99-514, 100
Stat. 2085, 2752 (effective for proceedings commenced after Dec.
31, 1985) and by sec. 6239(a) of the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3743
(effective with respect to proceedings commenced after Nov. 10,
1988).
                                - 3 -


filed on February 18, 1997.    A hearing on petitioners’ motion was

conducted on May 27, 1997, in Helena, Montana.

     The issue for decision is whether petitioners are prevailing

parties within the meaning of section 7430(c)(4).

                         FINDINGS OF FACT

     Petitioners are husband and wife.    They filed timely joint

Federal income tax returns for the years in issue.    At the time

the petition was filed, they resided in Ulm, Montana.    References

to petitioner are to Earl M. Hasbrouck.

     Petitioner has been employed as an independent contractor in

the construction industry since 1961.    Donna M. Hasbrouck is, and

was during the relevant periods, a professional bookkeeper.   On

their 1990 and 1992 Federal income tax returns, petitioner

listed his occupation as self-employed, and Donna M. Hasbrouck

listed her occupation as bookkeeper.    Sometime in 1993,

petitioner injured his back.   On their 1994 Federal income tax

return, petitioner listed his occupation as disabled, and Donna

M. Hasbrouck again listed her occupation as bookkeeper.

     In October 1987, petitioners purchased an 80-acre tract of

land located in Ulm, Montana (the property).    Before purchasing

the property petitioners had never been engaged in the trade or

business of farming.   Petitioners purchased the property with the

intention eventually to raise livestock.
                               - 4 -


     At the time they purchased the property, petitioners lived

approximately 11 miles away in Great Falls, Montana.    A few sheds

were on the property at the time of its purchase.

     Approximately 62 acres of the property had been placed in

the Conservation Reserve Program (CRP) by the previous owner.

The CRP is a program implemented by the Agricultural

Stabilization and Conservation Service (ASCS) and the Commodity

Credit Corporation (CCC) on behalf of the U.S. Department of

Agriculture (USDA).   The purpose of the CRP is to preserve and

improve the soil and water resources of erodible cropland.      Under

the CRP, the USDA enters into a long-term contract with the owner

or operator of highly erodible cropland to convert the cropland,

which is normally devoted to the production of an agricultural

commodity, to a less intensive use.    The less intensive use is

outlined in a conservation plan developed by the Soil

Conservation Service and the local ASCS and typically requires

the owner or operator to establish a permanent vegetative cover

on the land, as well as to control noxious weeds on the CRP

acreage.

     In exchange for the owner's implementation of the

conservation plan, the CCC agrees to:    (1) Pay the owner or

operator an annual rental payment for the period of years

specified in the contract; (2) share with the owner or operator

the cost of establishing the conservation practices specified in
                                  - 5 -


the conservation plan; and (3) provide technical assistance to

assist the owner or operator in carrying out the contract.

     On December 31, 1987, petitioners signed a Form CRP-1,

Conservation Reserve Program Contract (the contract) to continue

the enrollment of the 62 acres2 in the CRP.       The contract

provided for an annual rental rate of $43 per acre and was to be

effective until 1996.    A representative of the CCC signed the

contract on February 3, 1988.

     An appendix to the contract lists the eligibility

requirements for participation in the CRP.        In pertinent part,

the appendix provides:

     2    ELIGIBILITY REQUIREMENTS

          A    In order for any person to be
               eligible for payments under this
               contract, such person must be an
               owner or operator of eligible
               cropland and --

                 *       *    *    *      *   *      *

               (2)   if an owner of eligible
                     cropland, must have owned such
                     cropland for not less than 3
                     years prior to the close of
                     the applicable period for
                     entering in Contracts with
                     CCC, unless:

                         *    *    *      *   *      *    *

                     (c)     it is determined that the
                             new owner of such

     2
       There is evidence in the record that at some later time,
65.1 acres, rather than 62 acres, were placed in the CRP.
                               - 6 -


                          cropland did not acquire
                          such cropland for the
                          purpose of placing it in
                          the CRP.

     In order for a producer3 to qualify for payments under the

CRP, an annual determination is made by the local ASCS regarding

whether the producer is actively engaged in farming.   For this

purpose, petitioners submitted, on an annual basis, a Form CCC-

502A, Farm Operating Plan For Payment Eligibility Review For An

Individual (Farm Operating Plan form or form), to the Cascade

County ASCS Office4 outlining their implementation of the

conservation plan.   The Farm Operating Plan form provides that

the information collected will be “used in applying statutory

payment eligibility and limitation provisions.”   The form defines

“Active Personal Labor” as follows:

     1.   ACTIVE PERSONAL LABOR - is personally providing
          physical activities necessary in a farming
          operation, including activities involved in land
          preparation, planting, cultivating, harvesting,
          and marketing of agricultural commodities in the
          farming operation. Other physical activities
          include those physical activities required to
          establish and maintain conserving cover crops or
          conserving use acreages and those physical
          activities necessary in livestock operations.


     3
       A producer is defined as a person who as owner, landlord,
tenant, or sharecropper would have shared in the risk of
producing the crop on the land to be placed in the CRP (or shares
in the proceeds therefrom).
     4
       At some point in the 1990's, the Cascade County
Agricultural Stabilization and Conservation Service became known
as the Cascade County Farm Service Agency.
                                - 7 -


     Petitioners submitted a completed Farm Operating Plan form

each year of the CRP contract to the Cascade County ASCS.    As a

representative example, petitioners submitted to the Court their

completed Farm Operating Plan form for the year 1996.   In

response to question 13.A. on the form, “What estimated percent

or hours of active personal management do you provide?”,

petitioners indicated “100%”.   Petitioners also indicated that

they owned 100 percent of the equipment used in the farming

operation.

     The Cascade County ASCS made an annual review of the

information provided by petitioners in their Farm Operating Plan

forms and issued what petitioners termed a “farm status

determination” each year.   As a representative example,

petitioners submitted to the Court the farm status determination

they received from the Cascade County ASCS on May 6, 1992, which

states:

     The Cascade County ASC Committee has completed its
     review of your farm operating plan for 1992.

     Based on the information submitted, the committee
     determined that you are actively engaged in a farming
     operation as an individual, separate and apart from any
     other individual or entity. It also understands that
     you are separately responsible for your interest in the
     operation.

     Based on these findings, the Committee has determined
     that you are one “person” for payment limitation
     purposes, separate and distinct from any other
     individual or entity.
                               - 8 -


     This determination is based on the facts as submitted.
     Any unrevealed circumstances could require the
     application of a more restrictive rule.

     In fulfilling the terms of the CRP contract, petitioners,

among other things, planted approximately 2,750 trees, prepared

the land and planted the grasses specified by the Soil

Conservation Service, built fences, purchased seeders, tractors,

and water tanks, and kept several goats to prevent the spread of

noxious weeds.

     On their Federal income tax returns, petitioners reported

“Wages, salaries, tips, etc.” of $38,840, $30,254, and $23,374

for taxable years 1990, 1992, and 1994, respectively.

Petitioners also reported gross receipts from petitioner's

Schedule C construction business in the amounts of $10,758 for

1990 and $15,337 for 1992.   Consistent with petitioner's disabled

status, petitioners did not attach a Schedule C for his

construction business to their 1994 Federal income tax return.

     On Schedules F attached to their Federal income tax returns

for the years in issue, petitioners reported as income the $2,580

received pursuant to the CRP contract, as well as cooperative

distributions.5   Petitioners deducted the following Schedule F

expenses:




     5
       Petitioners reported cooperative distributions of $118 and
$77 for taxable years 1992 and 1994, respectively.
                               - 9 -


                          1990          1992     1994
     Depreciation        $4,421        $2,627   $1,523
     Feed purchased         254
     Gasoline, fuel,        350           947    1,330
       and oil
     Insurance              464           468      689
     Mortgage interest    3,929         3,689    2,260
     Other interest       1,135           575
     Labor hired            149
     Repairs and          1,040         1,833    3,221
       maintenance
     Seeds and plants       254           832      188
       purchased
     Supplies purchased   2,171           457      762
     Taxes                  355           250      648
     Utilities            1,327                    640
     Veterinary fees and    253
       medicine
     Other expenses:
       Legal & acct.        222
       Miscellaneous         30            37      120
       Advertisement                       10
       Office supplies                     40      152
       Road expenses                             1,071
       Windbreak exp.                               77
         Total expenses 16,354         11,765   12,681

Petitioners’ Schedules F reflected net losses of $13,774, $9,067,

and $10,024 for 1990, 1992, and 1994, respectively.

     In April 1995, petitioners received notification from

respondent that their 1992, 1993, and 1994 taxable years were to

be examined.   In May 1995, Donna M. Hasbrouck, accompanied by

Brian Bras, an accountant with the firm that prepared

petitioners’ tax returns, traveled to respondent's offices in

Great Falls, Montana, and met with Sue E. McConaughy (Ms.

McConaughy), the tax auditor responsible for the examination. Ms.

McConaughy had previously requested information from petitioners

regarding the deductions and losses reflected on the Schedules F.
                               - 10 -


Although certain books and records relating to the property were

provided to Ms. McConaughy, it is unclear from the record whether

the farm status determination letters from Cascade County ASCS

had been provided to her at the initial meeting.

     Ms. McConaughy issued her examination report by letter dated

June 9, 1995 (the 30-day letter).   Insofar as relevant for our

purposes, the 30-day letter proposed to disallow the losses

claimed on Schedules F of petitioners' 1992, 1993, and 1994

Federal income tax returns.   The following explanation for the

proposed disallowance was provided:

     Because the amount of income you receive each year is
     fixed by the federal government, no amount of effort or
     management skill on your part can increase it.
     Therefore, it has been determined that, at this point
     in your operation, you are not yet in business.

     In order to report income and expenses on Schedule F,
     you must be in the business of farming. Because you
     are not, the use of Schedule F is not appropriate.

     The examination report reclassified the CRP income and

expenses as rental income.    The report explained the adjustments

as follows:

     Previous court rulings have determined that, when CRP
     income is not farm income, it is reported as rental
     income. Your CRP income for the three years shown has
     been reclassified as rental income and the allocable
     expenses reclassified as rental expenses.

     The expenses allocated to the rental income are only
     the ones that are directly connected with the
     maintenance of the real estate.
                                   - 11 -


     In a six-page letter dated June 22, 1995 (the protest

letter), Mr. Bras disputed Ms. McConaughy’s findings.     The

protest letter covered in detail petitioners’ acquisition of the

property in October 1987 and their subsequent use of the land

under the CRP contract.      The “Statement of Facts” portion of the

protest letter states:

     Pursuant to the CRP contract, as signed by taxpayers on
     2/3/88, taxpayers must meet strict conditions in order
     to initially qualify and continue to qualify under the
     CRP. Among those conditions are the following:

                 *       *     *     *      *   *   *

     3.   Based upon their obligation under the CRP
          contract, taxpayers have actively maintained their
          property using conservation practices and other
          farm management techniques. As stated above,
          taxpayers’ farming activities are subject to an
          annual review by the local ASCS office.

          Taxpayers have purchased seeders, tractors, water
          tanks, and built fences to prevent adjoining
          farmers’ cattle from grazing upon their land.
          Seeding the land with grass seed and building
          shelter belts is required by the CRP contract.
          Taxpayers also have purchased water tanks and haul
          water since they do not have water available on a
          yearlong basis. They have also purchased a few
          goats to prevent the spread of noxious weeds such
          as leafy spurge and knapweed. The State of
          Montana currently is attempting to eradicate the
          spread of these and other noxious weeds. Again,
          these expenditures are dictated by the terms of
          the CRP contract.

          In the initial years of operation, taxpayers paid
          wages to employees for the building of the fence
          and other farm related work. Taxpayers filed the
          appropriate payroll reports with both state and
          federal authorities on the employees’ wages.
                             - 12 -


          No expenses have been incurred since the purchase
          of the land which do not specifically relate to
          the use of the property as prescribed by the CRP
          contract. Taxpayers have not incurred costs of a
          nature which are only for the future use of their
          farm after they are no longer being paid by the
          CRP.

In the protest letter petitioners requested that the matter be

transferred to the appropriate Appeals officer if the Examination

Division did not agree with petitioners’ position.   In addition

to a Form 2848, Power of Attorney and Declaration of

Representative, and the examination report, the protest letter

listed as enclosures the following:

     CRP Contract
     Letter from ASCS Office dated 3/16/87
     Letter from ASCS Office dated 8/8/90
     Letter from ASCS Office dated 9/7/90
     Letter from ASCS Office dated 7/20/93
     Discussion of CRP payments from the “1992 Farm Income
          Tax Workbook”
     Page 17 of IRS Publication 225

The letters from the ASCS Office listed above refer to the farm

status determination letters petitioners received annually from

the Cascade County ASCS.

     Sometime in September 1995, respondent requested that

petitioners sign a waiver of the limitations period.   In a letter

dated October 2, 1995, to Mark Murray, Operations Manager at

respondent's Great Falls office, petitioners declined to sign the

waiver, stating:

     there is no need for an extension of time. This matter
     was appealed to higher authority three months ago. It
     should not even be in your office. It especially
                                - 13 -


     should not be on the desk of Sue McConaughy. I feel
     there is ample time remaining (until April 15, 1996) in
     which to get the matter before an appeals officer
     before any statute of limitations expires.
          To that end, this is a demand that you forward the
     Hasbrouck appeal to the next level. Your excuse:
     “...we need the original documents with which to send
     the matter to appeal” is, in my opinion, self-serving
     nonsense. Your tax examiner made a determination and
     issued subsequent “findings” based on what is
     available, there is no logical reason an appeal cannot
     be accomplished using the same documents.
          Request for any extension of time is denied. The
     1992, 93 and ‘94 Federal Income Tax returns of
     HASBROUCK stand as submitted. We have a right to an
     appeal. We demand that right and we demand it be
     accomplished before an 90 day letter is issued.

     In a letter dated October 26, 1995, petitioners requested

the “previous court rulings”.    Mark Murray responded to this

letter, in a letter dated October 30, 1995, which states in

relevant part:

          I am responding to your letter dated October 26,
     1995 in which you requested “...all pertinent data,
     citations of law and/or authority, and detailed
     referenced support data...” regarding the examination
     of your 1992, 1993, and 1994 federal income tax
     returns.
          I am unable to comply with your request at this
     time because, at your request, the case files and their
     contents have been forwarded to the Appeals Division in
     Denver and now fall within that office’s jurisdiction.
     I will, however, forward your request so that
     appropriate reference information from the file can be
     sent to you.

Petitioners’ case was assigned to Anita Teichrow, an Appeals

officer in the Helena Appeals Office.    In a letter dated

November 30, 1995, Ms. Teichrow again requested that petitioners

sign a consent to waive the limitations period.    Ms. Teichrow’s
                                - 14 -


November 30, 1995, letter referenced the following taxable

periods: 12/31/90, 12/31/92, 12/31/93, and 12/31/94.

     In response to Ms. Teichrow’s November 30, 1995, letter,

petitioners stated in a December 11, 1995, letter:

          Ms. Teichrow, this writer has no sympathy for the
     IRS’ position you assert in your letter(s). Given the
     fact that the IRS has, via it’s own internal action,
     deliberately intentionally delayed adjudication of the
     Hasbrouck appeal, your excuses are understandable - but
     they are still merely “excuses.” We believe you are
     attempting to justify five months of IRS delays by
     imposing unreasonable time constraints on the taxpayer.
          We are also without sympathy to the IRS’ position
     because, in your letter, you threaten, “...I cannot
     proceed with consideration of your case unless I
     receive [the extension forms] within ten days from the
     date of this [November 30] letter...” That caveat
     pretty much ends our relationship. No matter how you
     sugar-coat your comments, we believe they can be
     interpreted no other way than to be a blatant attempt
     at intimidation. Simply stated, we will not be
     intimidated by threats - or any other form of
     unprofessional conduct.

                 *      *   *     *      *   *   *

          No unjustified extension of time will be
     forthcoming. The 1992 tax deadline is still five
     months away. We suspect a reasonable appeals officer
     will be able to see the whimsical nature of the tax
     examiner’s so-called “decisions” within fifteen minutes
     of responsible review. By any mathematical standard,
     that still leaves five months time in which to dispose
     of the appeal.

Also on December 11, 1995, petitioners wrote to Paul Thornton in

Helena, Montana, whom they identify as respondent's “Regional

Director of Appeals”.   In that letter, petitioners stated:

     Inasmuch as Teichrow did voluntarily remove herself
     from the Hasbrouck tax matter after December 10th, this
     correspondence is intended to request that you
                               - 15 -


     personally intervene and take the appropriate
     administrative action to ensure that the Hasbrouck
     appeal is placed into the hands of another IRS officer
     who will have the time for a responsible review.

     Sometime in early December, petitioners spoke with Greg

Loendorf, Ms. Teichrow’s supervisor.    On the basis of this

conversation, petitioners wrote a letter dated December 14, 1995,

to Ms. Teichrow, and stated:

          To begin with, I acknowledge that your supervisor
     wants you to remain on the Hasbrouck tax matter as the
     appeals officer. I have no objections.
          Your supervisor stated that you would be able to
     schedule an appeals conference sometime during early
     January. You may schedule it at your convenience.
     Just give us sufficient warning so that we may include
     Brian Bras.
          It is my understanding that the conference is to
     be held prior to the time any ninety day letter is
     issued. It is also my understanding that, prior to the
     time the conference is held, some responsible
     individual is going to see to it that Brian Bras and I
     finally have the opportunity to review the citations of
     law and/or authority we requested long, long ago in
     support of the tax examiner’s so-called “findings.” It
     is of extreme urgency we have the opportunity to review
     this data prior to the time of any conference because
     not one person involved in this dispute really
     understands that basis for McConaughy’s allegations.

              *     *     *      *      *     *     *

          Please see to it we receive the IRS support data.

     In a letter dated December 19, 1995, Ms. Teichrow responded

to petitioners’ December 14, 1995, letter, as follows:

     I spoke with my supervisor, Greg Loendorf, yesterday,
     since my understanding of your conversation with him
     was not the same as recited in your letter dated
     December 14, 1995.
                              - 16 -


     He advised me that if you do not sign a consent, the
     90-day letter will be issued. The letter will not be
     issued until the first part of January because of the
     processing time necessary for us to do so. However,
     Mr. Loendorf told me he agreed I would hold a
     conference during the 90-day period in an attempt to
     resolve the case.

     I have not had the opportunity to review your case in
     depth. However, it appears you received copies of the
     examiner’s workpapers along with her audit report.
     Therefore, at this time, you will not receive anything
     further from me regarding “citations of law and/or
     authority.”

     I reserved a room in the Great Falls IRS office for
     Thursday, January 18, 1996 in order to hold the
     conference. * * *

By letter dated December 20, 1995, petitioners responded as

follows to Ms. Teichrow's letter of the previous day:

     The tenor of your remarks indicates you intend no co-
     operation. What is the point of scheduling a meeting
     if the IRS intends to withhold the evidence necessary
     to resolve the dispute?

              *     *     *     *      *    *     *

          We did receive copies “of the examiner’s
     workpapers and her ... report,” as you suggest. * * *
     The IRS has already been notified that none of us who
     has reviewed the examiner’s work papers and report even
     remotely understands what basis McConaughy could
     possibly have used to make the determinations she did.
     It is our right to know and understand that basis
     before any meeting is scheduled. Because it is our
     right to know and understand that basis - and also
     because none of us can draft an intelligent reply to
     the examiner’s allegations in our own defense because
     we do not know and understand that basis - this
     paragraph constitutes Notice to the IRS that until such
     time as the support data we have repeatedly requested
     are furnished, there will be no meeting. There is
     nothing to meet about.

              *     *     *     *      *    *     *
                             - 17 -


         * * * I feel it will be fair to stipulate that
    before consideration be given to future meetings, the
    IRS will be required to have the citations of law
    and/or authority and support data we requested
    delivered into our hands at least two weeks prior to
    the time any meeting is scheduled. * * *
         21 days will be considered a reasonable time in
    which to furnish the citations of law and/or authority
    and support data. * * *

     On January 2, 1996, petitioners requested from Ms. Teichrow

a complete copy of respondent's administrative file.   Ms.

Teichrow responded by letter dated January 2, 1996, as follows:

     In response to Mr. Hasbrouck’s request for a copy of
     the entire file, I am enclosing a complete copy of the
     examiner’s report including workpapers showing the
     adjustments made for 1990, 1992, 1993 and 1994. I have
     not copied the entire file as much of the remainder is
     correspondence.

     I acknowledge receipt of your letter dated December 20,
     1995. It is my understanding from this communication
     that you have declined to meet with me on January 18,
     1996.

     I will not be responding to your request for “citations
     of law and/or authority and support data” within 21
     days. As previously advised, my work is managed on a
     first-in, first-out basis. As such, I have not had an
     opportunity to make an in-depth review of your case.

     In a letter to Ms. Teichrow dated January 3, 1996,

petitioners acknowledged receipt of the copy of the examiner’s

report and stated:

     The IRS steadfastly refuses to furnish any proof that
     the deficiency it claims is based on law or fact, in
     spite of telling us: “Previous court ruling[s] have
     determined ...” “What” previous court rulings? Court
     rulings have designations so we can look them up.
     “What” are those designations?
     I do decline to meet with you until such time as you
     comply with the request made by this taxpayer on
                             - 18 -


     October 26, 1995 to furnish data in support of IRS
     argument(s) * * *.

     In a letter dated January 8, 1996, petitioners again wrote

to Ms. Teichrow’s supervisor, Greg Loendorf.   In this letter,

petitioners requested that Mr. Loendorf “see to it that some

responsible individual within your department furnishes us with a

list of personnel as it pertains to the Appeals Division 'chain

of command,' beginning with the name of the assigned appeals

officer all the way to the top.”   Petitioners also claimed that

Ms. Teichrow “refused to provide the citations of law and/or

authority and support data” that petitioners had previously

requested.

     As indicated, on February 29, 1996, respondent issued a

notice of deficiency to petitioners in which deficiencies in

their 1990, 1992, and 1994 Federal income taxes were determined.

Relevant for our purposes, the adjustments that gave rise to the

deficiencies were explained as follows:

     (a) The $9,067.00 and the $10,024 shown on the 1992
     and 1994 returns, respectively, as Schedule F farm
     losses are not allowed because it has not been
     established that any amount of loss was sustained in a
     trade or business. However, certain of these
     deductions are allowable as rental expenses, below.
     Therefore, taxable income is increased $9,067.00 for
     1992 and $10,024.00 for 1994.

     (b) Of the losses addressed above, $3,622.00 for 1992
     and $1,941.00 for 1994 were expended for the
     production, maintenance or conservation of income. The
     remainder of the losses are not allowable since they
     were not sustained in a trade or business and were not
     expended for the production, conservation or
                               - 19 -


     maintenance of income. Therefore, taxable income is
     decreased $3,622.00 for 1992 and $1,941.00 for 1994.

     (c) Due to an increase in the amount of adjusted gross
     income for 1993, as computed at Exhibit A, no amount of
     net operating loss deduction is available to be carried
     from 1993 to 1990. Consequently, the tentative
     allowance for 1990 is recaptured in full.

     In a letter dated March 18, 1996, petitioners wrote

respondent and again demanded “copies of all evidence and support

data previously requested”.    Petitioners noted that their

previous requests for the “court rulings” referenced in Ms.

McConaughy’s report have been “ignored and denied by IRS action”,

and that the “previously requested data supporting the IRS

position” was required for the “effective presentation” of

petitioners’ case.

     In a letter dated March 29, 1996, to John Rigler, Problem

Resolution Officer with respondent's Helena office, petitioners

again requested information regarding the “chain of command” for

respondent's Appeals Office.    Petitioners stated that this

information was “necessary for the preparation of our defense in

seeking adjudication.”

     Petitioners wrote another letter on April 23, 1996, to John

Rigler, again outlining their position for the “complaint before

the ombudsman” regarding the “professional protocol of the

appeals section actions.”   Petitioners also requested the

“appeals division technical operations manual outlining one-by-

one the procedural steps required of IRS personnel in appeals
                                - 20 -


resolution.”    In another letter to John Rigler, dated April 24,

1996, petitioners further requested that they be given more

information from respondent's “technical manual” regarding “the

administration of the IRS operations department for case

preparation”.

     On May 3, 1996, petitioners retained Thomas E. Towe to

represent them in this case.6

     In a letter dated May 22, 1996, John Rigler responded to

petitioners’ April 12, April 13, and April 24 letters.     Mr.

Rigler stated:

     You clearly have been frustrated in your efforts to
     find out what “court rulings” were referred to in the
     examination report proposing an adjustment to rental
     income and expenses on your 1990 income tax return. To
     rectify this problem, an IRS attorney researched this
     matter and provided me with the following information
     to give you:


          Under the Conservation Reserve Program (CRP), the
          farmer receives a yearly rental payment from the
          government in return for implementing a ten year
          conservation program. The farmer is barred from
          harvesting any crops from the land or utilizing it
          for grazing purposes. Other than planting cover
          and eradicating noxious weeds, the land must be
          left alone. See In re Matter of Lundell Farms, 86
          B.R. 582, 584 (Bankr.W.D.Wis. 1988); 7 C.F.R.
          section 704.1 et seq.

          In In re Way, 120 B.R. 81, 82 (Bankr.S.D.Tex.
          1990), the Court explained CRP as follows: “Under
          farm programs like the [CRP], owners and operators

     6
       On Mar. 6, 1997, Mr. Towe filed a motion to withdraw as
counsel of record for petitioners. Mr. Towe’s motion was granted
on Mar. 20, 1997.
                           - 21 -


     of highly erodible cropland may enter into a long-
     term contract with the Secretary of Agriculture
     providing for conversion to a less intensive use
     of that cropland. By contracting with the U.S.
     Department of Agriculture, Agriculture
     Stabilization Conservation Service (“ASCS”) not to
     place farm land into production, the farmer
     foregoes the possibility of generating farm income
     by growing crop and selling. In re Welch, 74 B.R.
     401, 403 (Bankr.S.D.Ohio 1987); In re Shepard, 75
     B.R. 501, 504 (Bankr.N.D.Ohio 1987).”

     Title 16 of the U.S. Code specifically designates
     these payments as rental payments. Once the CRP
     Contract is in place, the regulations require that
     if the property is sold or transferred, the new
     owner of the property has the right to terminate
     the CRP Contract. See 7 C.F.R. section 704.21; In
     re Waters, 90 B.R. 946 (Bankr.N.D.Iowa 1988).

     The next question, however is whether an
     individual is in a trade or business. In a
     similar situation, an individual owned 160 acres
     of farm land of which approximately 120 acres was
     tillable. The farmer then placed 116.9 acres in
     the CRP Program. In this case, the Service
     determined that the individual had retired from
     farming. Private Letter Ruling 8822064. Thus,
     absent any other facts, should an individual
     purchase farm land already in the CRP Program and
     owns no other operating farm land, the Service
     will more than likely determine that the
     individual is not in the trade or business of
     farming since there is not material participation
     occurring with respect to such commodity.

               *   *   *     *      *   *   *

There is nothing further I can do for you. As I
explained in my April 5, 1996, letter to you, the IRS
problem resolution program cannot take the place of
normal appeals channels. Since you chose not to
resolve this matter with IRS Appeals Officer Anita
Teichrow, you must decide if you wish to petition the
U.S. Tax Court. You must do so within the 90-day
statutory period. If you petition the U.S. Tax Court,
IRS District Counsel will again attempt to resolve this
                              - 22 -


     disputed tax deficiency with you short of going to
     court. * * *

     The petition in this case was filed on May 31, 1996.     In

their petition, petitioners allege that they were actively

engaged in the trade or business of farming because they:

     have a contract with the Cascade County ASCS Committee
     representing the United States Department of
     Agriculture for the CRP program which requires that
     they actively participate in the farming operation.
     They have, in fact, fulfilled the terms of their
     agreement and have, pursuant to that end, done
     considerable farming activity each year in order to
     fulfill their obligations under the CRP contract. In
     addition, they have actively managed the balance of the
     80-acre tract, i.e., they have taken care of the
     animals which the agricultural land sustains.

     In his answer, filed on July 26, 1996, respondent denies

petitioners’ allegation that they were actively engaged in the

trade or business of farming during the years in issue.

     On June 14 and July 23, 1996, Mr. Towe made written requests

for a conference with Helena District Counsel for the purpose of

settling petitioners’ case.

     In a letter dated October 16, 1996, to Mr. Towe, respondent

conceded the deficiencies against petitioners.   Respondent

explained the concession as follows:

          On September 25, 1996, the Tax Court decided the
     case of Ray v. Commissioner, [T.C. Memo. 1996-436] * *
     * which dealt with CRP payments and whether they are
     received in the taxpayer’s trade or business. The
     facts are very similar to your clients’ case. The only
     difference, however, is that in Ray, the taxpayer was a
     farmer at the time he acquired the land. In * * *
     [your] case, your clients were not farmers when the CRP
     land was purchased. Prior to the determination of the
                              - 23 -


     Ray case, our research failed to locate any other cases
     directly dealing with the issue currently in dispute.
     In light of the Court’s recent decision in Ray, we have
     reconsidered our position and we are conceding the case
     in full.

                              OPINION

     A taxpayer who is a prevailing party in an administrative or

court proceeding is entitled to an award of reasonable litigation

and administrative costs incurred in such proceedings.    Sec.

7430(a).   To be a “prevailing party”, a 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 either the amount in controversy or the

most significant issue or set of issues presented; and (3) the

taxpayer met the net worth requirements of 28 U.S.C. sec.

2412(d)(2)(B) (1994) on the date the petition was filed.    Sec.

7430(c)(4)(A).   Additionally, the taxpayer must also establish

that all available administrative remedies have been exhausted

insofar as litigation costs are concerned, sec. 7430(b)(1); that

the taxpayer has not unreasonably protracted the administrative

or judicial proceedings, sec. 7430(b)(4); and that the costs

claimed are reasonable in amount, sec. 7430(c)(1) and (2).

All of the foregoing requirements must be satisfied.     Minahan v.

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

     In response to petitioners' motion, respondent argues:      (1)

That petitioners are not prevailing parties because the position
                               - 24 -


of the United States was substantially justified; (2) that

petitioners have failed to exhaust their administrative remedies;

and (3) that the costs claimed are not reasonable.   Respondent

concedes that petitioners have satisfied the other requirements

of section 7430.

     We first consider whether respondent’s position was

substantially justified.   For the following reasons, we find that

it was.

     A position is substantially justified if it is justified to

a degree that could satisfy a reasonable person and has a

reasonable basis in both fact and law.    Pierce v. Underwood, 487

U.S. 552, 565 (1988) (interpreting similar language in the Equal

Access to Justice Act, 28 U.S.C. sec. 2412 (1988)); Nalle v.

Commissioner, 55 F.3d 189, 191 (5th Cir. 1995), affg. T.C. Memo.

1994-182; Swanson v. Commissioner, 106 T.C. 76, 86 (1996).     The

determination of reasonableness is based on all of the facts and

circumstances surrounding the proceedings.    Nalle v.

Commissioner, supra at 191.    A position has a reasonable basis in

fact if there is such relevant evidence as a reasonable mind

might accept as adequate to support a conclusion.    Pierce v.

Underwood, supra at 564-565.   A position is not substantially

justified in law if legal precedent does not provide substantial

support for the Commissioner’s position given the facts available
                              - 25 -


to the Commissioner.   Coastal Petroleum Refiners, Inc. v.

Commissioner, 94 T.C. 685, 694-695 (1990).

     Respondent has taken the position that petitioners have

failed to establish that they were actively engaged in the trade

or business of farming during the years in issue.    Respondent

took this position in the administrative proceeding when the

statutory notice of deficiency was issued to petitioners on

February 29, 1996, sec. 7430(c)(7)(B), and in the court

proceeding when the answer to the petition was filed on July 26,

1996.   We may consider the reasonableness of respondent's

position in the administrative proceeding separately from

respondent's position in the judicial proceeding.    Huffman v.

Commissioner, 978 F.2d 1139, 1144-1147 (9th Cir. 1992), affg. in

part, revg. in part and remanding on another issue T.C. Memo.

1991-144.   In this case, however, because the positions are the

same, we consider them in a single analysis.

     Petitioners argue that respondent's position was not

substantially justified either in fact or in law.    In

petitioners' view, the fact that the property was subject to the

CRP contract conclusively establishes that they were actively

engaged in the trade or business of farming for purposes of

section 162(a) during the years in issue.    They point out that

the USDA and the Internal Revenue Service (IRS) are both agencies

of the United States and suggest that because the former agency
                               - 26 -


determined that they were "actively engaged in farming",

respondent's position that they were not actively engaged in the

trade or business of farming cannot be considered substantially

justified.   In addition they argue that respondent's concession

of the underlying deficiencies is in effect tantamount to a

concession that his position was not substantially justified.

     We disagree with petitioners on both points.   As pointed out

by respondent, the "determination" made by the USDA through the

Cascade County ASCS that petitioners were "actively engaged in

farming" is not a determination for Federal income tax purposes

that petitioners were actively engaged in a trade or business for

purposes of section 162(a).   It is clear to us that different

criteria are taken into account in making such determinations.

For example, a profit motive is necessary to support a deduction

claimed under section 162.    Nothing in the record suggests that a

profit motive is necessary to qualify for CRP payments.

Furthermore, the fact that the Commissioner ultimately concedes

all or part of a case is not sufficient to establish that the

Commissioner’s position was unreasonable, Sokol v. Commissioner,

92 T.C. 760, 765-767 (1989); Sher v. Commissioner, 89 T.C. 79, 87

(1987), affd. 861 F.2d 131 (5th Cir. 1988), but is merely a

factor to be considered, Estate of Perry v. Commissioner, 931

F.2d 1044, 1046 (5th Cir. 1991).
                                - 27 -


     Deductions, such as those claimed by petitioners on their

Schedules F, are a matter of legislative grace.    A taxpayer

claiming such deductions must prove entitlement to them.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).     In

particular, for a taxpayer to claim a deduction on a Schedule F,

the taxpayer must establish that the farming activity constitutes

a trade or business.    The Supreme Court has stated that "to be

engaged in a trade or business, the taxpayer must be involved in

the activity with continuity and regularity and * * * the

taxpayer's primary purpose for engaging in the activity must be

for income or profit.    A sporadic activity * * * does not

qualify."    Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

The question of whether a taxpayer is engaged in a trade or

business requires an examination of all the relevant facts.

Id. at 35.   In applying the facts and circumstances test, courts

have focused on three factors indicative of whether a trade or

business exists.

     First, the taxpayer must undertake the activity intending to

make a profit.     Drobny v. Commissioner, 86 T.C. 1326, 1340

(1986), affd. 113 F.3d 670 (7th Cir. 1997); Green v.

Commissioner, 83 T.C. 667, 687 (1984).    Second, the taxpayer must

be regularly and actively involved in the activity.     Snyder v.

United States, 674 F.2d 1359, 1364 (10th Cir. 1982).    Third, the

taxpayer’s business operations must have actually commenced.
                              - 28 -


Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), affd. without

published opinion 691 F.2d 490 (3d Cir. 1982).

     Respondent developed his position in this case on the basis

of his examination and investigation of petitioners’ returns.

Cf. Powers v. Commissioner, 100 T.C. 457, 473 (1993), affd. in

part, revd. in part and remanded 43 F.3d 172 (5th Cir. 1995).

Other than the information relevant to the qualification of the

property for the CRP contract, petitioners failed or refused to

provide complete information to respondent regarding whether they

were actively engaged in the trade or business of farming during

the years in issue.   Some of the factors respondent took into

account in determining that petitioners were not engaged in the

trade or business of farming include:   (1) Petitioners had not

engaged in the business of farming prior to their purchase of the

property in 1987; (2) petitioners' only activities with respect

to the property during the years in issue were those undertaken

pursuant to the CRP contract; (3) petitioners planned to start a

cattle operation on the land after the expiration of the CRP

contract; (4) petitioners resided approximately 11 miles from the

property during the years in question; (5) petitioner was

employed in the construction industry and Donna M. Hasbrouck was

employed as a bookkeeper during the years in issue; (6)

petitioner sustained a back injury in 1993 which resulted in his

listing his occupation as "disabled" on petitioners' 1994 tax
                              - 29 -


return; (7) petitioners earned substantial amounts of income from

sources other than their farming activity for the years in issue;

and (8) petitioners incurred significant losses from their

farming activity during the years in issue which they used to

offset their other income.

     From the foregoing facts, we do not consider it unreasonable

for respondent to have concluded that petitioners' activities in

connection with the property did not constitute a trade or

business during the years in issue.    Accordingly, we find that

respondent’s position had a reasonable basis in fact.

     Petitioners also contend that respondent's position was not

substantially justified in law because it is inconsistent with

positions taken by the Commissioner in two private letter rulings

and Ray v. Commissioner, T.C. Memo. 1996-436.

     The rulings consider whether CRP payments were includable in

the taxpayers' net earnings from self-employment and therefore

subject to the self-employment tax imposed by section 1401.    The

Commissioner's conclusions regarding the nature of the CRP

payments, as articulated in the rulings, were dependent upon

factual determinations focusing on whether the taxpayers

materially participated in the trade or business of farming

during the relevant years.   The private letter rulings do not

stand for the proposition that a taxpayer is actively engaged in

the trade or business of farming merely because the taxpayer is
                              - 30 -


eligible to receive CRP payments with respect to certain

property.7

     Nor do we agree, as petitioners suggest, that Ray v.

Commissioner, supra, supports a finding that respondent’s

position was not substantially justified in law.   As in the

private letter rulings, the issue in Ray was whether CRP payments

were includible in the taxpayer's net earnings from self-

employment and therefore subject to the self-employment tax

imposed by section 1401.   To be income subject to the self-

employment tax, we stated that "the income in question must

derive from a trade or business carried on by an individual, and

that there must be a nexus between such trade or business and the

income that the individual has received."   In Ray, however, the

parties stipulated that the taxpayer was “engaged in the active

trade or business of farming and/or cattle grazing”.   Thus, the


     7
      In Rev. Rul. 60-32, 1960-1 C.B. 23, respondent took the
position that payments attributable to the acreage reserve
program described in the Soil Bank Act, title I of the
Agricultural Act of 1956, ch. 327, 70 Stat. 188 (formerly 7
U.S.C. 1801), constitute net earnings from self-employment to the
recipient unless the recipient does not operate, or materially
participate in the operation of, a farm. But see Wuebker v.
Commissioner, 110 T.C. ___ (1998)(rejecting the reasoning of the
revenue ruling and holding that CRP payments, as rental payments,
are not subject to the self-employment tax imposed by sec. 1401).
Neither party made reference to this revenue ruling in connection
with the motion here under consideration. Because the revenue
ruling contemplates an examination of facts and circumstances, we
do not consider respondent's position in this proceeding to be
contrary to the position stated in the revenue ruling.
                              - 31 -


inquiry in that case was not whether the taxpayer had entered in

the trade or business of farming, but whether the CRP payments

had a direct nexus to the taxpayer’s existing trade or business

of farming and/or cattle grazing.   On this issue, we found that:

     Since the CRP acreage was added to his existing
     farmland, and since petitioner Connie Ray was already
     in the business of farming and ranching, this was a
     payment to him in connection with his ongoing trade or
     business. [Ray v. Commissioner, supra.8]

     The issue in dispute in Ray was obviously different from the

issue originally in dispute in this case.    Given the different

issues, and the factual distinctions between the two cases, we

consider Ray to be of limited application here, notwithstanding

respondent's concessions of the deficiencies in reliance upon

that case.   Furthermore, we do not consider the position

originally taken by respondent here to be in conflict with the

position taken by the Commissioner in Ray.

     On the basis of the facts available to respondent at the

relevant time,9 we find that respondent's position had a

reasonable basis in fact and law.   It follows, and we hold, that


     8
       We went on to hold that the CRP payments in question were
subject to the self-employment tax. Ray v. Commissioner, T.C.
Memo. 1996-436. But see Wuebker v. Commissioner, 110 T.C. ___
(1998).
     9
       Petitioners' attack on the reasonableness of respondent's
position is undermined by their failure to take full advantage of
the opportunities to meet with IRS officials in order to discuss
respondent’s adjustments and present additional information in
support of the disallowed deductions.
                              - 32 -


respondent's position in the administrative and litigation

proceedings was substantially justified.

     Because the requirements of section 7430 are conjunctive,

Minahan v. Commissioner, 88 T.C. at 497, our holding that

respondent’s position was substantially justified results in the

denial of petitioners’ motion.     Consequently, we need not address

respondent’s other objections.10

     To reflect the foregoing and the Stipulation of Settled

Issues filed on December 16, 1996,

                                      An appropriate order and

                                 decision will be entered.




     10
       We note that petitioners have requested an award for
costs incurred before the issuance of the notice of deficiency.
Administrative costs are those costs incurred in connection with
an administrative proceeding within the IRS. Sec. 7430(a)(1),
(c)(5). Sec. 7430, for present purposes, limits recoverable
administrative costs to those incurred on or after the date of
the notice of the deficiency and up to the time the petition is
filed. Sec. 7430(c)(2); see Huffman v. Commissioner, 978 F.2d
1139, 1145 (9th Cir. 1992), affg. in part, revg. in part and
remanding T.C. Memo. 1991-144.
     Petitioners have also requested an award for fees for their
own time at an hourly rate of $45. Sec. 7430(c) operates to
cover actual expenditures made with regard to representation.
Consequently, pro se taxpayers are not entitled to an award for
the value of their services, because no fee is paid or incurred.
Corrigan v. United States, 27 F.3d 436 (9th Cir. 1994); United
States v. McPherson, 840 F.2d 244 (4th Cir. 1988); Frisch v.
Commissioner, 87 T.C. 838 (1986).
