                        T.C. Memo. 2006-222



                      UNITED STATES TAX COURT



            MICHAEL AND TANYA NEYLAN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16443-05.               Filed October 23, 2006.



     Lowell E. Mann, for petitioners.

     David A. Breen, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   The instant matter is before the Court on

petitioners’ motion for reasonable administrative and litigation

costs1 pursuant to Rule 2312 and section 7430.   The issue we must


     1
      Although petitioners titled the instant motion “MOTION FOR
AWARD OF REASONABLE ADMINISTRATIVE COSTS”, the attached list of
costs includes both administrative and litigation costs. We
                                                   (continued...)
                               - 2 -

decide is whether petitioners were the prevailing party.   For the

reasons stated below, we deny petitioners’ motion for reasonable

costs.

                            Background

     At the time of filing the petition in the instant case,

petitioners resided in Roebling, New Jersey.   Vanya Tyrrell (Mrs.

Tyrrell) prepared petitioners’ 2003 Form 1040, U.S. Individual

Income Tax Return (tax return).3

     In the spring of 2005, respondent sent a letter to

petitioners requesting that they submit documentation to support

certain deductions claimed on their 2003 tax return.   This was

the initial contact letter and did not provide petitioners with

an opportunity for administrative review with respondent’s Office

of Appeals.   Petitioners did not respond with the requested

documentation.   Instead, petitioners’ attorney, Lowell E. Mann

(Mr. Mann), sent a letter protesting respondent’s proposed



     1
      (...continued)
treat petitioners’ motion as a motion for both administrative and
litigation costs.
     2
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended.
     3
      Petitioners’ tax return was one of approximately 175 tax
returns that were prepared by Vanya Tyrrell and chosen for
examination by respondent’s Correspondence Examination Unit. All
such cases involve similar unsubstantiated deductions. Lowell E.
Mann represents the petitioners in all such cases and has filed
virtually identical petitions for each such case.
                               - 3 -

adjustments and requesting that the case be transferred to

respondent’s Appeals Office.   Because petitioners failed to

submit the requested documentation substantiating the disputed

deductions, respondent determined a deficiency of $1,830 in

income for 2003 and sent petitioners a notice of deficiency on

June 13, 2005.

     Mr. Mann sent a letter to respondent requesting that

respondent rescind the notice of deficiency.   Respondent did not

rescind the notice of deficiency, and petitioners timely filed

their petition in this Court on September 6, 2005.   Respondent

filed his answer on October 17, 2005.   By notice dated November

10, 2005, the instant case was placed on the April 3, 2006,

calendar in Philadelphia, Pennsylvania.

     On March 15, 2006, Ms. Tyrrell sent documentation to support

the deductions in question to Mr. Mann.   Respondent’s Appeals

officer received the documentation from petitioners’ counsel on

March 21, 2006.   At the call of the instant case from the

Philadelphia trial session calendar on April 3, 2006, the parties

filed a stipulation of settled issues, which indicated

respondent’s concession and a reduced deficiency of $473.    In the

instant motion, petitioners now seek $3,437.50 in administrative

and litigation costs.
                                - 4 -

                             Discussion

     The prevailing party in a Tax Court proceeding may be

entitled to recover administrative and litigation costs.     See

sec. 7430(a); Rule 231.    However, a taxpayer will not be treated

as the prevailing party if the Commissioner’s position was

substantially justified.   Sec. 7430(c)(4)(B); see Pierce v.

Underwood, 487 U.S. 552, 565 (1988).      The fact that Commissioner

concedes is not determinative of the reasonableness of

Commissioner’s position.    Wasie v. Commissioner, 86 T.C. 962, 969

(1986).   The taxpayer bears the burden of proving the elements in

section 7430 required for an award of costs, except that the

taxpayer will not be treated as the prevailing party if the

Commissioner establishes that the position of the Commissioner

was substantially justified.4   See Rule 232(e).

     The Court determines the reasonableness of respondent’s

position as of the time respondent took respondent’s position.

Sec. 7430(c)(7).   In the administrative proceeding here,

respondent took a position as of the date of the notice of

deficiency.   Sec. 7430(c)(7)(B).   In the judicial proceeding,

respondent took a position when respondent filed respondent’s

answer.   Sec. 7430(c)(7)(A); Huffman v. Commissioner, 978 F.2d

1139, 1144-47 (9th Cir. 1992), affg. in part, revg. in part on



     4
      The elements of sec. 7430 other than those relevant to
whether petitioners were the prevailing party are not discussed.
                               - 5 -

other grounds and remanding T.C. Memo. 1991-144.   Respondent’s

administrative and litigation positions are substantially

justified if they have a reasonable basis in both law and fact.

Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997).

     In the instant case, we conclude that respondent’s position

was both reasonable and substantially justified in both the

administrative and judicial proceedings.   Petitioners failed to

provide the requisite documentation until after respondent issued

the notice of deficiency and filed an answer.   Deductions are a

matter of legislative grace, and petitioners must prove they are

entitled to the deductions.   Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).   In the absence of any proof

of entitlement to the disputed deductions, respondent was

reasonable to maintain his position that the disputed deductions

were not allowed.   Prouty v. Commissioner, T.C. Memo. 2002-175.

It was not until March 21, 2006, that respondent received the

documentation relating to the disputed deductions, at which time

respondent conceded the propriety of the deductions.5


     5
      Respondent also contends that petitioners protracted the
instant proceedings and are therefore ineligible for cost
recovery. Sec. 7430(b)(3). Although we do not address that
issue, since we have disposed of the instant motion on other
grounds, we note that petitioners did not provide the required
documentation to support their claimed deductions until less than
2 weeks before trial. Once in possession of the requested
documentation, respondent presumably would have conceded the
deductions at any point in the administrative or litigation
process, as respondent ultimately did on the eve of trial after
                                                   (continued...)
                                 - 6 -

Accordingly, we hold that petitioners are not entitled to recover

their administrative or litigation costs.

     We have considered all of petitioners’ contentions,6 and, to

the extent they are not addressed herein, they are irrelevant,

moot, or without merit.

     To reflect the foregoing,


                                              An appropriate order and

                                         decision will be entered.




     5
      (...continued)
receiving the documentation. Consequently, petitioners forced an
administrative proceeding and litigation, instead of a brief
exchange of correspondence.
     6
      This includes both arguments made in petitioners’ motion
and subsequent memorandum of law.
