                         T.C. Memo. 1999-60



                       UNITED STATES TAX COURT



                   EDDIE MILLS, JR., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 6696-96.                       Filed March 3, 1999.



       Mary Ann Maxson, for petitioner.

       Elaine L. Sierra and Thomas G. Schlier, for respondent.



                         MEMORANDUM OPINION

       DEAN, Special Trial Judge:   This matter is before the Court

on petitioner's motion for award of reasonable litigation and

administrative costs under section 74301 and Rules 230, 231, and

232.



       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended. All Rule references are to
the Tax Court Rules of Practice and Procedure.
                               - 2 -


     On January 9, 1996, respondent issued to petitioner a

statutory notice of deficiency for tax year 1993 determining a

deficiency in income tax of $6,166 and a section 6662(a)

accuracy-related penalty of $1,233.

     The deficiency resulted from respondent's determination that

petitioner was not entitled to:   (a) Itemized deductions for home

mortgage interest and charitable contributions; (b) deductions

for dependency exemptions; and (c) head of household filing

status.   Respondent determined that petitioner was liable for the

section 6662 accuracy-related penalty because part of the

underpayment of tax for the year was due to negligence.

     Petitioner, then a resident of Menlo Park, California,

timely filed his petition on April 12, 1996, and it was followed

by respondent's answer, filed timely on June 3, 1996.   On

October 22, 1996, the Court issued a notice setting the case for

trial on January 6, 1997, at San Francisco, California.    The

case, however, was settled before trial, and a stipulation of

settlement was filed February 26, 1997.   The stipulation of

settlement reflects that no deficiency or overpayment is due and

that there is no liability for the accuracy-related penalty under

section 6662.

     Petitioner filed a motion for the award of litigation and

administrative costs, in response to which respondent filed a

notice of objection.   Neither party requested a hearing in this
                                - 3 -


case, and we conclude that none is necessary to decide this

motion.   See Rule 232(a)(2).

     The issues for decision are:    (1) Whether respondent's

position in the underlying proceedings was substantially

justified; and (2) whether the amount claimed by petitioner as

attorney's fees and costs is reasonable.

                            Background

     As a result of an examination of petitioner's return,

respondent disallowed for lack of substantiation:    (a)

Petitioner's deduction of home mortgage interest and charitable

contributions; (b) amounts deducted for dependency exemptions for

two children of petitioner's sister; and (c) petitioner's claim

of head of household filing status.

     Petitioner sent a letter to an Appeals officer of respondent

on October 30, 1996, 4½ months after the answer was filed.      In

the letter, petitioner's representative explained that during the

taxable year at issue petitioner lived in a house with his

mother, Jeanette Mills, his sister, Linda Mills Robertson, and

his sister's three children.    According to the letter,

petitioner's sister was receiving "AFDC" payments.    Petitioner

and his mother "shared a joint checking account" in which were

deposited funds from his mother's income and petitioner's salary,

the letter advised.   It further explained that "As a courtesy to

her son," petitioner's mother paid all the family bills from the
                               - 4 -


joint checking account; checks written on the account bore her

signature only.

      According to the October 30, 1996, letter, the family home

had originally been titled jointly in the name of petitioner's

mother and father.   The letter states that when petitioner's

father died in 1982, petitioner's mother added petitioner's

sister's name to the home mortgage held by Great Western Mortgage

Co.   On August 1, 1989, petitioner's sister caused to be recorded

a "grant deed" (copy attached to the letter of October 30, 1996)

conveying "her joint tenancy interest" in the home to her mother,

but Great Western Mortgage Co. refused to remove the sister's

name from the mortgage as a joint borrower.

      Petitioner and his mother in 1990 and 1993 jointly borrowed

$27,000 and $74,000, respectively, from Household Finance Corp.

of California evidenced by deeds of trust (copies attached to the

letter of October 30, 1996).

      Sent with the October 30, 1996, letter was a copy of a 1993

Federal income tax return for petitioner's mother, Jeanette

Mills, in which she reported adjusted gross income of $2,816, a

copy of a compilation listing church contributions in her name,

and a copy of a handwritten worksheet "showing support" of the

three children of petitioner's sister.

      On November 7, 1996, about a week after receiving

petitioner's October 30, 1996, letter, respondent's Appeals
                              - 5 -


officer offered to settle petitioner's case, agreeing to allow

$15,832 of the $19,414 in disallowed itemized deductions and

conceding the accuracy-related penalty in full.   The only

adjustments to the return not compromised under the offer of

settlement were disallowance of the deduction for two dependency

exemptions and denial of petitioner's claimed head of household

filing status.

     Respondent's offer was not accepted, the case was referred

to District Counsel for trial on November 21, 1996, and a

"Branerton"2 conference was held on December 12, 1996.

     On December 18, 1996, near close of business at 4:52 p.m.,

petitioner's representative faxed a document entitled "Dependency

Support Worksheet" to respondent that contained more detailed and

some different information than had previously been provided.    On

December 19, 1996, after close of business, at 5:57 p.m.

petitioner's representative faxed to respondent a copy of a

"grant deed" recorded June 29, 1990, conveying title to the

family home from Jeanette Mills to Jeanette Mills and petitioner

as joint tenants.

     The parties agreed to settle the case for no deficiency and

no overpayment the very next day, December 20, 1996.


     2
        See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974)
(requires informal discovery, including discussion, deliberation,
and an interchange of ideas, thoughts, and opinions between the
parties).
                               - 6 -


                            Discussion

     Section 7430(a), as in effect at the time that the petition

in this case was filed, provides that in the case of any

administrative or court proceeding brought by or against the

United States in connection with the determination, collection,

or refund of any tax, interest, or penalty, the "prevailing

party" may be awarded a judgment for reasonable administrative

costs incurred in connection with any administrative proceedings

within the Internal Revenue Service (IRS) and reasonable

litigation costs incurred in connection with such court

proceedings.   See sec. 7430(a), (c).

     To qualify as a prevailing party under the statute,

petitioner must establish that:   (1) The position of the United

States in the proceeding was not substantially justified;3 (2) he

substantially prevailed with respect to the amount in controversy

or with respect to the most significant issue presented; and (3)

he met the net worth requirement of 28 U.S.C. section

2412(d)(2)(B) on the date the petition was filed.   See sec.

7430(c)(4)(A).




     3
        Because the proceedings in this case were commenced
before the date of enactment of the Taxpayer Bill of Rights 2,
Pub. L. 104-168, sec. 701, 110 Stat. 1452, 1463, respondent does
not bear the burden of proving that the position of the United
States was substantially justified. See Maggie Management Co. v.
Commissioner, 108 T.C. 430, 441 (1997).
                                - 7 -


     Petitioner must also establish that he exhausted the

administrative remedies available to him within the IRS and that

he did not unreasonably protract the proceedings.    See sec.

7430(b)(1), (4).   Petitioner bears the burden of proof with

respect to each of the preceding requirements.     See Rule 232(e).

     Whether the Commissioner's position is substantially

justified depends upon a finding of reasonableness based upon

both law and fact.    See Pierce v. Underwood, 487 U.S. 552, 565

(1988); Powers v. Commissioner, 100 T.C. 457, 470 (1993), affd.

in part, revd. in part on another issue and remanded 43 F.3d 172

(5th Cir. 1995).   The phrase "substantially justified" does not

mean justified to a high degree but "'justified in substance or

in the main'--that is, justified to a degree that could satisfy a

reasonable person".    Pierce v. Underwood, supra at 565.

     The taxpayer need not show bad faith to establish that the

Commissioner's position was not substantially justified for

purposes of a motion for administrative or litigation costs under

section 7430.   See Estate of Perry v. Commissioner, 931 F.2d

1044, 1046 (5th Cir. 1991); Powers v. Commissioner, supra at 471.

     The Commissioner's concession of a case is a factor to be

considered.   See Powers v. Commissioner, supra.    The fact,

however, that the Commissioner eventually concedes the case is

not by   itself sufficient to establish that a position is

unreasonable.   See Estate of Merchant v. Commissioner, 947 F.2d
                                 - 8 -


1390, 1395 (9th Cir. 1991), affg. T.C. Memo. 1990-160; Powers v.

Commissioner, supra at 471; Sokol v. Commissioner, 92 T.C. 760,

767 (1989).

     The term "administrative proceeding" means any procedure or

other action before the IRS.     Sec. 7430(c)(5).   The term

"reasonable administrative costs" includes only the costs

incurred on or after the earlier of (i) the date of the receipt

by the taxpayer of the notice of the decision of the IRS Office

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

deficiency.   Sec. 7430(c)(2).    The "position of the United

States" is the position taken in an administrative proceeding

fixed by the earlier of the date the taxpayer receives the

decision of the Appeals Office, or the date of the notice of

deficiency in the case.   Sec. 7430(c)(7)(B).

     As there is no evidence of the receipt by petitioner of a

decision by the Appeals Office, the relevant document is the

notice of deficiency.   The position of the United States in the

administrative proceeding was determined by the notice of

deficiency issued January 9, 1996.

     Respondent took a position in the judicial proceeding on

June 3, 1996, when the answer was filed in the case.      See sec.

7430(c)(7)(A); California Marine Cleaning, Inc. v. Commissioner,

T.C. Memo. 1998-311; Kahn-Langer v. Commissioner, T.C. Memo.

1995-527, Lockett v. Commissioner, T.C. Memo. 1994-144 (citing
                                - 9 -


Huffman v. Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992),

affg. in part, revg. in part and remanding T.C. Memo. 1991-144).

     Here it is not necessary to analyze respondent's position

separately on each of these dates as respondent's position was

the same at both times.   See Swanson v. Commissioner, 106 T.C.

76, 87 (1996).

     In order to determine whether respondent's position in the

administrative and judicial proceedings was substantially

justified, we may analyze respondent's position in the context of

what caused respondent to take the position.   See Lennox v.

Commissioner, 998 F.2d 244, 247-249 (5th Cir. 1993), revg. in

part and remanding T.C. Memo. 1992-382.   We may also look at the

manner in which respondent maintained the position.   See Wasie v.

Commissioner, 86 T.C. 962, 969, (1986); Kahn-Langer v.

Commissioner, supra.

     We may consider events preceding the date the notice of

deficiency was issued to determine what caused respondent to take

the position.    See Lennox v. Commissioner, supra; Uddo v.

Commissioner, T.C. Memo. 1998-276; Williford v. Commissioner,

T.C. Memo. 1994-135.   The reasonableness of respondent's

position necessarily requires considering what respondent knew at

the time the position was taken.   See Rutana v. Commissioner, 88

T.C. 1329, 1332 (1987); DeVenney v. Commissioner, 85 T.C. 927,

930, (1985); Triplett v. Commissioner, T.C. Memo. 1998-313.
                                - 10 -


     We shall examine each issue raised by respondent to

determine whether respondent's position was substantially

justified.    See Powers v. Commissioner, 51 F.3d 34, 35 (5th Cir.

1995); Swanson v. Commissioner, supra at 102.

Itemized Deductions

     Charitable Contributions

     Respondent contends that respondent's position denying

petitioner's deductions for charitable contributions for lack of

substantiation was substantially justified and properly

maintained.

     Deductions for charitable contributions are allowable only

to the extent verified under Treasury regulations.    See sec.

170(a)(1).    The applicable regulations require a taxpayer to

maintain for each contribution either a canceled check, a receipt

from the donee containing certain information, or other reliable

written records.    See sec. 1.170A-13(a)(1), Income Tax Regs.

     The deduction for charitable contributions is to be claimed

by the person who made the contribution.    See Herring v.

Commissioner, 66 T.C. 308, 312 (1976).     Further, it is the source

of the funds that determines who made the contribution.      See

Clemens v. Commissioner, 8 T.C. 121, 126 (1947); Finley v.

Commissioner, T.C. Memo. 1982-411, affd. without published

opinion 720 F.2d 1289 (5th Cir. 1983).    A taxpayer, however, is

not entitled to a deduction for charitable contributions made by
                              - 11 -


a person to whom he has transferred money, unless the taxpayer

previously designated that the money transferred was to be used

for charitable purposes.   See Herring v. Commissioner, supra;

Miller v. Commissioner, T.C. Memo. 1982-491; Wilson v.

Commissioner, a Memorandum Opinion of this Court dated Feb. 21,

1952 (taxpayer not allowed to deduct the contributions of his

mother to whom he had given money).

     In this case, before the issuance of the notice of

deficiency, petitioner supplied respondent with canceled checks

made out to charitable organizations and a statement of

contributions from the East Palo Alto Seventh-Day Adventist

Church.   The canceled checks were signed by petitioner's mother

(described by petitioner as "custodian of the family assets"),

and the statement of contributions listed her as the contributor.

While the evidence was sufficient to substantiate that

petitioner's mother made charitable contributions,4 it did not

substantiate that petitioner made any charitable contributions

for the year.

     We find respondent's position on this issue to have been

reasonable in fact and law.



     4
        We note from the copy of petitioner's mother's 1993
Federal income tax return in the record that she claimed the
standard deduction. Apparently the standard deduction is larger
than the total itemized deductions, including charitable
contributions, to which she would be entitled.
                                  - 12 -


     Home Mortgage Interest

     Respondent argues that when the statutory notice was issued

and the answer was filed, petitioner had not established that he

held a legal or equitable ownership interest in the family

residence, a prerequisite to the interest deduction.     We agree

with respondent.

     A taxpayer other than a corporation may not deduct personal

interest paid or accrued during the taxable year.     See sec.

163(h).     Interest, however, paid by a taxpayer on a mortgage on

real property of which he is the legal or equitable owner may be

deducted, even if the taxpayer is not directly liable on the note

secured by the mortgage.    See sec. 1.163-1(b), Income Tax Regs.

But the deduction is limited to the amount of "qualified

residence interest".    See sec. 163(h)(2)(D).

     A "qualified residence" is the principal residence of the

taxpayer and one other residence selected by the taxpayer which

is used as a residence by the taxpayer.     Sec. 163(h)(5)(A).

     "Qualified residence interest" includes interest paid or

accrued on "acquisition indebtedness" or "home equity

indebtedness" with respect to a qualified residence of the

taxpayer.    Sec. 163(h)(3)(A).

     "Acquisition indebtedness" is indebtedness incurred in

acquiring, constructing, or substantially improving a qualified

residence of the taxpayer that is secured by the residence.      It
                              - 13 -


also includes indebtedness secured by a qualified residence of

the taxpayer incurred in refinancing acquisition indebtedness.

Sec. 163(h)(3)(B).

     "Home equity indebtedness" is indebtedness secured by a

qualified residence that is other than acquisition indebtedness.

Sec. 163(h)(3)(C)(i).   Home equity indebtedness may not exceed

the fair market value of the qualified residence reduced by the

acquisition indebtedness, not to exceed $100,000.    See sec.

163(h)(3)(C)(i) and (ii).

     "Secured debt" is debt that is secured by an instrument such

as a mortgage or deed of trust:   (a) That makes the interest of

the debtor in the qualified residence security for payment; (b)

under which, in the case of default, the residence could be

subjected to the satisfaction of the debt; and (c) that is

recorded or otherwise perfected under State law.    Sec. 1.163-

10T(o)(1), Temporary Income Tax Regs., 52 Fed. Reg. 48417 (Dec.

22, 1987).

     There is nothing in the record that shows that, before

October 30, 1996, petitioner produced any evidence of his

ownership interest in the family home.   In the October 30, 1996,

letter petitioner's representative provided respondent with some

indirect evidence, copies of deeds of trust5 on which petitioner


     5
         An instrument in use in some States, including
                                                    (continued...)
                              - 14 -


was named cotrustor with his mother.   Naming a person in a

mortgage instrument, however, does not mean that the person owns

the property used as security.   Petitioner's sister's name

remained on the Great Western mortgage after she had apparently

conveyed her ownership interest in the property to her mother.6

See also Seattle-First Natl. Bank v. Hart, 573 P.2d 827 (Wash.

Ct. App. 1978).

     Petitioner offered no direct evidence of his legal or

equitable ownership interest in the family home until

December 19, 1996, when a copy of the "grant deed" was produced

showing the conveyance of title in the home from his mother to

him and his mother jointly.   Respondent agreed to settle the case

the very next day, conceding the mortgage interest issue.

     Even if respondent had concluded earlier, from the deed of

trust instruments alone, that petitioner was the legal or

equitable owner of the family home, petitioner failed to provide

evidence that he had paid mortgage interest from his own funds.

Usually, a deduction with respect to a joint obligation is

allowable to the party who makes the payment out of his own


     5
      (...continued)
California, that takes the place of and serves the same use as a
mortgage. In re Moore's Estate, 286 P.2d 939, 944 (Cal. Dist.
Ct. App. 1955); Bank of Italy Natl. Trust & Sav. Association v.
Bentley, 20 P.2d 940, 944 (Cal. 1933).
     6
        There is nothing in the record to show that petitioner's
sister ever obtained an ownership interest in the property.
                               - 15 -


funds.   See Finney v. Commissioner, T.C. Memo. 1976-329, and

cases cited therein.    This may require that the taxpayer claiming

the deduction produce evidence sufficient to trace the payment

directly to such funds.    See id.   The record in this case

contains no evidence that petitioner has ever provided to

respondent evidence that would allow a tracing of mortgage

interest payments to deposits of his separate funds into the

account he "shared" with his mother.7

     We therefore find that respondents's position on the

mortgage interest deduction was reasonable in fact and in law.

Dependency Exemptions

     A taxpayer is allowed as a deduction an exemption amount for

each dependent who is a child of the taxpayer under a certain age

or whose gross income is less than the exemption amount.       See

sec. 151(c)(1).   A "dependent" includes a niece or a nephew over

half of whose support for the taxable year is received from the

taxpayer.   Sec. 152(a).   Under section 152(a), the taxpayer bears


     7
        Petitioner also has not shown that the interest payments
at issue were with respect to home equity indebtedness that did
not exceed the fair market value of the residence reduced by the
acquisition indebtedness. Sec. 163(h)(3)(C)(i). Respondent
cites sec. 1.163-10T(b), (c), and (d), Temporary Income Tax
Regs., 52 Fed. Reg. 48410-48411 (Dec. 22, 1987), for the
proposition that petitioner failed to prove that the loans did
not exceed the adjusted purchase price of the home. But the rule
for equity indebtedness was changed for tax years beginning after
Dec. 31, 1987, by the Omnibus Budget Reconciliation Act of 1987,
Pub. L. 100-203, sec. 10102(a), and 101 Stat. 1330-384, amending
sec. 163(h)(3).
                               - 16 -


the burden of proving that he provided over one-half of a

dependent's support for any year for which the taxpayer claims an

exemption.   See Seraydar v. Commissioner, 50 T.C. 756, 760

(1968).   In the absence of credible evidence regarding the total

amount of support received by each claimed dependent from all

sources during the taxable year, a taxpayer cannot be said to

have carried the burden of proving that he provided more than

one-half that amount.   See Blanco v. Commissioner, 56 T.C. 512,

514 (1971); Stafford v. Commissioner, 46 T.C. 515, 518 (1966).

It was respondent's position that petitioner had not shown that

he had contributed over half the support of his niece and one

nephew.

     In the motion for litigation and administrative costs, it is

alleged that before the issuance of the notice of deficiency,

petitioner made an "attempt to submit the necessary

substantiation as requested by the examination letter."   It is

also alleged that additional documentation was submitted and,

apparently, ignored.    Petitioner fails, however, to advise either

the Court or respondent as to the nature of the substantiation

allegedly submitted.

     Exhibit 2 to petitioner's representative's letter of

October 30, 1996 (attached to respondent's notice of objection to

petitioner's motion), is described in the letter as a document

submitted during the examination of the return.   It is a copy of
                              - 17 -


handwritten notations on accounting paper that the letter

characterizes as "a worksheet showing support".   It purports to

compute the total monthly support contributed by petitioner for

petitioner's entire household.   The latter sum is divided by 6 to

compute the "house-hold support" per person that petitioner

alleges he provided for the year.   The notations indicate an

amount contributed by "Linda AFDC/Stamps (4)" and determines that

the amount contributed by petitioner is more than half the total

support of each dependent.

     We see nothing in the record that would substantiate what

were essentially mere claims by petitioner that he had supplied

half the support for his niece and nephew.   It seems that at the

time respondent took a position in the notice of deficiency and

the answer, petitioner had not substantiated any of the claimed

household payments.

     Certainly the ownership of the family home (and an amount of

support in the form of fair rental value of the home) was in

doubt until the day before the agreed settlement.   Exhibit 2 to

petitioner's letter of October 30, 1996, alleges that total

family support supplied by petitioner included $5,670 for food.

Unexplained is part V of petitioner's mother's Schedule C of her

1993 return (Exhibit 1 to petitioner's letter of October 30,

1996).   The Schedule C pertains to her "child care business" in

which she "was paid by the County of Santa Clara for providing
                             - 18 -


care to her three resident grandchildren".   The Schedule C shows

a business expense of $2,416 for food and $212 for "fast food".

The record does not indicate how, if at all, these expenses

figure in any of petitioner's support computations.

     Eventually, on December 18, 1996, petitioner submitted a

more detailed "Dependency Support Worksheet" with some additional

and some different figures (still without substantiation) from

those originally submitted in the letter of October 30, 1996.

The case was settled 2 days later.

     We find in this case that respondents's position denying

deductions for dependency exemptions was reasonable in fact and

in law.

Head of Household Filing Status

     Individuals who qualify as heads of households have special

tax rates applied to their taxable income.   See sec. 1(b).     As

relevant here, in order to qualify for head of household

treatment, a taxpayer must maintain a household which for more

than one-half of the taxable year is the principal place of abode

of a dependent of the taxpayer.   See sec. 2(b)(1)(A)(ii).

     We have found that respondent's position that petitioner had

no dependents for the taxable year was reasonable.    Because

petitioner would be eligible for head of household filing status

only if, among other requirements, his niece and nephew were his

dependents, it follows that respondent's position that petitioner
                              - 19 -


was not entitled to head of household filing status was

reasonable.

Accuracy-Related Penalty Under Section 6662

     Section 6662 imposes a penalty equal to 20 percent of the

portion of the underpayment of tax attributable to negligence or

disregard of rules or regulations.     See sec. 6662(a) and (b)(1).

Negligence is defined as any failure to make a reasonable attempt

to comply with the provisions of the Internal Revenue Code, and

the term "disregard" includes any careless, reckless, or

intentional disregard.   See sec. 6662(c).

     Petitioner has not disputed the legal standard applied by

respondent here but disputes only whether respondent had a

reasonable factual basis to believe that the legal standard

applied to him.   This case is primarily one of substantiation.

When respondent issued the statutory notice of deficiency and

filed the answer in this case, petitioner had not substantiated

deductions for charitable contributions, home mortgage interest,

and dependency exemptions.   Indeed, although respondent has

settled the issues in this case, petitioner has yet provided only

indirect or inferential evidence for most of the issues involved

here.   We conclude that the position of respondent had a

reasonable basis in fact based on the information produced during

the examination in this case before trial.
                               - 20 -


     We hold that respondent's position on the issues in this

case was substantially justified and that petitioner is not

entitled to an award for litigation and administrative costs

under section 7430.    We thus need not address the reasonableness

of the costs claimed by petitioner.     Petitioner's motion will

therefore be denied.

     To reflect the foregoing,



                                    An appropriate order and

                               decision will be entered.
