                        T.C. Memo. 2005-116



                      UNITED STATES TAX COURT



                   HELEN E. FOY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18978-02.               Filed May 19, 2005.


     Terri A. Merriam, Wendy S. Pearson, and Jennifer A. Gellner,

for petitioner.

     Julie L. Payne and Robert Boeshaar, for respondent.



                        MEMORANDUM OPINION

     MARVEL, Judge:   This case is before the Court on

petitioner’s motion for litigation and administrative costs
                               - 2 -

(motion)1 pursuant to section 7430 and Rule 231.2   Petitioner

resided in Kenmore, Washington, when her petition in this case

was filed.

     On April 2, 2004, we received and filed petitioner’s motion.

On that date, we also received the parties’ signed decision

document, which we filed as the parties’ stipulation of settled

issues.   By order dated June 7, 2004, we ordered respondent to

file a response to petitioner’s motion.   In accordance with the

June 7 order and respondent’s June 18, 2004, motion to extend

time to file a response, which we granted on June 21, 2004,

respondent’s response to petitioner’s motion was submitted and

filed on August 4, 2004.

     On September 3, 2004, we received and filed petitioner’s

motion for leave to file a reply to respondent’s response, which

we granted.   Petitioner’s reply was filed on September 15, 2004.

On December 6, 2004, we ordered petitioner to submit, on or

before January 7, 2005, an additional declaration and supporting

documentation to support the reasonableness of the costs claimed.

On January 28, 2005, we received and filed respondent’s


     1
      Petitioner also filed an amended motion on Apr. 2, 2004.
References to petitioner’s motion are to petitioner’s amended
motion.
     2
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect on the date petitioner’s
petition was filed, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                               - 3 -

supplemental response.   On February 7, 2005, we received and

filed petitioner’s motion for leave to file supplemental

declaration supporting petitioner’s motion for litigation and

administrative costs out of time, which we granted.    On February

9, 2005, we filed petitioner’s supplemental declaration.

     Neither party requested a hearing, and, after reviewing the

relevant documents, we have concluded that a hearing on

petitioner’s motion is not necessary.    In disposing of

petitioner’s motion, we rely on the parties’ filings and attached

exhibits.

                            Background

     Petitioner and her husband, Donald Foy, invested in

Shorthorn Genetic Engineering 1984-3 (SGE 1984-3), Durham

Shorthorn Genetic Breeding Syndicate 1987-4 (DSBS 1987-4), and

Timeshare Breeding Services JV (TBS JV), three of the many

livestock breeding partnerships (Hoyt partnerships) formed and

promoted by Walter J. Hoyt III (Mr. Hoyt) and/or related

companies (Hoyt organization).3   Petitioner and Mr. Foy acquired


     3
      Walter J. Hoyt III also organized, promoted, operated, and
served as the general partner of more than 100 livestock breeding
limited partnerships from 1971 through 1998. See, e.g., River
City Ranches #1, Ltd. v. Commissioner, T.C. Memo. 2003-150, affd.
in part, revd. in part and remanded 401 F.3d 1136 (9th Cir.
2005). In general, the Hoyt partnerships purchased cattle from
related Hoyt entities for no money down and a promissory note.
See, e.g., Durham Farms #1, J.V. v. Commissioner, T.C. Memo.
2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003); Shorthorn
Genetic Engg. 1982-2, Ltd. v. Commissioner, T.C. Memo. 1996-515.
                                                   (continued...)
                               - 4 -

their partnership units jointly and titled their partnership

interests as joint tenancies with right of survivorship.

Petitioner wrote numerous checks to the Hoyt organization, and

the Hoyt organization issued Schedules K-1 (Form 1065), Partner’s

Share of Income, Credits, Deductions, etc., with respect to SGE

1984-3, DSBS 1987-4, and TBS JV to petitioner and Mr. Foy

jointly.

     Petitioner and Mr. Foy filed joint Federal income tax

returns for 1981 through 1986 on which they claimed substantial

losses and an investment credit related to their investment in

SGE 1984-3.   Following an audit and related litigation,4

respondent adjusted the Hoyt partnership losses and investment

credit claimed on petitioner and Mr. Foy’s 1981-1986 tax returns

and assessed substantial income tax deficiencies.



     3
      (...continued)
The investors in the Hoyt partnerships assumed personal liability
for the partnerships’ promissory notes, made payments on the
notes to the Hoyt partnerships, see, e.g., Shorthorn Genetic
Engg. 1982-2, Ltd. v. Commissioner, supra, and, in return,
deducted large partnership losses related to the purchase,
management, and sale of livestock, see River City Ranches #1,
Ltd. v. Commissioner, supra; Mekulsia v. Commissioner, T.C. Memo.
2003-138, affd. 389 F.3d 601 (6th Cir. 2004); Durham Farms #1,
J.V. v. Commissioner, supra; Shorthorn Genetic Engg. 1982-2, Ltd.
v. Commissioner, supra; Bales v. Commissioner, T.C. Memo 1989-
568.
     4
      According to respondent, the litigation regarding
petitioner and Mr. Foy’s investment in SGE 1984-3 was resolved by
this Court’s order and decision, entered on Nov. 27, 1996, in
Shorthorn Genetic Engg. 1984-3, Ltd. v. Commissioner, docket No.
24514-89.
                               - 5 -

     On or about August 2, 2000, petitioner submitted to

respondent Form 8857, Request for Innocent Spouse Relief, in

which she requested relief from joint and several liability for

1981-1993.5   Petitioner attached a supporting statement to the

request in which she summarized the facts and law in support of

her request for relief under section 6015(b).   Subsequently, by

letter dated July 22, 2002, to Debra Brush, the Appeals officer

to whom petitioner’s request for section 6015 relief had been

assigned, petitioner’s attorney supplemented the facts and legal

analysis in support of her request for relief under section

6015(b), (c), or (f).   In the July 22 letter, petitioner’s

attorney explained in detail the reasons why petitioner was

entitled to an allocation of liability under section 6015(c).

Among other statements, petitioner’s attorney represented that

Mr. Foy had died on June 28, 1993, that petitioner satisfied all

of the requirements for relief under section 6015(c), that there

was no fraudulent asset transfer, and that petitioner did not

have actual knowledge, at the time she signed the joint returns,

of the items giving rise to the deficiencies.   In the letter,

petitioner’s attorney also reminded Appeals Officer Brush that

the burden of proof is on the Commissioner to show actual



     5
      The years at issue in this case are 1981 through 1986. The
years 1987 through 1993 are not at issue because no deficiencies
have been determined or assessed. In addition, petitioner did
not file joint returns for 1994 through 1997.
                                - 6 -

knowledge, and she pointed out that this Court had granted relief

under section 6015(c) to another Hoyt investor under similar

factual circumstances in Mora v. Commissioner, 117 T.C. 279

(2001).    Although petitioner’s attorney continued to maintain in

the July 22 letter that petitioner was not a partner in the Hoyt

partnerships in which petitioner and Mr. Foy had invested and

that, therefore, the Hoyt partnership items on their 1981-1986

returns were items properly allocated to Mr. Foy, a fair reading

of petitioner’s contention is that she was entitled to relief

under section 6015(c) and that she did not have any actual

knowledge of the items giving rise to the deficiencies that were

allocable to Mr. Foy.

     Approximately 2 months later, respondent issued a Notice of

Determination Concerning Your Request for Relief Under the

Equitable Relief Provision of Section 6015(f) (notice of

determination) with respect to petitioner’s request for relief

under section 6015.   Although the notice of determination

referenced only section 6015(f), the explanation of adjustments

addressed petitioner’s claim for relief under section 6015(b),

(c), and (f).   The explanation of adjustments stated as follows

with respect to petitioner’s request for relief under section

6015(c):

     IRC SECTION 6015(c)--Election to Allocate Deficiency
     This subsection is commonly called “separation of
     liability” which prorates a deficiency between spouses
     filing a joint return based on their proportionate
                               - 7 -

     share of earnings. Under this section, the requesting
     spouse must establish certain conditions before a (sic)
     relief can be granted. Even if you meet the
     requirements for being a widow, you (sic) request for
     separation of liability will not be granted because you
     had actual knowledge and the reason to know of the
     items giving rise to the deficiency that were allocable
     to your spouse. [Emphasis supplied.]

     Petitioner submitted a timely petition contesting

respondent’s determination, which we filed on December 9, 2002.

In her petition, petitioner alleged, in pertinent part, that

respondent erred in concluding that petitioner did not qualify

for relief under section 6015(c) and that “Respondent made no

effort to prove, and failed to prove, that Petitioner had actual

knowledge of the factual circumstances which made the tax items

unallowable as a deduction.”   As she did with her administrative

request for relief under section 6015(c), petitioner included an

extensive recitation of the facts on which she relied in support

of her allegation, including the following:

     6.p. Neither Petitioner nor Mr. Foy had actual
          knowledge of the underlying problems with the
          transactions, nor could they have discovered that
          Jay Hoyt failed to transfer title to livestock to
          the partnership and that he was otherwise
          converting partnership assets.

              *     *     *      *     *      *   *

     6.q. Due to the complexity of Jay Hoyt’s fraud, it was
          impossible for either Petitioner or Mr. Foy to
          discover the true nature of the transactions.

     6.r. Mr. Foy and all of the Hoyt investors were
          deceived by Jay Hoyt as to the nature of their
          investment and were ultimately determined by a
          court of law to be victims of his elaborate fraud.
                                   - 8 -

     On February 11, 2003, respondent’s answer to petitioner’s

petition was filed.    In his answer, respondent denied, without

qualification, the representation in subparagraph 6.p. and denied

the representations in subparagraphs 6.q. and r. “for lack of

knowledge or information.”

     On February 23, 2004, this case was called for hearing

during the Seattle, Washington, trial session.      The parties

reported that they believed they had a basis for settlement but

were awaiting final Government approval.      The case was scheduled

for recall on March 2, 2004.    At the recall, the parties reported

that the case had been settled and requested until April 1, 2004,

to submit a signed decision document.      On April 2, 2004, the

parties submitted a signed decision document, which we filed as a

stipulation of settled issues.      The stipulation of settled issues

reflected that the parties had agreed to a section 6015(c)

allocation with respect to petitioner’s and Mr. Foy’s 1981-1986

income tax liabilities as follows:

                    Joint tax liability          Petitioner’s share
     Year            before allocation           under sec. 6015(c)

     1981             $22,995.36                        -0-
     1982              22,461.15                        -0-
     1983              24,280.00                        -0-
     1984               8,057.93                      $51.46
     1985              14,902.52                        -0-
     1986              10,607.08                        -0-

            Total     103,304.04                       51.46

The allocation of liability under section 6015(c) was made by
                               - 9 -

treating petitioner’s and Mr. Foy’s investments in SGE 1984-3 as

joint investments, allocating 50 percent of the SGE 1984-3 items

to petitioner, and adjusting the allocation, as required by

section 6015(d)(3)(B), for the tax benefit that petitioner’s

share of the partnership items provided to Mr. Foy.

     In her motion, petitioner asserted that she met all of the

requirements under section 7430 to recover litigation costs in

the amount of $11,354.04.   The administrative and litigation

costs claimed in the motion were calculated using an hourly rate

of $195 for two of petitioner’s attorneys and included a claim of

$5,916.20 for petitioner’s alleged share of attorney’s fees (the

group fees) that petitioner’s attorneys had charged to two groups

of similarly situated Hoyt investor clients with pending section

6015 claims.   In support of the motion, petitioner’s counsel

attached billing records for petitioner’s account, dated

September 10, 2002, to March 31, 2004, that described in detail

the attorney’s fees and costs petitioner incurred individually

and contained generic entries6 denoting monthly charges to

petitioner’s account for her alleged share of the group fees.

Petitioner alleged that the group fees were reasonable and that


     6
      Although petitioner agrees that the fee summary for her
account attached to the motion describes her share of the “Group
Innocent Spouse fees” as “flat” fees, petitioner contends that
the flat fee reference is simply the way in which the Pearson-
Merriam (petitioner’s attorneys’ law firm) billing program
describes sum certain fees. Petitioner’s representation is
supported by a declaration of petitioner’s counsel.
                              - 10 -

her share of the group fees had been reasonably allocated to her,

but she did not include any supporting information or

documentation to establish the nature of the work performed, the

hourly rates used, the identity of the person who performed the

work, the number of hours billed for the work, the number of Hoyt

investor clients who shared in the group fees, or the manner in

which the group fees were allocated to petitioner and to the

other Hoyt investor clients of petitioner’s attorneys.

     On August 4, 2004, we filed respondent’s response to

petitioner’s motion, in which respondent objected to an award of

costs.   Petitioner requested and was granted leave to file a

reply to respondent’s response to the motion.   On September 15,

2004, we filed petitioner’s reply to respondent’s response, which

included a supplemental declaration but did not provide any

detailed information regarding her counsel’s billing and

allocation arrangements with respect to the group fees.     On

December 6, 2004, we ordered petitioner to submit, on or before

January 7, 2005, an additional affidavit with supporting

documentation to support her contention that the group fees were

reasonable and had been reasonably allocated and that her share

of the group fees was incurred in connection with this matter.

In the December 6, 2004, order, we also authorized respondent to

submit a supplemental response addressing the information
                                - 11 -

contained in petitioner’s affidavit, on or before January 31,

2005.

     Although petitioner did not submit the requested documents

before January 7, 2005, respondent submitted a supplemental

response, which we filed on January 28, 2005.     On February 7,

2005, we received and filed petitioner’s motion for leave to file

supplemental declaration supporting petitioner’s motion for

litigation and administrative costs out of time, which we

granted.     On February 9, 2005, we filed petitioner’s supplemental

declaration, which contained billing records for fees and costs

petitioner’s attorneys had charged to common accounts for two

separate groups of Hoyt investor clients.     The billing records

provided specific information about the nature of the work

performed for the benefit of both groups of Hoyt investor clients

and included charges to the common accounts that were computed

using an hourly rate of $195 for two of petitioner’s attorneys.

                              Discussion

        Section 7430(a) authorizes the award of reasonable

administrative and litigation costs to the prevailing party in

administrative or court proceedings brought by or against the

United States in connection with the determination of income tax.

In addition to being the prevailing party, in order to receive an

award of reasonable litigation costs, a taxpayer must exhaust

administrative remedies and not unreasonably protract the
                              - 12 -

administrative or court proceeding.    Sec. 7430(b)(1), (3).

Unless the taxpayer satisfies all of the section 7430

requirements, we do not award costs.    Minahan v. Commissioner, 88

T.C. 492, 497 (1987).

     Section 7430(c)(4)(A) and (B)(i) provides that a taxpayer is

a prevailing party if (1) the taxpayer substantially prevailed

with respect to the amount in controversy or the most significant

issue or set of issues, (2) the taxpayer meets the net worth

requirements of 28 U.S.C. section 2412(d)(2)(B) (2000), and (3)

the Commissioner’s position in the administrative or court

proceeding was not substantially justified.    See also sec.

301.7430-5(a), Proced. & Admin. Regs.    Although the taxpayer has

the burden of proving that the taxpayer meets requirements (1)

and (2), supra, the Commissioner has the burden of proving that

his position was substantially justified.    See sec.

7430(c)(4)(B)(i); Rule 232(e).

     Respondent concedes that petitioner exhausted the available

administrative remedies as required by section 7430(b)(1), that

petitioner did not unreasonably protract the administrative and

court proceedings as required by section 7430(b)(3), and that

petitioner meets the net worth requirements of 28 U.S.C. section

2412(d)(2)(B).   In addition, respondent does not dispute that

petitioner substantially prevailed with respect to the amount in

controversy.   Respondent alleges, however, that his
                               - 13 -

administrative and litigating positions were substantially

justified and that the costs petitioner claims are unreasonable.

A.   Whether Respondent’s Administrative and Litigation Positions
     Were Substantially Justified

      For purposes of section 7430, an administrative proceeding

is any procedure or action before the Internal Revenue Service

(the Service), sec. 7430(c)(5), and the “position of the United

States” in an administrative proceeding refers to the position

taken by the Service as of the earlier of (i) the date of the

receipt by the taxpayer of the notice of decision of the Internal

Revenue Service Office of Appeals or (ii) the date of the notice

of deficiency, sec. 7430(c)(7)(B); see also sec. 301.7430-3(a),

(c), Proced. & Admin. Regs.    In this case, the relevant position

is that taken by the Appeals Office in the notice of

determination dated September 10, 2002.

      For purposes of section 7430, a court proceeding means any

civil action brought in a court of the United States, including

this Court, sec. 7430(c)(6), and the “position of the United

States” in a court proceeding means the position taken by the

United States in a judicial proceeding to which section 7430(a)

applies, sec. 7430(c)(7)(A).   In this case, respondent’s

litigating position is that taken in his answer to petitioner’s

petition.   See Huffman v. Commissioner, 978 F.2d 1139, 1148 (9th

Cir. 1992), affg. in part, revg. in part and remanding T.C. Memo.
                             - 14 -

1991-144; Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442

(1997).

     Although respondent’s administrative and litigation

positions are often considered separately, we may consider them

together if respondent maintains the same position throughout the

administrative and litigation process.   Huffman v. Commissioner,

supra at 1144-1147; Maggie Mgmt. Co. v. Commissioner, supra at

442; Livingston v. Commissioner, T.C. Memo. 2000-387.      In the

present case, respondent’s position in both the notice of

determination and the answer was that petitioner’s election to

allocate the joint liability under section 6015(c) was invalid

because she had actual knowledge when she signed the returns of

any items giving rise to the deficiency that were allocable to

her spouse.

     The Commissioner’s position is substantially justified if it

has a reasonable basis in both fact and law and is justified to a

degree that could satisfy a reasonable person.   Huffman v.

Commissioner, supra at 1147 n.8 (citing Pierce v. Underwood, 487

U.S. 552, 565 (1988)); Maggie Mgmt. Co. v. Commissioner, supra at

443; sec. 301.7430-5(c)(1), Proced. & Admin. Regs.   The

reasonableness of respondent’s position turns on the available

facts that formed the basis for the position and any legal

precedents related to the case.   Maggie Mgmt. Co. v.

Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C.
                              - 15 -

927, 930 (1985).   A significant factor in determining whether the

Commissioner’s position is substantially justified as of a given

date is whether, on or before that date, the taxpayer has

presented all relevant information under the taxpayer’s control

and relevant legal arguments supporting the taxpayer’s position

to the appropriate Service personnel.7   Maggie Mgmt. Co. v.

Commissioner, supra at 443; sec. 301.7430-5(c)(1), Proced. &

Admin. Regs.

     The only issue petitioner raises in her motion is whether

respondent’s position with respect to section 6015(c) was

substantially justified.   In deciding whether to award

administrative and litigation costs, therefore, we focus our

analysis on the reasonableness of respondent’s position with

respect to section 6015(c).




     7
      “[A]ppropriate Internal Revenue Service personnel” are
those employees who are reviewing the taxpayer’s information or
arguments, or employees who, in the normal course of procedure
and administration, would transfer the information or arguments
to the reviewing employees. Sec. 301.7430-5(c)(1), Proced. &
Admin. Regs.
                              - 16 -

     1.    Section 6015(c)

     Under section 6015(c), if the requesting spouse is no longer

married to,8 or is legally separated from, the spouse with whom

she filed the joint return, the requesting spouse may elect to

limit her liability for a deficiency as provided in section

6015(d).   Sec. 6015(c)(1), (3)(A)(i)(I).   The election under

section 6015(c) must be made no later than 2 years after the

Secretary9 has begun collection activities with respect to the

electing spouse.   Sec. 6015(c)(3)(B).

     In general, section 6015(d) provides that any item giving

rise to a deficiency on a joint return shall be allocated to each

spouse as though they had filed separate returns, and the

requesting spouse shall be liable only for her proportionate

share of the deficiency that results from such allocation.    Sec.

6015(d)(1), (3)(A).   To the extent that the item giving rise to

the deficiency provided a tax benefit on the joint return to the

other spouse, the item shall be allocated to the other spouse in




     8
      A requesting spouse is no longer married if she is widowed.
Rosenthal v. Commissioner, T.C. Memo. 2004-89.
     9
      The term “Secretary” means “the Secretary of the Treasury
or his delegate”, sec. 7701(a)(11)(B), and the term “or his
delegate” means “any officer, employee, or agency of the Treasury
Department duly authorized by the Secretary of the Treasury
directly, or indirectly by one or more redelegations of
authority, to perform the function mentioned or described in the
context”, sec. 7701(a)(12)(A).
                                  - 17 -

computing his or her proportionate share of the deficiency.10

Sec. 6015(d)(3)(B); Hopkins v. Commissioner, 121 T.C. 73, 83-86

(2003).

     An election under section 6015(c) is invalid, however, if

the Secretary demonstrates that the requesting spouse had actual

knowledge, when signing the return, of any item giving rise to a

deficiency that is otherwise allocable to the nonrequesting

spouse.11   Sec. 6015(c)(3)(C).    In cases involving erroneous

deductions, an individual is deemed to have actual knowledge of

an item giving rise to a deficiency if she has actual knowledge

of the factual basis for the denial of the deductions.     King v.

Commissioner, 116 T.C. 198, 204 (2001).     Although the requesting

spouse bears the burden of proving the portion of the deficiency

that is properly allocable to her, see sec. 6015(c)(2),

respondent bears the burden of proving that the requesting spouse

had actual knowledge of any items giving rise to the deficiency,

sec. 6015(c)(3)(C).




     10
      In addition, the requesting spouse’s proportionate share
of the deficiency shall be increased by the value of any
disqualified asset transferred to her by the nonrequesting
spouse. Sec. 6015(c)(4).
     11
      An election under sec. 6015(c) is also invalid if the
Secretary demonstrates that assets were transferred between the
individuals filing the joint return as part of a fraudulent
scheme. Sec. 6015(c)(3)(A)(ii).
                                - 18 -

     2.   Reasonableness of Respondent’s Position

     Respondent contends that the Appeals Office’s position in

the notice of determination was substantially justified because

the information available to the Appeals officer at the time led

her to believe that petitioner had actual knowledge and because

no allocation of the Hoyt partnership items could be made given

petitioner’s contention that all of the items were attributable

to Mr. Foy.    Respondent also contends that the position of the

Appeals Office was reasonable because the Appeals officer had no

information available from which she could determine whether any

disqualified assets within the meaning of section 6015(c)(4) had

been transferred to petitioner and whether any assets had been

transferred between petitioner and Mr. Foy as part of a

fraudulent scheme.    Sec. 6015(c)(3)(A)(ii).

     Respondent further argues that, as of the date of his

answer, “The information then available to respondent showed that

petitioner had knowledge of and had been involved with the Hoyt

organization to some degree.”    Respondent also argues that “At

the time this case was answered, the deficiencies in issue could

not be allocated between petitioner and her former spouse under

section 6015(d) because the parties disagreed about whether and

to what extent the investment in SGE 1984-3 was attributable to

petitioner.”   Respondent maintains that it was impossible to

determine with certainty whether petitioner had actual knowledge
                              - 19 -

of any item giving rise to the deficiency without further factual

development.

     We reject respondent’s justification for his administrative

and litigation position for several reasons.    First, although

respondent argues that petitioner did not present all relevant

information under her control on or before the date the notice of

determination was issued, the record for purposes of this motion

establishes otherwise.   In a protest letter dated September 26,

2001, appealing the Service’s denial of any relief under section

6015, petitioner stated that she had no actual knowledge of the

items giving rise to the liabilities in question12 and provided

respondent a detailed statement of the facts supporting her

argument that she was entitled to relief under section 6015(c),

which included a citation to our opinion in King v. Commissioner,

supra at 204.   Petitioner also offered to provide any additional

information that the Service might require.    In a subsequent

letter dated July 22, 2002, to Appeals Officer Brush, petitioner

provided an even more detailed explanation of why she believed

she qualified for relief under section 6015(c).    She reiterated

her position that she had no actual knowledge at the time she

signed the relevant returns of the items giving rise to the


     12
      A party’s statement, if credible, is evidence on which the
finder of fact may rely to establish a relevant fact. In this
case, there is nothing in the record to suggest that petitioner’s
statement regarding her lack of actual knowledge was not
credible.
                                - 20 -

deficiency, reminded Appeals Officer Brush that the Commissioner

had the burden of proving actual knowledge, and cited the Opinion

of this Court in Mora v. Commissioner, 117 T.C. 279 (2001), in

support of her position that she was entitled to relief under

section 6015(c).   Petitioner also stated that there was no

fraudulent transfer of any assets and reiterated her offer to

provide any additional information that the Appeals Office might

require.

     The Appeals Office issued its notice of determination

approximately 2 months later.    The record does not disclose any

effort by the Appeals Office to request any additional factual

information from petitioner or to pose any questions to

petitioner after the July 22, 2002, letter and before the notice

of determination was issued on September 10, 2002.   Respondent

had an opportunity to obtain any additional information he felt

he needed during the administrative proceeding, but he did not

request any additional information from petitioner until the

discovery phase of this case.    Respondent’s claim, in response to

petitioner’s motion, that he did not have sufficient information

when he filed his answer and that the lack of information was

somehow petitioner’s fault is not sufficient justification for

respondent’s litigating position under the circumstances.     See

Powers v. Commissioner, 100 T.C. 457, 473 (1993) (Commissioner’s

position was not substantially justified because it had no
                               - 21 -

factual basis, and Commissioner made no attempt to obtain

relevant information before adopting his position), affd. in

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

1995).

     Second, in determining that petitioner had actual knowledge,

respondent failed to evaluate properly the standard for actual

knowledge articulated in King v. Commissioner, 116 T.C. 198

(2001), and Mora v. Commissioner, supra, in light of the

extensive information he had acquired regarding the operation of

the Hoyt partnerships.   When the notice of determination was

issued on September 10, 2002, the Service had already entered

into a settlement agreement with Mr. Hoyt and was well aware of

the basis for adjusting the Hoyt partnership items at issue in

this case.   See River City Ranches #1, Ltd. v. Commissioner, T.C.

Memo. 2003-150; affd. in part, revd. in part and remanded 401

F.3d 1136 (9th Cir. 2005); Mekulsia v. Commissioner, T.C. Memo.

2003-138, affd. 389 F.3d 601 (6th Cir. 2004); Durham Farms #1

J.V. v. Commissioner, T.C. Memo. 2000-159, affd. 59 Fed. Appx.

952 (9th Cir. 2003); Shorthorn Genetic Engg. 1982-2, Ltd. v.

Commissioner, T.C. Memo. 1996-515; Bales v. Commissioner, T.C.

Memo. 1989-568.   Moreover, it was a matter of public record as of

September 10, 2002, that Mr. Hoyt had overstated the number and
                                - 22 -

value of cattle sold to the partnerships.   See, e.g., Mora v.

Commissioner, supra at 292.13

     In King v. Commissioner, supra at 204, we held that “the

proper application of the actual knowledge standard in section

6015(c)(3)(C), in the context of a disallowed deduction, requires

respondent to prove that petitioner had actual knowledge of the

factual circumstances which made the item unallowable as a

deduction.”   In other words, respondent had to prove that

petitioner knew the Hoyt organization had an insufficient number

of cattle to sustain the partnership deductions claimed on the

joint return and knowingly claimed improper deductions.   Nothing

in the record indicates, however, that respondent made any

reasonable effort to identify the grounds for the disallowance of

the Hoyt partnership losses and credits petitioner and Mr. Foy

claimed, or to evaluate his ability to prove that petitioner had

actual knowledge of the factual circumstances that caused the

disallowance of the Hoyt partnership items before taking his

position in this case.   Respondent should have meaningfully

evaluated whether he could prove that petitioner had actual

knowledge by taking into account the information supplied by

petitioner, the extensive audit and litigating history regarding

the Hoyt organization and the Hoyt partnerships, and the specific


     13
      By Sept. 10, 2002, Mr. Hoyt had been indicted, convicted,
and sentenced for his fraudulent activities with respect to the
Hoyt partnerships.
                              - 23 -

information regarding the manner in which the Hoyt organization

operated the Hoyt partnerships, including the ones in which

petitioner and Mr. Foy had invested.   The record does not

indicate that respondent considered any of the information that

was available to him in September 2002 before adopting his

administrative position.   Respondent’s failure to properly apply

the actual knowledge standard in the context of the information

he had acquired regarding Mr. Hoyt and the Hoyt organization in

this case cannot be rationalized.   Respondent’s lack of diligence

in evaluating his ability to prove actual knowledge, therefore,

was not justified.   See Stieha v. Commissioner, 89 T.C. 784, 791

(1987) (Commissioner’s lack of diligence in evaluating the impact

of recent court opinions not substantially justified).

     Third, the record discloses no meaningful effort on the part

of respondent to properly analyze section 6015(c) with respect to

the position, as determined by respondent, that petitioner and

Mr. Foy had invested jointly in the Hoyt partnerships.   In an

“EXPLANATION OF ITEMS” attached to the Appeal Transmittal

Memorandum and Appeals Case Memo that was prepared with respect

to petitioner’s section 6015 request, the Appeals Office took the

position that “Joint investments in the tax shelter partnerships

are considered actual knowledge and an erroneous item

attributable to both spouses” and determined that in the present

case:   “The taxpayers were into the tax shelter jointly.    The
                                - 24 -

erroneous item is attributable to both.”    In addition, respondent

admitted in the notice of determination and in his response to

petitioner’s motion that the facts available to him suggested

that the Foys invested jointly in the Hoyt partnerships.

Nevertheless, respondent failed to consider how the deficiencies

could be allocated between petitioner and her spouse under

section 6015(c) and (d) if respondent’s position regarding their

joint investment was correct.    If respondent had made the

allocation that flowed naturally from his position that the Foys

had invested jointly in the Hoyt partnership, he would

necessarily have allocated the Hoyt partnership items between

petitioner and Mr. Foy in accordance with their respective

ownership interests.   Respondent also likely would have realized

that he had to prove that petitioner had actual knowledge of the

reasons for disallowing Mr. Foy’s allocable share of the Hoyt

partnership items in order for him to conclude that petitioner

was not entitled to any section 6015(c) relief.    Respondent’s

failure to make an allocation under section 6015(c) further

demonstrates that his position was unreasonable.

     The fourth flaw in respondent’s position stems from his

failure to make a computation under section 6015(c) and (d) to

reflect his contention that the Foys’ partnership interest in SGE

1984-3 was jointly owned.   Had respondent done so, the resulting

calculation would have shown substantially reduced tax
                               - 25 -

liabilities owed by petitioner after application of section

6015(c) and (d) and would have confirmed that petitioner

qualified for section 6015(c) relief.14   If respondent had then

conceded that petitioner was entitled to section 6015(c) relief

in the notice of determination or in his answer, the concession

would have enabled the parties to settle this case at a much

earlier date.15

     3.   Conclusion

     We hold that respondent’s litigating position was not

reasonable under the circumstances and that, therefore, it was

not substantially justified.   Because respondent’s administrative

and litigating positions were not substantially justified, we


     14
      Although respondent’s calculation would not have arrived
at the same tax liability numbers as those reflected in the
settlement because of respondent’s interpretation of sec.
6015(d)(3)(B), see Hopkins v. Commissioner, 121 T.C. 73 (2003),
the computation would nevertheless have confirmed that petitioner
was entitled to sec. 6015(c) relief. When our opinion in Hopkins
v. Commissioner, supra, rejecting respondent’s interpretation of
sec. 6015(d)(3)(B), was filed on July 29, 2003, respondent had
reason to know that the application of the tax benefit rule of
sec. 6015(d)(3)(B) might increase the relief available to
petitioner under sec. 6015(c). If respondent had revised his
calculation at that time (approximately 5 months after his answer
was filed), he would have arrived at the same tax liabilities as
those reflected in the settlement.
     15
      The fact that respondent eventually conceded that
petitioner was entitled to proportionate relief under sec.
6015(c) is a factor we may consider, although it is not
determinative, in deciding whether respondent’s position was
substantially justified. Maggie Mgmt. Co. v. Commissioner, 108
T.C. 430 (1997); Powers v. Commissioner, 100 T.C. 457, 471 (1993)
affd. in part, revd. in part, and remanded in part 43 F.3d 172
(5th Cir. 1995).
                              - 26 -

conclude that petitioner was the prevailing party as defined by

section 7430(c)(4)(A).

B.   Reasonableness of Costs Claimed

      1.   Amount of Costs Claimed

      Section 7430 permits a taxpayer to recover both reasonable

administrative costs16 and reasonable litigation costs17.   The

amount of reasonable attorney’s fees that we may award is limited

by statute and adjusted for cost of living.18   Sec.

7430(c)(1)(B)(iii) (and flush language).   A taxpayer may recover

attorney’s fees in excess of the statutory limit in the presence

of one or more of the following special factors:   (1) Limited

availability of qualified attorneys for the proceeding, (2)




      16
      Sec. 7430(c)(2) defines reasonable administrative costs to
mean the expenses, costs, and fees described in sec.
7430(c)(1)(B) incurred on or after the earliest of the date of
the receipt by the taxpayer of the notice of decision of the
Appeals Office, the date of the notice of deficiency, or the date
on which the first letter of proposed deficiency that allows the
taxpayer the opportunity for administrative review by the Appeals
Office is sent.
      17
      Sec. 7430(c)(1) defines reasonable litigation costs to
include, among other things, reasonable court costs and
reasonable fees paid or incurred for the services of attorneys in
connection with the court proceeding (attorney’s fees).
Attorney’s fees are limited by statute and adjusted for cost of
living. Sec. 7430(c)(1)(B)(iii) (and flush language).
      18
      Rev. Proc. 2001-59, 2001-2 C.B. 623, 628; Rev. Proc. 2002-
70, 2002-2 C.B. 845, 850; and Rev. Proc. 2003-85, 2003-2 C.B.
1184, 1190, respectively, provide that, for fees incurred in
calendar years 2002-2004, the attorney fee award limitation under
sec. 7430(c)(1)(B)(iii) is $150 per hour.
                              - 27 -

difficulty of the issues presented in the case, or (3) local

availability of tax expertise.   Id.

     Pursuant to Rule 232(d), if the parties disagree as to the

amount of attorney’s fees that is reasonable, the moving party

must submit an additional affidavit that includes, in relevant

part, the following:   (1) A detailed summary of the time expended

by each individual for whom fees are sought, including a

description of the nature of the services performed during each

period of time; (2) a description of the fee arrangement with the

client; (3) a statement of whether a special factor exists that

justifies a rate in excess of the statutory limit; and (4) any

other information that will assist the Court in evaluating the

award of costs and fees.

     The amount of petitioner’s claim for administrative and

litigation costs includes the cost of professional services that

were charged by her attorneys to her individual account and her

share of group fees that were charged to common accounts for the

benefit of several Hoyt investor clients, including petitioner.

The fees and costs petitioner claims are summarized as follows:
                                - 28 -

                                 Time       Hourly
         Attorney/Item         expended      rate     Total cost

   Wendy Pearson               8.8 hours     $195     $1,716.00
   Terri Merriam               2.9 hours      195        565.50
   Jennifer Gellner           10.5 hours      150      1,575.00
   Jennifer Gellner            2.1 hours      110        231.00
   Legal assistant            10.3 hours       75        772.50
   Contract assistance        10.0 hours       50        500.00
   Tax Court filing fee          --            --         60.00
   Postage                       --            --          5.84
   Online research               --            --         12.00
   Share of group fees
     and costs1                  --            --      5,916.20

                Total fees and costs                  11,354.04
     1
      The amount petitioner claims for her share of the group fees
and costs represents charges to separate accounts for two groups
of Hoyt investor clients and includes attorney’s fees billed at
an hourly rate of $195 for some of petitioner’s attorneys and the
costs of contract assistance, online research, postage, copies,
and the attorneys’ hotels, meals, and parking as well as the
costs of work performed by legal assistants.

     2.      The Parties’ Arguments

     Respondent contends that the costs petitioner claims are

unreasonable in that the hourly rate charged by some of

petitioner’s attorneys exceeds $150 per hour, and petitioner has

not shown that any of the three special factors enumerated in

section 7430(c)(1)(B)(iii) apply.      Respondent further argues that

costs petitioner claims for her share of the group fees are not

reasonable because (1) the method of billing does not properly

account for the time expended or hourly rate at which the work

was performed, and (2) the fees were charged for work that

contributed to the resolution of clients’ cases other than

petitioner’s and, therefore, were not “incurred in connection
                               - 29 -

with” petitioner’s administrative and court proceedings as

required by section 7430(a).

     Petitioner contends that an “informal survey” of local

attorneys shows that the prevailing hourly rate for attorneys

specializing in Federal tax practice in the Seattle, Washington,

area is between $225 and $350 and that billing at an hourly rate

that is less than the customary rate for similar work is a factor

that supports the reasonableness of the attorney’s fees.    With

respect to her share of the group fees, petitioner contends that

the group fees were charged to a group of Hoyt investor clients,

all of whom had pending section 6015 claims, for work relating to

common legal and factual issues that directly affected or

contributed to the resolution of each client’s case.

Petitioner’s counsel further contend that the group fee

arrangement allowed the Hoyt investor clients to obtain

professional advice and assistance at a reduced cost, that any

services related to the development of factual issues unique to a

particular client were charged only to the individual client, and

that no client was charged for work that did not directly benefit

the client’s case.

     3.   Hourly Rate

     We first decide whether the hourly rate for the attorney’s

fees is reasonable.   In the absence of proof that a special

factor applies, petitioner may not recover attorney’s fees in
                                     - 30 -

excess of the statutory limit.         See sec. 7430(c)(1)(B)(iii).

Petitioner does not argue, and has otherwise failed to

demonstrate, that there was a limited availability of qualified

attorneys or of attorneys with tax expertise to represent her in

this case or that the issues presented were sufficiently

difficult to support her claim for an enhanced hourly rate.           The

fact that petitioner’s attorneys billed her and the other Hoyt

investor clients for professional services at a rate lower than

the local customary rate does not establish that the fees

petitioner claims are reasonable.19           We conclude, therefore, that

petitioner may not recover attorney’s fees in excess of $150 per

hour.        Id.

        With respect to the attorney’s fees and costs charged to

petitioner’s individual account, we award petitioner $1,320 for

work performed by Ms. Pearson20 and $435 for work performed by Ms.

Merriam.21         Because Ms. Gellner’s hourly rate does not exceed the

statutory limit, we find that her fees are reasonable and award

petitioner $1,806 for Ms. Gellner’s professional services.



        19
      The existence of a prevailing hourly rate in the relevant
area that exceeds the statutory rate is not a special factor.
Pierce v. Underwood, 487 U.S. 552, 571-572 (1988); Foothill Ranch
Co. Pship. v. Commissioner, 110 T.C. 94, 102 (1998).
        20
      We compute the award of Ms. Pearson’s fees as follows:
8.8 hours multiplied by $150 hourly rate equals $1,320.
        21
      We compute the award of Ms. Merriam’s fees as follows:
2.9 hours multiplied by $150 hourly rate equals $435.
                              - 31 -

Respondent does not object to the reasonableness of the costs

petitioner claims for the services of legal assistants, contract

assistance, filing fees, postage, and online research that were

charged to her individual account.     Consequently, we award

petitioner those costs in the amount of $1,350.34.22

     4.    Allocation of Group Fees

     We next decide whether the attorney’s fees and costs for

petitioner’s share of the group fees are reasonable and were

reasonably allocated among petitioner and the other Hoyt investor

clients.   Section 7430(a) authorizes an award of reasonable

administrative and litigation costs incurred in connection with

an administrative or court proceeding brought by or against the

United States with respect to the determination, collection, or

refund of any tax.   In order for costs, including attorney’s

fees, to qualify as reasonable litigation or administrative

costs, they must come within the relevant definitions, sec.

7430(c)(1) and (2), and they must be incurred in connection with

a qualifying proceeding.


     22
      This figure includes the following costs: $772.50 for
legal assistants, $500 for contract assistance, $60 Tax Court
filing fee, $5.84 for postage, and $12 for online research.

     Only costs for the services of an individual who is admitted
to practice before this Court or the Internal Revenue Service may
be awarded as attorney’s fees. Sec. 7430(c)(3)(A). We award
fees for work performed by legal assistants, therefore, as costs,
rather than as attorney’s fees. See Fields v. Commissioner, T.C.
Memo. 2002-320; O’Bryon v. Commissioner, T.C. Memo. 2000-379.
                              - 32 -

     Petitioner’s attorneys represent many Hoyt investors.    It is

not surprising or unreasonable that they would perform certain

legal work for the common benefit of similarly situated clients.

Under certain circumstances, it may be both efficient and

economical for an attorney to allocate the fees and costs for

legal research and other legal work benefiting several clients

equitably among those clients as long as the clients agree, the

fees and costs are reasonable, and the attorney appropriately

allocates the common legal work.   See, e.g., Minahan v.

Commissioner, 88 T.C. 516 (1987), and Minahan v. Commissioner, 88

T.C. 492 (1987), in which we allocated common costs among several

taxpayers who were represented by the same attorneys under an

agreement that provided for the sharing of costs.   Moreover,

legal work that benefits multiple clients is no less relevant to

an administrative or court proceeding than work performed solely

for one client.   If the work is performed for multiple clients

and enables an attorney to properly represent a particular client

in the administrative or court proceeding described in section

7430, the section 7430(a) requirement that the costs for such

work are “incurred in connection with” the proceeding would

appear to be satisfied.

     Petitioner’s counsel produced billing records for accounts

of two Hoyt investor client groups seeking relief from joint and

several liability to substantiate petitioner’s share of the group
                                   - 33 -

fees.        The billing records for both group accounts identify the

attorneys who performed work on the innocent spouse cases and set

forth the time expended by each attorney, the attorneys’ hourly

rates, and the nature of the work performed.23       Petitioner’s

counsel contend in their supporting declarations that one group

of Hoyt investors (the general group) ranged in size from 97 to

75 members during the 14-month period that petitioner

participated in the group fee arrangement and that petitioner’s

pro rata share of the general group’s fees was computed by

dividing the total monthly charges equally among all members of

the group.       Petitioner’s counsel further contend that there

existed a separate group of nine Hoyt investors, including

petitioner (the litigation group), whose cases were set for trial

during the Court’s February 2004 trial session, and that the nine

Hoyt investors shared the total billing costs of trial

preparation equally, with the exception of approximately 15 hours

that were allocated among the general group.       In addition,

petitioner’s counsel produced a spreadsheet demonstrating how the

total monthly fees incurred by the general group of Hoyt investor

clients in January 2004 were divided equally among petitioner and

the other participants.


        23
      The billing records of the general group’s account appear
to be missing the first page of charges for April 2003 and pages
in March and December 2003, including monthly summary pages of
the total charges for March and December 2003. See infra note
26.
                               - 34 -

     After reviewing the record, we conclude that petitioner has

benefited from the work her attorneys performed for both groups

of Hoyt investor clients and is entitled to recover a reasonable

share of the fees and costs she incurred as a member of each

group.    With respect to the litigation group of Hoyt investor

clients, we award petitioner $3,577.22, which represents a one-

ninth share of the attorney’s fees adjusted to an hourly rate of

$150 and costs.24

     Petitioner’s attempt to recover her allocable portion of the

general group’s fees and costs, however, is problematic in that

the information petitioner provided does not enable us to

evaluate the reasonableness of the group fees or the



     24
      We compute petitioner’s share of the litigation group’s
fees and costs as follows: $37,667 (total fees and costs
incurred by litigation group), minus $13,962 (work performed by
attorneys at $195 hourly rate), plus $10,740 (total attorney’s
fees incurred at $195 hourly rate adjusted to hourly rate of
$150), minus $2,250 (15 hours of work performed at an hourly rate
of $150), divided by 9 (members of litigation group), equals
$3,577.22.

     We subtracted 15 hours of work performed at an hourly rate
of $150 in computing the total amount of fees and costs incurred
by the litigation group because petitioner’s counsel stated that
approximately 15 billable hours shown on the billing records of
the litigation group’s account were actually charged to the
members of the general group. Because petitioner’s counsel have
failed to identify the nature of the work or hourly rate for
those 15 hours, we assume that they were billed at the highest
hourly rate allowed. Further, we do not add any charges for the
15 hours to the total costs and fees incurred by the general
group of Hoyt investors in computing petitioner’s share of that
group’s fees and costs because we lack any information about the
15 hours of work performed.
                             - 35 -

reasonableness of the allocation.    The composition of the general

group of Hoyt investors varied from month to month as clients

chose to dismiss their claims or became widowed or divorced and

sought relief only under section 6015(c).    Because the billing

records for both petitioner’s and the general group’s accounts

lack any factual detail regarding the number of Hoyt investor

clients who participated in the fee arrangement in each of the

relevant months, it is impossible to verify that the generic

monthly charges for group fees that appear on the records for

petitioner’s individual account are reasonable and were

reasonably allocated among petitioner and the other Hoyt

investors clients.25

     Petitioner bears the burden of proving that the amount of

the costs claimed is reasonable.    Rule 232(e); Powers v.

Commissioner, 100 T.C. at 491.     We conclude that because

petitioner has failed to fully substantiate her claim for a share

of the general group’s fees, she is entitled to recover only a

portion of the amount she claims.    For purposes of computing the

amount petitioner is entitled to recover, we shall assume that

the composition of the general group of Hoyt investor clients



     25
      Had petitioner produced documentation for each month that
showed the number of clients who shared the fees, such as a
spreadsheet similar to that produced for the January 2004 fee
allocation, we could have properly determined whether the amount
of costs petitioner claims was reasonable.
                              - 36 -

remained constant at its greatest size, 97, throughout the 14-

month period that petitioner participated in the group fee

arrangement.   Accordingly, we award petitioner $2,301.95, which

represents a one-ninety-seventh share of the general group’s

attorney’s fees adjusted to an hourly rate of $150 and costs.26




     26
      Although the billing records submitted for the general
group’s account were incomplete, see supra note 23, we were able
to construct a complete set of billing records based on the
records submitted in related cases involving motions for
litigation costs that were filed by other members of the general
group of Hoyt investors. See Bulger v. Commissioner, docket No.
3829-03; Owen v. Commissioner, T.C. Memo. 2005-115. We take
judicial notice of the records submitted in these related cases
for purposes of computing the amount we award petitioner for her
share of the general group’s fees and costs. We compute
petitioner’s share of the general group’s fees and costs as
follows: $256,031.11 (total fees and costs incurred by general
group of Hoyt investors), minus $141,882 (attorney’s fees
incurred at hourly rate of $195), plus $109,140 (total attorney’s
fees incurred at $195 hourly rate adjusted to hourly rate of
$150), divided by 97 (members of Hoyt investor group), equals
$2,301.95.
                                   - 37 -

     5.        Conclusion

     To summarize, we award petitioner the following attorney’s

fees and costs:27

                                     Time      Hourly
              Attorney/Item        expended     rate    Total cost

         Wendy Pearson             8.8 hours    $150    $1,320.00
         Terri Merriam             2.9 hours     150       435.00
         Jennifer Gellner         10.5 hours     150     1,575.00
         Jennifer Gellner          2.1 hours     110       231.00
         Costs                       --           --     1,350.34
         Share of group fees
           and costs1                --            --     5,879.17

                    Total fees and costs awarded         10,790.51
     1
      Petitioner’s award for her Share of Group Fees and Costs
includes $3,577.22 (share of fees from litigation group of Hoyt
investors), and $2,301.95 (share of fees from general group of
Hoyt investors).

C.   Conclusion

     We have carefully considered all remaining arguments made by

the parties for results contrary to those expressed herein, and,

to the extent not discussed above, we find those arguments to be

irrelevant, moot, or without merit.




         27
      Respondent does not contend that the fees and costs at
issue here must be traced and allocated to the various positions
taken by the parties under sec. 6015, nor does he contend that
his positions under sec. 6015(b) and (f) were substantially
justified. Moreover, respondent’s failure to timely and properly
evaluate petitioner’s sec. 6015(c) argument, in our view, was
responsible for the legal work expended on arguments for relief
under sec. 6015(b) and (f). Consequently, we have not attempted
to allocate the fees and costs to the various arguments made by
the parties under sec. 6015.
                        - 38 -

To reflect the foregoing,



                                  An appropriate order and

                             decision will be entered.
