                        T.C. Memo. 2001-233



                      UNITED STATES TAX COURT



                  JAMES TINNELL, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20318-97.                Filed September 6, 2001.


     W. Leslie Sully, Jr., for petitioner.

     Paul L. Dixon, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   This case is before the Court on

petitioner’s motion for award of litigation costs filed pursuant

to section 7430 and Rule 231 on June 5, 2001.1   Petitioner seeks

to recover litigation costs of $187,958.22 incurred in contesting


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

respondent’s deficiency determination for the taxable years 1991

through 1994.

     The issues for decision are whether petitioner qualifies as

a “prevailing party” for purposes of section 7430 and, if so,

whether the litigation costs petitioner seeks are adequately

documented and are reasonable, and whether petitioner has

unreasonably protracted the Court proceedings.      Neither

petitioner nor respondent requested an evidentiary hearing, and

we conclude that such a hearing is not necessary for the proper

disposition of petitioner’s motion.      See Rule 232(a)(2).

                           Background

     The following facts are based upon the entire record,

including the affidavits and exhibits submitted by the parties

with respect to petitioner’s motion for costs, the parties’

pleadings and stipulations of settled issues, the stipulations of

fact, and related documents.

     Petitioner, a businessman and licensed physician, resided in

Las Vegas, Nevada, when the petition in this case was filed on

October 9, 1997.

     During the relevant periods, petitioner conducted a mining

activity known as Jetco Enterprises, the financial results of

which he reported on Schedules C, Profit or Loss From Business,

of his respective tax returns.    For each of the years at issue,
                                - 3 -

petitioner reported a substantial net loss from his mining

activity.

     Following an examination of petitioner’s tax returns for the

years at issue, respondent issued notices of deficiency in which

respondent proposed noncomputational adjustments2 to petitioner’s

tax returns as follows:

     (a) Respondent disallowed all of petitioner’s mining expense

deductions for each of the years 1991, 1992, 1993, and 1994;

     (b) respondent disallowed part of petitioner’s alimony

deductions for 1991 and 1992;

     (c) respondent determined that petitioner received a capital

gain of $23,380 from the disposition of stock of Zila,

Pharmaceutical, Inc. (Zila), for 1992;

     (d) respondent determined that petitioner had unreported

income of $667,856 from the sale of Zila stock options and the

disallowance of a net operating loss for 1993;

     (e) respondent determined that petitioner had additional

royalty income of $3,726 from Zila for 1992; and

     (f) respondent determined that petitioner was liable for

additions to tax and penalties under sections 6651(a)(1), 6654,

and 6662(a) for each of the years at issue.

     Respondent disallowed petitioner’s mining expense deductions

on the grounds that petitioner had failed to show that his mining


     2
      Respondent also proposed several computational adjustments.
                               - 4 -

activity was “an active trade or business” or that it “has been

operated in a businesslike manner”.    Both parties treated this

language as raising an issue under section 183(a), which provides

that “In the case of an activity engaged in by an individual or

an S corporation, if such activity is not engaged in for profit,

no deduction attributable to such activity shall be allowed” (the

section 183 issue).   Alternatively, respondent determined that

“If the Schedule C activity is determined to be a legitimate

business,” the expenses were not ordinary and necessary business

expenses under section 162 (the section 162 issue).

     On October 9, 1997, petitioner filed a petition to

redetermine the deficiencies, in which he alleged that each of

the proposed adjustments was erroneous.    In respondent’s answer,

filed on November 24, 1997, respondent denied petitioner’s

allegations of error and also denied some of petitioner’s factual

allegations for lack of sufficient information.

     The parties resolved most of the issues prior to trial,3

leaving just two issues to be tried:    (1) Whether petitioner’s



     3
      Prior to trial, the parties entered into two stipulations
of settled issues. In the first such stipulation, petitioner
conceded three of the previously disputed adjustments. In the
second such stipulation, petitioner conceded the adjustment with
respect to the exercise of stock options in Zila, Inc., and the
parties agreed on the disposition of adjustments relating to NOL
deductions and carrybacks for 1991 and 1993. In the stipulation
of facts filed just prior to trial, the parties resolved the sec.
162 issue with respect to petitioner’s claimed mining expense
deductions.
                              - 5 -

mining activity for 1991, 1992, 1993, and 1994 constituted an

activity engaged in for profit within the meaning of section 183,

and (2) whether petitioner was liable for the accuracy-related

penalty under section 6662(a) for each of the years at issue.

Following a trial on the merits, we held in Tinnell v.

Commissioner, T.C. Memo. 2001-106 (Tinnell I), that petitioner’s

mining activity was an activity engaged in for profit within the

meaning of section 183 and that petitioner was liable for the

accuracy-related penalty with respect to the stipulated and

computational issues and the adjustment with respect to

petitioner’s exercise of his Zila stock options.   We based our

holding with respect to section 183 on a review of the relevant

facts and circumstances and an analysis of nine factors,

enumerated in section 1.183-2(b), Income Tax Regs.   This Court

and others, including the Court of Appeals for the Ninth Circuit

to which an appeal in this case would lie, typically apply these

factors to evaluate whether a taxpayer conducted his activity

with the intention of making a profit.   See, e.g., Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).

     After we issued our opinion in Tinnell I, petitioner filed a

motion for award of litigation costs in which he alleges that he

satisfies all of the requirements of section 7430 and that he is

entitled to litigation costs of $187,958.22.
                              - 6 -

     In his response to petitioner’s motion, respondent agrees

that (1) petitioner has substantially prevailed with respect to

the amount in controversy under section 7430(c)(4)(A)(i), (2)

petitioner meets the net worth requirements under section

7430(c)(4)(A)(ii), and (3) petitioner exhausted administrative

remedies available to him as required by section 7430(b)(1).

Respondent contends, however, that petitioner is not a prevailing

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

position taken by respondent in this case was substantially

justified within the meaning of section 7430(c)(4)(B).

Alternatively, respondent contends that petitioner is not

entitled to the litigation costs claimed because petitioner

unreasonably protracted this litigation, the litigation costs

claimed are excessive, and the litigation costs claimed are not

adequately documented.

                           Discussion

     In general, section 74304 provides for an award of

reasonable litigation costs to a taxpayer who:   (1) Is the

prevailing party in a court proceeding brought against the United

States involving the determination of any tax, interest, or


     4
      Sec. 7430, as most recently amended by Congress in the IRS
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3101,
112 Stat. 727, applies to that portion of the claimed costs
incurred after Jan. 18, 1999. Sec. 7430, as amended by the
Taxpayer Relief Act of 1997, Pub. L. 105-34, secs. 1285, 1453,
111 Stat. 1038, 1055, applies to that portion of the claimed
costs incurred on or before Jan. 18, 1999.
                               - 7 -

penalty pursuant to the Internal Revenue Code; (2) has exhausted

his administrative remedies within the IRS; and (3) did not

unreasonably delay or protract the court proceedings.    Respondent

concedes that petitioner exhausted his administrative remedies

but maintains that petitioner is not a prevailing party and that

he unreasonably delayed or protracted these proceedings.

     To be a prevailing party, a taxpayer must satisfy the

applicable net worth requirements set forth in section

7430(c)(4)(A)(ii) and must substantially prevail with respect to

either the amount in controversy or the most significant issue or

set of issues presented.   Sec. 7430(c)(4)(A).   Respondent

concedes that petitioner satisfies the applicable net worth

requirements and that petitioner has substantially prevailed but

argues that respondent’s litigating position was substantially

justified.

     Section 7430(c)(4)(B)(i) provides that a party shall not be

treated as a prevailing party if the Commissioner establishes

that his position was substantially justified.    Whether the

Commissioner’s position was substantially justified is to be

resolved by applying a reasonableness standard.    Pierce v.

Underwood, 487 U.S. 552, 564 (1988); Sher v. Commissioner, 89

T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988).    The

litigating position of the Commissioner is substantially

justified if the position had a reasonable basis in both fact and
                                   - 8 -

law.       Norgaard v. Commissioner, 939 F.2d 874, 881 (9th cir.

1991), affg. in part and revg. in part T.C. Memo. 1989-390;

Maggie Mgmt. Co. v. Commissioner, 108 T.C. 440, 443 (1997).

Although the Commissioner’s litigating position may have been

incorrect in hindsight,5 it is substantially justified “if a

reasonable person could think it correct”.       Pierce v. Underwood,

supra at 566 n.2.       “Thus, whether respondent acted reasonably in

the instant case ultimately turns upon those available facts

which formed the basis for the position taken in the notice of

deficiency and during the litigation, as well as upon any legal

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

Commissioner, supra at 443.

           When a taxpayer seeks an award of litigation costs under

section 7430, we look at the Commissioner’s answer to ascertain

his initial litigating position, and we must decide whether the

Commissioner’s position was reasonable by examining the facts

reasonably available to the Commissioner at the time he asserted

his position in his answer.       Maggie Mgmt. Co. v. Commissioner,

supra at 443; DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

In Tinnell I, respondent’s litigating position with respect to


       5
      The fact that the Commissioner eventually loses a case does
not by itself establish that the Commissioner’s position was
unreasonable, but the litigating result is a factor that may be
considered. See Anthony v. United States, 987 F.2d 670, 674
(10th Cir. 1993); Estate of Perry v. Commissioner, 931 F.2d 1044,
1046 (5th Cir. 1991); Sokol v. Commissioner, 92 T.C. 760, 767
(1989).
                                - 9 -

petitioner’s mining activity expenses as set forth in his answer

was the same position asserted in the notices of deficiency;

i.e., the expenses must be disallowed because of section 183 or,

alternatively, because petitioner failed to establish they were

deductible under section 162.

     Petitioner’s motion focuses on respondent’s litigating

position under section 183 with respect to respondent’s

disallowance of petitioner’s mining expense deductions.6   In his

response to petitioner’s motion, respondent asserts that he had a

reasonable basis in fact and law to disallow the deductions under

section 183.   Although respondent also alleges that petitioner

fails to satisfy certain requirements of section 7430, we shall

confine our analysis to the section 183 issue because it disposes

of petitioner’s entire claim, making it unnecessary to address

other issues raised by respondent.

     In Tinnell I, respondent determined that petitioner had not

engaged in his mining activity with the profit objective required

by section 183.   Whether the requisite profit objective exists is

a question of fact that must be determined after considering all

the relevant facts and circumstances.   Golanty v. Commissioner,

72 T.C. at 426.




     6
      The sec. 162 issue was resolved by the parties prior to
trial.
                                - 10 -

       Section 1.183-2(b), Income Tax Regs., sets forth a

nonexhaustive list of factors that courts often consider in

deciding whether a profit objective exists.     No single factor and

not even a majority of the factors is controlling.      Id.   Rather,

the factors are evaluated in order to arrive at an informed

conclusion based on all the evidence regarding whether the

requisite profit objective existed.      Golanty v. Commissioner,

supra.

       We considered the factors set forth in section 1.183-2(b),

Income Tax Regs., and concluded that some factors favored

respondent and some factors favored petitioner.     One of the

factors that favored respondent was petitioner’s history of

income or loss.     Petitioner had engaged in his mining activity

since at least 1980 and had claimed substantial net operating

losses with respect to his mining activity in every year from

1989 through and including the years at issue.     A record of

substantial losses over many years is an important factor bearing

on a taxpayer’s true intent.     Golanty v. Commissioner, supra at

426.     We also found that petitioner failed to prove that he

maintained accurate and businesslike records, a fact that is

relevant in determining whether the manner in which petitioner

conducted his activity is consistent with an intent to make a

profit.
                                - 11 -

       Although we ultimately held in favor of petitioner on the

section 183 issue, our conclusion regarding petitioner’s profit

objective was not easy.    Respondent presented facts in support of

his position that petitioner’s primary objective in conducting

his mining activity was not to make a profit, and respondent’s

arguments with respect to this highly fact-intensive issue were

reasonable and not frivolous.      Although we did not agree with

respondent’s arguments in the final analysis, respondent has

persuaded us that his position had a reasonable basis in fact and

law.    We hold, therefore, that respondent’s litigating position

regarding the section 183 issue was substantially justified and

that petitioner is not entitled to an award of litigation costs

under section 7430.

       To reflect the foregoing,



                                            An appropriate order and

                                       decision will be entered under

                                       Rule 155.
