                       T.C. Memo. 2002-175



                     UNITED STATES TAX COURT



        FREDERICK M. AND CHERYL A. PROUTY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6020-01.              Filed July 24, 2002.


     Frederick M. and Cheryl A. Prouty, pro sese.

     William W. Kiessling, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     DEAN, Special Trial Judge:   This case is before the Court on

petitioners' Motion for Administrative Costs filed pursuant to

section 7430 and Rule 231.   All references to section 7430 are to

such section as in effect at the time the petition was filed.

Unless otherwise specified, all other section references are to

the Internal Revenue Code in effect for the year in issue, and
                                - 2 -

all Rule references are to the Tax Court Rules of Practice and

Procedure.

     Respondent filed a response to petitioners' motion.

Respondent agrees that petitioners:     (a) Have substantially

prevailed with respect to the most significant issue presented;

and (b) have exhausted their administrative remedies.

     Respondent does not agree, however, that petitioners:       (1)

Have shown that they meet the net worth requirements as provided

by law; (2) have not unreasonably protracted the administrative

proceedings; (3) have claimed a reasonable amount of costs; or

(4) that respondent's positions in the administrative proceedings

were not substantially justified.

     We conclude that a hearing is not necessary to decide this

motion.   See Rule 232(a)(2).   Accordingly, we rule on

petitioners' motion for administrative costs on the basis of the

parties' submissions and the record in this case.

                         FINDINGS OF FACT

     Petitioners resided in Old Hickory, Tennessee, at the time

they filed their petition.

     Petitioners timely filed their Form 1040, U.S. Individual

Income Tax Return, for 1998.    One of the attachments to the

return was a Form W-2, Wage and Tax Statement, in the name of

Fred M. Prouty, Jr., reporting wages of $23,925.30.     The total

wages reported on line 7 of the tax return were $23,925.     There
                               - 3 -

was another attached Form W-2 for Mr. Prouty from "Theatrical &

TV Motion Picture Special Payment Fund" (TMPSPF) in the amount of

$10.40.

     Attached to the return were two Forms W-2 in the name of

Cheryl Prouty (petitioner).   One was from "Sinclair Television of

Nashville, Inc." indicating wages, tips and other compensation of

$28,429.47, and the other was from "Lambert Broadcasting of

Nashville" (Lambert) indicating $26,259.82.   On neither form was

box 15 checked to indicate that petitioner was a "statutory

employee".

     Petitioners filed with their return two Schedules C, Profit

or Loss From Business.   No Schedule C was filed for Mr. Prouty,

both were for petitioner.   One was for her multilevel sales

representative business, and one was for the business of "TV

Sales Executive" under the business name, "WZTV & WNAB".   The

latter Schedule C reported business income of $61,001, expenses

of $7,904, and net profit of $53,097.

     The Internal Revenue Service Center (Service Center) in

Ogden, Utah, sent petitioners a form notice CP-2000 dated October

31, 2000, proposing changes to their 1998 income tax return.

Among other items, the Internal Revenue Service (IRS) proposed an

increase in taxable wages of $7,914, an amount that comports with

the sum of the disallowance of petitioner's TV Sales Executive

Schedule C deduction of $7,904 and the Form W-2 in the name of
                                - 4 -

Mr. Prouty reporting $10.40 of income from TMPSPF.    One paragraph

of the notice states:    "Since your employer did not indicate on

Form W-2 that you were a statutory employee, we disallowed the

expenses you claimed against that income on Schedule C", and the

notice requests verification that "you are a statutory employee."

     A copy of the notice CP-2000 that was sent to petitioners

was returned to the Ogden Service Center and dated as received on

November 17, 2000.    The returned copy of the notice exhibits

various handwritten notations and included an attachment.    The

attachment is a copy of a letter from an official of the Lambert

Broadcasting Company describing petitioner as an outside sales

representative compensated 100 percent by commissions.    On the

face of the letter, beneath the signature of the official, the

following is typed:

          Note: The other TV station I worked for was the
     same type employment. (Sullivan Broadcasting of
     Nashville) I am not on good terms with them so I had
     rather not get a letter from them. I received no
     travel allowance from them. I hope this letter will be
     satisfactory.

           Thank you, Cheryl Prouty

As part of the returned copy of the notice, there was a statement

signed by petitioner authorizing William DeMontbreun, CPA, to

contact the IRS about the notice.

     A statutory notice of deficiency dated February 6, 2001, was

issued to Frederick M. and Cheryl A. Prouty for the tax year

1998.   The notice determines adjustments for increased taxable
                               - 5 -

wages of $7,914, an increase in nonemployee compensation of

$1,160, a disallowance of the claimed $766 credit for excess

Social Security and RRTA tax withheld, and computational

adjustments.

     On February 13, 2001, the Ogden Service Center received a

faxed copy of a letter "To Whom It May Concern", stating that

petitioner "was a 100% commissioned Account Executive for

Sullivan Broadcasting"1 from November 1989 to June 1998.

     On March 9, 2001, the Ogden Service Center received a

"Transfer To Appeals Request" signed by petitioners, requesting

that their case be transferred to the Appeals Office in

Nashville, Tennessee.   The Ogden Service Center sent to

petitioners a revised notice of tax changes dated March 20, 2001,

proposing the allowance of the claimed $7,904 of deductions on

petitioner's Schedule C.   Petitioners met with their accountant

on March 23, 2001, to discuss the proposed tax changes sent to

them on March 20, 2001.

     The petition in this case was filed on May 8, 2001, and

respondent filed the answer on June 29, 2001.   On July 2, 2001,

the case was assigned to an Appeals officer for consideration.

The Appeals officer, on August 23, 2001, met with petitioner and

her accountant who stated that although Mr. Prouty had failed to


     1
      There is no explanation in the record as to whether
"Sullivan" broadcasting is the same company as "Sinclair
Television of Nashville" as listed on the W-2.
                                 - 6 -

report business income of $1,160, he also had failed to claim

certain business expenses.    They requested that the Appeals

officer allow additional time for them to gather substantiation

for the unclaimed expenses.    On September 21, 2001, petitioners

faxed to the Appeals officer a copy of a Schedule C for Mr.

Prouty that reported the previously unreported nonemployee

compensation of $1,160 and also unclaimed expenses of $720.

     Respondent having conceded petitioner's TV executive

expenses of $7,904 as of March 20, 2001, petitioners conceded the

other adjustments in the notice of deficiency, and respondent

additionally agreed to the Schedule C expenses for Mr. Prouty of

$720.    A Stipulation of Settlement was filed by Order of the

Court dated February 13, 2002.

                               OPINION

Requirements Under Section 74302

     Under section 7430(a), a judgment for costs incurred in an

administrative proceeding in connection with the determination of

any tax may be awarded only if a taxpayer:    (1) Is the

"prevailing party"; and (2) did not unreasonably protract the

administrative proceeding.    See sec. 7430(a) and (b)(3).

     A taxpayer must satisfy each of the respective requirements

in order to be entitled to an award of administrative costs under


     2
      We apply sec. 7430 as amended by Congress in the IRS
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3101,
112 Stat. 727-730.
                                 - 7 -

section 7430.   See Rule 232(e).   Upon satisfaction of these

requirements, a taxpayer may be entitled to reasonable costs

incurred in connection with the administrative proceeding.      See

sec. 7430(a)(1) and (2), (c)(1) and (2).

     To be a prevailing party, the taxpayer must substantially

prevail with respect to either the amount in controversy or the

most significant issue or set of issues presented and satisfy the

applicable net worth requirement.    See sec. 7430(c)(4)(A).

     Respondent argues that petitioners have not shown that they

satisfy the net worth requirements of section 7430(c)(4)(A)(ii).

Because petitioners, even if they meet the net worth

requirements, will nevertheless not be treated as prevailing

parties if respondent can establish that his position in the

administrative proceedings was substantially justified, we

examine this factor first.   See sec. 7430(c)(4)(B).

     Substantial Justification

     The Commissioner's position is substantially justified if,

based on all of the facts and circumstances and the legal

precedent relating to the case, the Commissioner acted

reasonably.   See Pierce v. Underwood, 487 U.S. 552 (1988); Sher

v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th

Cir. 1988).   In other words, to be substantially justified, the

Commissioner's position must have a reasonable basis in both law

and fact.   See Pierce v. Underwood, supra; Rickel v.
                                - 8 -

Commissioner, 900 F.2d 655, 665 (3d Cir. 1990), affg. in part and

revg. in part on other grounds 92 T.C. 510 (1989).     A position is

substantially justified if the position is "justified to a degree

that could satisfy a reasonable person".      Pierce v. Underwood,

supra at 565 (construing similar language in the Equal Access to

Justice Act).    Thus, the Commissioner's position may be incorrect

but nevertheless be substantially justified "'if a reasonable

person could think it correct'".     Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 443 (1997) (quoting Pierce v.

Underwood, supra at 566 n.2).

     The relevant inquiry is "whether * * * [the Commissioner]

knew or should have known that * * * [his] position was invalid

at the onset".    Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.

1995), affg. T.C. Memo. 1994-182.    We look to whether the

Commissioner's position was reasonable given the available facts

and circumstances at the time that the Commissioner took his

position.   See Maggie Mgmt. Co. v. Commissioner, supra at 443;

DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

     The fact that the Commissioner eventually concedes, or even

loses, a case does not establish that his position was

unreasonable.    Sokol v. Commissioner, 92 T.C. 760, 767 (1989);

see also Estate of Perry v. Commissioner, 931 F.2d 1044, 1046

(5th Cir. 1991).    The Commissioner's concession, however,

remains a factor to be considered.      See Powers v. Commissioner,
                                - 9 -

100 T.C. 457, 471 (1993), affd. in part, revd. in part and

remanded on another issue 43 F.3d 172 (5th Cir. 1995).

     As relevant herein, the position of the United States that

must be examined in light of the substantial justification

standard with respect to the recovery of administrative costs is

the position taken by the Commissioner as of the date of the

notice of deficiency.   See sec. 7430(c)(7)(B).

     In order to decide whether the Commissioner's position was

substantially justified we must review the substantive merits of

the case.

     Reasonable Basis In Fact

     In Rev. Rul. 90-93, 1990-2 C.B. 33, respondent announced the

position that a person described in section 3121(d)(3), commonly

referred to as a "statutory employee", is "not an employee for

purposes of sections 62 and 67."   Such persons may properly

reflect business income and expenses in full on Schedule C in

calculating adjusted gross income under section 62(a)(1).

Persons who are employees for purposes of sections 62 and 67 have

their miscellaneous deductions limited as provided by section

67(a).

     Petitioners do not appear to suggest that respondent applied

the wrong legal standard in taking a position denying their

deduction on Schedule C of expenses for the business of "TV Sales

Executive" under the business name, "WZTV & WNAB".   A reading of
                                - 10 -

their transfer to Appeals request indicates that petitioners feel

that respondent's position on the adjustment was not reasonable

in fact based upon their statements to respondent.

     As to that argument, respondent asserts that it was

incumbent upon petitioners to substantiate their entitlement to

the items claimed.   It is reasonable, according to respondent,

not to concede an adjustment until he has received and verified

adequate substantiation for the items in question.    He therefore

concludes that as to the stated adjustment, his position was

reasonable when taken and appropriately conceded when

substantiation was provided to Appeals.

     Taxpayers are required to maintain books and records in

accordance with rules and regulations prescribed by the Secretary

of the Treasury.   See sec. 6001.   Generally, taxpayers must keep

records sufficient to establish gross income, deductions, or

other matters required to be shown on the return.    See sec.

1.6001-1(a), Income Tax Regs.

     Petitioners' request for transfer to Appeals argues that the

Code does not require an employer to indicate that an employee is

a statutory employee and that petitioners sent the Commissioner a

letter describing petitioner's duties.    Regardless of what

responsibility petitioner's employers may have had, it was

petitioner's responsibility to verify her entitlement to report

income and deductions on Schedule C.     The Forms W-2 attached to
                              - 11 -

the return indicate petitioner's status as an employee.   The

amounts reported on the forms were not included as wages, and

without further explanation it is not apparent what income items

are reported on the Schedule C.   A taxpayer's self-serving

declaration is no ironclad substitute for the records that the

law requires.   See Weiss v. Commissioner, T.C. Memo. 1999-17; see

also Seaboard Commercial Corp. v. Commissioner, 28 T.C. 1034,

1051 (1957) (a taxpayer's income tax return is a self-serving

declaration that may not be accepted as proof for the deduction

or exclusion claimed by the taxpayer); Halle v. Commissioner, 7

T.C. 245, 247 (1946) (a taxpayer's return is not self-proving as

to the truth of its contents), affd. 175 F.2d 500 (2d Cir. 1949).

     Petitioner submitted on November 17, 2000, a letter that

substantiated her status as a person described in section

3121(d)(3) as to the amount on one of her Forms W-2.   It was not

until February 13, 2001, that evidence of her status, a person

described in section 3121(d)(3), with respect to the Sullivan

Broadcasting3 was supplied to the Commissioner.   Respondent must

then have concluded that the amounts reported on petitioner's

Schedule C include the amounts reported on the Forms W-2.     The

notice conceding the business expense issue related to her

employment status was sent to petitioners less than a month

later.


     3
      See supra note 1.
                              - 12 -

     From the record before us we conclude that the case remained

unsettled due to petitioners' request for additional time to

substantiate unreported expenses to offset what they conceded was

income not reported by Mr. Prouty.

     It is reasonable for respondent to make adjustments for

items and to refuse to concede the adjustments until he has

received and verified substantiation for the amounts adjusted.

See Beecroft v. Commissioner, T.C. Memo. 1997-23; Simpson Fin.

Servs., Inc. v. Commissioner, T.C. Memo. 1996-317; McDaniel v.

Commissioner, T.C. Memo. 1993-148.

     We are persuaded that respondent's position on the above

issue was reasonable.   Respondent's position was based on

petitioners' failure to substantiate fully or account for the

item.   Further, the issue was settled within a reasonable period

of time after petitioners gave sufficient information to

respondent.   See Harrison v. Commissioner, 854 F.2d 263, 265 (7th

Cir. 1988), affg. T.C. Memo. 1987-52; Wickert v. Commissioner,

842 F.2d 1005 (8th Cir. 1988), affg. T.C. Memo. 1986-277; Ashburn

v. United States, 740 F.2d 843 (11th Cir. 1984); McDaniel v.

Commissioner, supra.

     Because respondent's position in the administrative

proceedings was substantially justified, we need not decide

whether petitioners meet the net worth requirements, unreasonably
                              - 13 -

protracted the proceedings, or whether the administrative costs

claimed by petitioners are reasonable.

Conclusion

     We find that respondent's position on the disputed issue was

a reasonable position sufficiently supported by the facts and

circumstances in petitioners' case and the existing legal

precedent.   See Pierce v. Underwood, 487 U.S. 552 (1988).

Because we find respondent's position to have been reasonable, we

cannot find petitioners to be "prevailing" parties, and their

motion will therefore be denied.

     To reflect the foregoing,

                                         Decision will be entered

                                    in accordance with the

                                    agreement of the parties.
