                         T.C. Memo. 2009-85


                      UNITED STATES TAX COURT



             RICHARD AND MABEL KELBY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13268-03L.             Filed April 28, 2009.




     William E. Taggart, Jr., for petitioners.

     Rebecca Duewer-Grenville, for respondent.



                         MEMORANDUM OPINION


     HAINES, Judge:   This collection review case is before the

Court on petitioners’ motion for recovery of litigation costs

brought under section 7430 and Rule 231.1     Petitioners seek to


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code as amended. Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
                                                   (continued...)
                                -2-

recover costs totaling $157,965 incurred from July 10, 2003, the

date respondent issued the original notice of determination upon

which this case is based, through the filing of this motion.

                            Background

     In deciding the parties’ cross-motions for entry of

decision, we discussed in detail the history of this case.        Kelby

v. Commissioner, 130 T.C. 79 (2008).     We need not repeat the

entirety of that discussion, but rather we incorporate it herein.

After the filing of the petition, this case was remanded to

respondent’s Office of Appeals three times.    After each remand,

petitioners amended their petition.    Petitioners raised three

issues during their hearings and before this Court.

A.   The 1989 Income Tax Liability

     First, petitioners challenged the existence of their alleged

1989 Federal income tax liability.2    Petitioners contended that

they filed their 1989 joint return in July or August 1990 and

paid the tax due.   In 1993 respondent created a substitute for

return (SFR) for Ms. Kelby, but not Mr. Kelby.    The SFR reflected

Ms. Kelby’s wages and related income tax withheld as reported on

her 1989 Forms W-2, Wage and Tax Statement.    Respondent then sent



     1
      (...continued)
the nearest dollar.
     2
      The notice of determination also related to liabilities for
1994 through 1997, and 2000. Petitioners did not challenge those
liabilities.
                                -3-

Ms. Kelby a notice of deficiency for 1989, but she did not

receive it because petitioners had moved.    In 1993 respondent

assessed the tax shown as due on the SFR and began collection

activities.   In 1995 petitioners reconstructed their 1989 return

showing Mr. and Ms. Kelby’s wage income and income tax withheld.

Respondent accepted the return and assessed the tax due although

petitioners contended they had paid the tax in 1990.    Respondent

also abated the erroneous 1993 assessment.    Thus, the first issue

was whether petitioners paid their 1989 liability in 1990 and

whether the 1995 assessment was proper.

     Respondent’s Appeals officers took up the issue and

determined that there was no record of petitioners’ submitting

their 1989 return in 1990 or that a payment was made then.

Furthermore, petitioners presented no evidence to show that the

return was submitted or that payment had been made, such as a

canceled check.

     On August 22, 2006, more than 3 years after their original

hearing, petitioners sent respondent Ms. Kelby’s notes concerning

whom she spoke with at the local Internal Revenue Service (IRS)

office in 1995 and how she paid the liability in 1990.

Petitioners requested that the notes be included in the

stipulation of facts being prepared for trial.    Before August 22,

2006, this documentation had not been provided to respondent or

the Appeals officers.   With this information, respondent
                                -4-

contacted the IRS employees with whom Ms. Kelby spoke.    Those IRS

employees corroborated portions of Ms. Kelby’s story.    Shortly

thereafter respondent conceded that the 1989 liability had been

fully satisfied and allowed petitioners a credit as of April 1990

equal to the 1989 tax liability.

B.   Collection Alternatives

     Second, petitioners sought a collection alternative,

specifically an offer-in-compromise (OIC).   They offered $500 to

satisfy their tax liabilities, which totaled more than $55,000,

including interest.3   In each of the notices of determination

respondent’s Appeals officers rejected petitioners’ OIC because

petitioners’ collection potential was far greater than $500.

During their final hearing, after respondent conceded the payment

of the 1989 liability, the parties entered into an installment

agreement whereby petitioners would pay $300 per month.

C.   Release of the Notice of Federal Tax Lien

     Finally, petitioners sought the release of the notice of

Federal tax lien (NFTL) which began this whole series of events.

Respondent consistently denied petitioners’ request.    After the

parties came to an agreement with respect to the installment

agreement, petitioners continued to seek the release of the NFTL.




     3
      The total outstanding liabilities vary by offer because of
the accrual of interest.
                                 -5-

On October 15, 2007, at a hearing before this Court, petitioners

announced their intention to abandon the issue.

D.   Motions for Entry of Decision

     At the October 15, 2007, hearing the parties agreed that

there were no substantive issues remaining.    However, they

disputed what the decision in the case should be.    Each postured

so as to appear to be the prevailing party.    Unable to reach an

agreement, they filed cross-motions for entry of decision.      In

Kelby v. Commissioner, supra at 85, we determined that because of

respondent’s concessions with respect to the 1989 liability, all

issues with respect to that year were moot.    We also determined

that under section 6330 the position we review is the position

taken by respondent’s Appeals Office in the last supplemental

notice of determination, not each notice separately as

petitioners contended.    Id. at 87.

     Not long after the release of Kelby v. Commissioner, supra,

petitioners filed their motion for recovery of litigation costs.

In accordance with Rule 232 respondent filed a response to

petitioners’ motion, and petitioners filed a reply and an

additional affidavit.    A hearing was held in San Francisco,

California, on November 3, 2008.

                             Discussion

     Taxpayers are eligible for an award of reasonable fees and

costs incurred in certain administrative and court proceedings if
                                -6-

they meet the requirements of section 7430.    To qualify under

section 7430, the taxpayers must establish that they:     (1) Were

the prevailing party within the meaning of section 7430(c)(4);

(2) exhausted the applicable administrative remedies; (3) did not

unreasonably protract the proceedings; and (4) have claimed costs

that are reasonable.   All four elements of section 7430 are in

dispute.

A.   Whether Petitioners Were the Prevailing Party

     To be a prevailing party, a taxpayer must:    (1)

Substantially prevail as to the amount or most significant issue

in controversy and (2) meet the requirements listed in 28 U.S.C.

section 2412(d)(1)(B) and (2)(B).4    Sec. 7430(c)(4).   Further,

the position taken by the Commissioner in the administrative and

court proceedings must not have been substantially justified.

Id.; Kenagy v. United States, 942 F.2d 459, 463 (8th Cir. 1991).

Although a taxpayer bears the burden of proving he meets

requirements (1) and (2), the Commissioner bears the burden of

proving his position was substantially justified.     Maggie Mgmt.

Co. v. Commissioner, 108 T.C. 430, 441 (1997); see Kenney v.

United States, 458 F.3d 1025, 1032 (9th Cir. 2006).      The parties

agree that petitioners meet the requirements of 28 U.S.C. section



     4
      Under 28 U.S.C. sec. 2412(d)(1)(B) and (2)(B), an
individual taxpayer is ineligible for an award of costs if the
taxpayer’s net worth exceeded $2 million at the time the petition
was filed.
                                  -7-

2412(d)(1)(B) and (2)(B).    They dispute the other two

requirements of section 7430(c)(4).

     The parties agree that this case involved three issues:    (1)

Whether petitioners were liable for the alleged unpaid 1989 tax;

(2) whether petitioners were eligible for a collection

alternative; and (3) whether the NFTL should have been released.

The most significant issue or set of issues is relevant in

determining whether petitioners were the prevailing party.   Each

of the three issues was significant to the parties, and a

reasonable argument can be made that each was the most

significant.    Complicating matters, petitioners contend that the

issues are intertwined.    They argue that they gave up their OIC

claim and entered into the installment agreement only because

respondent conceded the 1989 liability was satisfied, thus making

an installment agreement appropriate.    Because we conclude that

petitioners were not the prevailing party with respect to any of

these issues or any set of issues, we need not determine which

issue was the most significant.

     1.     The Release of the Federal Tax Lien

     Petitioners abandoned their argument that the NFTL should be

released.    Accordingly, petitioners did not substantially prevail

as to this issue.
                                 -8-

     2.    Collection Alternatives

     During their hearings and in their petition and amended

petitions petitioners sought an OIC which would have satisfied

their outstanding liabilities for $500.   Respondent rejected

those offers on the basis of petitioners’ financial status at the

time of the offers.   Petitioners allege that their financial

status improved over the course of the proceedings.

Nevertheless, they did not increase the amount of their offer.

     After respondent conceded the 1989 liability, petitioners

continued to seek an OIC.    The Appeals officer rejected the OIC,

and the parties entered into an installment agreement.    The

parties agreed that petitioners would satisfy their outstanding

liabilities by making payments of $300 per month.   Until that

point petitioners sought to compromise their income tax

liabilities of more than $55,000 for only $500.   The concession

of the 1989 liability reduced the outstanding liabilities to just

less than $40,000.

     Petitioners’ installment agreement is substantially

different from their OICs.   Under the installment agreement,

petitioners remain liable for their unpaid taxes.   Under the

proposed OICs, petitioners would have satisfied all their

outstanding tax liabilities for approximately 1 percent of the

total.    The parties’ installment agreement more closely resembles

respondent’s position than petitioners’ because petitioners
                                  -9-

continued to be liable for all their unpaid taxes.     Under these

circumstances we cannot say that petitioners substantially

prevailed as to this issue.

     3.   The 1989 Tax Liability

     Respondent conceded that petitioners were not liable for the

alleged unpaid 1989 tax.    Accordingly, we conclude that

petitioners substantially prevailed as to this issue.     However,

for a taxpayer to be the “prevailing party” under section

7430(c)(4), the position taken by the Commissioner in the

proceedings must not have been substantially justified.

     “Substantially justified” means “justified to a degree that

could satisfy a reasonable person”, or having “reasonable basis

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

(1988); Kenney v. United States, supra at 1032; see Maggie Mgmt.

Co. v. Commissioner, supra at 443.      For a position to be

substantially justified, “substantial evidence” must exist to

support it.   Pierce v. Underwood, supra at 564.     “That phrase

does not mean a large or considerable amount of evidence, but

rather ‘such relevant evidence as a reasonable mind might accept

as adequate to support a conclusion.’”      Id. at 564-565 (quoting

Consol. Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)).      The

Commissioner’s position may be incorrect but substantially

justified “if a reasonable person could think it correct”.        Id.

at 566 n.2.   A significant factor in determining whether the
                                -10-

Commissioner acted reasonably as of a given date is whether, on

or before that date, the taxpayer presented all relevant

information under the taxpayer’s control.    Corson v.

Commissioner, 123 T.C. 202, 206-207 (2004); sec. 301.7430-

5(c)(1), Proced. & Admin. Regs.    Thus, whether the Commissioner

acted reasonably ultimately turns upon the available facts which

formed the basis for the Commissioner’s position.    DeVenney v.

Commissioner, 85 T.C. 927, 930 (1985); see Nalle v. Commissioner,

55 F.3d 189, 191-192 (5th Cir. 1995), affg. T.C. Memo. 1994-182.

     The fact that the Commissioner eventually loses or concedes

an issue does not by itself establish that the position taken was

unreasonable.   Estate of Perry v. Commissioner, 931 F.2d 1044,

1046 (5th Cir. 1991); Swanson v. Commissioner, 106 T.C. 76, 94

(1996).   However, it is a factor that may be considered.    Estate

of Perry v. Commissioner, supra at 1046; Powers v. Commissioner,

100 T.C. 457, 471 (1993), affd. in part and revd. in part 43 F.3d

172 (5th Cir. 1995).

     At some point in July or August 1990 petitioners likely

filed their 1989 return and paid the tax due.   For some reason

the return and payment were lost or improperly recorded or an IRS

employee erred in some other way, causing petitioners not to be

credited with the filing of their 1989 return and the payment of

the tax due.    Respondent then erroneously assessed the 1989 tax

in 1993 and, in an effort to correct the erroneous 1993
                               -11-

assessment, erroneously assessed the 1989 tax again in 1995.

However, the question before us is not whether respondent erred

in failing to record the filing of the 1989 return and payment of

the tax due or whether respondent erred in assessing the 1989 tax

in 1993 and 1995.   Respondent likely did.

     The question is whether, in the course of the administrative

and judicial proceedings, respondent was substantially justified

in taking the position that petitioners did not file their 1989

return and pay the tax due in 1990.   We conclude that respondent

was substantially justified, both during the administrative

hearings and before this Court, in contending that petitioners

were liable for the alleged unpaid 1989 tax.

     The Court of Appeals for the Ninth Circuit, to which an

appeal in this case would lie, has held that the reasonableness

of the Commissioner’s position is analyzed separately for the

administrative and judicial proceedings.     Kenney v. United

States, 458 F.3d at 1032-1033; Huffman v. Commissioner, 978 F.2d

1139, 1143 (9th Cir. 1992), affg. in part and revg. in part T.C.

Memo. 1991-144.   Although this case was remanded for further

administrative proceedings several times, and several amended

petitions and amended answers were filed, respondent’s position

was remarkably consistent.   The Appeals officers took the

position that petitioners were liable for the 1989 tax liability

because they filed their return in 1995 and did not pay the tax
                                -12-

due.    They also took the position that petitioners were not

eligible for a $500 OIC because petitioners’ collection potential

was substantially greater than $500 and the NFTL should not be

released.    Respondent took the identical position before this

Court, arguing that petitioners were liable for the unpaid 1989

tax and that the Appeals officers did not abuse their discretion

in denying the OICs and not releasing the NFTL.

       Respondent’s position changed when petitioners provided Ms.

Kelby’s notes.    These notes had not previously been provided to

respondent or any of the Appeals officers.    Petitioners failed to

present to respondent and the Appeals officers all the relevant

information under their control.    Once that information was

presented, respondent promptly conceded the 1989 tax liability

issue.

       Petitioners argue that the notes were irrelevant because

they related to discussions Ms. Kelby had with IRS employees

regarding the correction of the erroneous 1993 assessment of the

1989 liability.    Those discussions resulted in the IRS’s

assessing the 1989 liability in 1995 in an effort to correct the

erroneous 1993 assessment.    The erroneous 1995 assessment is the

nexus of the parties’ dispute with respect to the 1989 liability.

Evidence of who made the 1995 assessment which allowed respondent

to investigate how and why the assessment was made is highly

relevant.    Furthermore, it is unlikely petitioners would have
                                 -13-

sought to include the notes in the stipulation of facts if they

had been irrelevant.

     Before Ms. Kelby’s notes were provided to respondent,

petitioners had not provided respondent or the Appeals officers

sufficient credible information upon which the liability could

have been conceded.    Therefore, we conclude that respondent was

substantially justified in taking the position that petitioners

were liable for the alleged 1989 tax.

B.   Conclusion

     Because we conclude that petitioners were not the prevailing

party with respect to any of the issues, they are precluded from

recovering litigation costs, and we need not address whether

petitioners have satisfied the other elements of section 7430.

     To reflect the foregoing,


                                        An appropriate order and

                                 decision will be entered.
