                        T.C. Memo. 2007-317



                      UNITED STATES TAX COURT



                   GABINO DIAZ, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1853-06.                Filed October 23, 2007.



     Jeffrey D. Moffatt, for petitioner.

     John D. Faucher, for respondent.



                        MEMORANDUM OPINION

     SWIFT, Judge:   This matter is before the Court on

petitioner’s motion for an award of litigation costs under

section 7430(a)(2) and Rule 231.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect at all relevant times, and
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all Rule references are to the Tax Court Rules of Practice and

Procedure.

                             Background

     At the time the petition was filed, petitioner resided in

Newhall, California.

     On approximately February 10, 2004, petitioner timely filed

his 2003 Federal income tax return.

     During respondent’s audit of petitioner’s 2003 Federal

income tax return, petitioner submitted to respondent certain

documentation.   The documents included various checks and

mortgage interest statements to petitioner and to one other

individual.   Printed on the checks as owners of the bank account

on which the checks are drawn are the names of petitioner and two

other individuals.   The checks are made payable to various

companies and individuals.   The signatures on most of the checks

are illegible.   None of the checks appears to be signed by

petitioner.   The record does not indicate the relationship

between petitioner and the other individuals whose names appear

on the checks and on the interest statements.

     Also during respondent’s audit, petitioner submitted

additional documentation which included an automobile lease

agreement in petitioner’s name, Form W-2, Wage and Tax Statement,

relating to wages paid to petitioner, and copies of three
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additional checks.   Again, the signatures on the checks are

illegible.

     Respondent, concluding that the above documentation was

inadequate, disallowed all $36,182 of the deductions claimed on

Schedule A, Itemized Deductions, of petitioner’s 2003 Federal

income tax return ($23,885 in home mortgage interest, $8,673 in

state income tax, $363 in contributions, and $3,261 in

miscellaneous expenses).

     Petitioner protested respondent’s audit adjustments to

respondent’s Appeals Office but did not explain to respondent’s

Appeals Office the confusing checks and signatures that

petitioner had provided to respondent.

     On November 28, 2005, respondent determined a deficiency of

$6,077 in petitioner’s 2003 Federal income taxes.   The deficiency

was based on a disallowance by respondent of the $36,182 claimed

Schedule A deductions.

     On January 25, 2006, petitioner filed a petition regarding

respondent’s November 28, 2005, notice of deficiency.    In the

petition, petitioner claimed that the documentation petitioner

submitted to respondent during the audit adequately substantiated

the deductions respondent had disallowed.

     On March 7, 2006, respondent filed an answer in which

respondent argued that the documentation petitioner submitted to
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respondent during the audit did not adequately substantiate

petitioner’s claimed deductions.

     Before the scheduled trial date, the case was referred back

to respondent’s Appeals Office, and petitioner submitted

additional documentation relating to petitioner’s claimed

deductions.   A number of conferences occurred in which

petitioner’s counsel met with respondent’s Appeals officer and

discussed the deductions in question and explained the

documentation that had been submitted.

     On February 16, 2007, respondent agreed to settle, and

petitioner and respondent stipulated that $30,905 of the total

$36,182 claimed Schedule A deductions that had been disallowed

were allowable and that all other issues were resolved.

     On March 12, 2007, petitioner filed a motion for litigation

costs requesting reimbursement for legal fees incurred by

petitioner.

                              Discussion

     Generally, under section 7430 a taxpayer may recover from

respondent costs relating to litigation in which the taxpayer

substantially prevails.

     Recoverable litigation costs include court costs and

reasonable attorney’s fees.    Sec. 7430(c)(1); Dunaway v.

Commissioner, 124 T.C. 80 (2005).      Litigation costs may be

awarded if, among other things, the taxpayer:     (1) Is the
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prevailing party; (2) exhausted available administrative

remedies; and (3) did not unreasonably protract the court

proceedings.   Sec. 7430(a) and (b)(1), (3).

     Under section 7430(c)(4)(A), a “prevailing party” is defined

as a party who has substantially prevailed with respect to the

amount in controversy or who has substantially prevailed with

respect to the most significant issue or set of issues and who

meets certain net worth requirements.   Sec. 7430(c)(4)(A).   If

respondent establishes that respondent’s position in the

proceeding was substantially justified, the taxpayer will not be

treated as a prevailing party.   Sec. 7430(c)(4)(B).   Whether

respondent’s position was substantially justified depends on

whether his position was supported by a reasonable basis in law

and fact.   Pierce v. Underwood, 487 U.S. 552 (1988); Rickel v.

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

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

     The fact that respondent eventually loses or concedes an

issue or issues does not by itself establish that respondent’s

position was unreasonable.   Maggie Mgmt. Co. v. Commissioner, 108

T.C. 430, 443 (1997).

     Whether respondent acted reasonably turns largely on the

basis of the available information used to form respondent’s

position and whether respondent knew or should have known that

his position was invalid at the time respondent took the position
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in the litigation.   Coastal Petroleum Refiners, Inc. v.

Commissioner, 94 T.C. 685, 688-690 (1990).

     Respondent’s position in a judicial proceeding is that which

is set forth in respondent’s answer to the petition.    Sec.

7430(c)(7)(A); see Huffman v. Commissioner, 978 F.2d 1139, 1147-

1148 (9th Cir. 1992), affg. in part and revg. in part T.C. Memo.

1991-144; Maggie Mgmt. Co. v. Commissioner, supra at 442.

     Respondent concedes that petitioner substantially prevailed

with respect to the amount in controversy and exhausted all

administrative remedies.    Respondent argues, however, that

respondent’s position was substantially justified and that

therefore petitioner does not qualify as a prevailing party for

purposes of section 7430.

     Relying on an unpublished opinion, McKee v. Commissioner,

209 Fed. Appx. 691 (9th Cir. 2006) (holding that respondent’s

position was not substantially justified where respondent

admitted that key errors were made in calculating the taxpayer’s

deficiency), revg. T.C. Memo. 2004-115, petitioner argues that

respondent’s position was not substantially justified.

     We conclude that on the record before us respondent was

substantially justified in asserting in his answer that

petitioner’s claimed deductions were not substantiated.    A number

of individuals in addition to petitioner were referenced on

checks and other documentation that were provided to respondent.
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Most of the signatures on the checks were illegible.     The

signatures that were legible were not those of petitioner.     Prior

to litigation it certainly is understandable that it was unclear

to respondent who actually paid the expenses in question.

     Further, in his answer, respondent acted reasonably in

contesting the claimed deductions.     At the time respondent filed

his answer respondent neither knew nor should have known that

respondent’s position was incorrect.

     Petitioner’s claim for reimbursement of litigation costs

will be denied.

     To reflect the foregoing,

                                             An appropriate order and

                                       decision will be entered for

                                       respondent.
