                       T.C. Memo. 1997-214



                     UNITED STATES TAX COURT




      CAROLYN S. EIFERT, A/K/A SUE ARMSTRONG, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 12155-96.                       Filed May 7, 1997.




     Leland Franks, for petitioner.

     Katherine Holmes Ankeny, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION



     ARMEN, Special Trial Judge:   This case is before the Court

on petitioner's motion to recover administrative and litigation
                              - 2 -

costs1 pursuant to section 7430 and Rule 231.2

     Respondent concedes that petitioner substantially prevailed

as to the amount in controversy.   See sec. 7430(c)(4)(A)(ii)(I).

The issues remaining for decision are as follows:

     (1) Whether respondent's position in the administrative and

court proceedings was substantially justified;

     (2) whether petitioner satisfied the net worth requirement

prescribed by section 7430(c)(4)(iii);

     (3) whether petitioner exhausted administrative remedies;

     (4) whether petitioner protracted the administrative and

court proceedings; and

     (5) whether the attorney's fees and other costs that

petitioner seeks to recover are reasonable in amount.

     Neither party requested an evidentiary hearing, and the

Court concludes that a hearing is not necessary for the proper

disposition of petitioner's motion.   Rule 232(a)(3).   We

therefore decide the matter before us based on the pleadings,

petitioner's motion, respondent's response to petitioner's




     1
       Although petitioner's motion is styled "Motion for Payment
of Litigation Costs", we are satisfied that petitioner intended
to move for an award of both administrative costs and litigation
costs.
     2
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue. All references to section 7430 are to such section in
effect at the time that the petition was filed. All Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

motion, and petitioner's reply to respondent's response, as well

as the various exhibits and affidavits attached thereto.

     Carolyn S. Eifert (petitioner) resided in Hobbs, New Mexico,

at the time that her petition was filed with the Court.


                          FINDINGS OF FACT

     In the mid-1980's, petitioner owned an unincorporated

business known as "Eifert's Fashions & Shoes".

     In July 1985, petitioner filed a petition in bankruptcy with

the Bankruptcy Court for the District of New Mexico (the

bankruptcy court).    Petitioner filed her petition in bankruptcy

under chapter 7 of title 11 of the United States Code.

Petitioner was represented before the bankruptcy court by an

attorney (petitioner's bankruptcy attorney).

     Petitioner attached to her petition in bankruptcy a schedule

setting forth all of her liabilities.   Among the liabilities set

forth on such schedule was a debt owed to Moncor Bank of Hobbs,

New Mexico, in the amount of $127,960 (the Moncor Bank debt).

     In September 1986, petitioner was granted a discharge from

all dischargeable debts by the bankruptcy court (the Discharge of

Debtor).   Subsequently, in February 1989, after petitioner's

bankruptcy estate had been fully administered, the bankruptcy

court entered a final decree closing petitioner's bankruptcy case

(the Final Decree).
                                - 4 -

     At some point in time not clearly disclosed by the record,

but before February 1994, Moncor Bank was taken over by the

Federal Deposit Insurance Corp. (FDIC) and placed in

receivership.

     On or about January 31, 1994, petitioner received four Forms

1099-G (the Forms 1099-G).   Each of the Forms 1099-G was issued

for the calendar year 1993 and referenced petitioner's tax

identification number.   Each of the Forms 1099-G disclosed income

from discharge of indebtedness in the identical amount of

$251,203.73 and stated that such income was being reported to the

Internal Revenue Service (IRS).

     Two of the Forms 1099-G were purportedly issued by Arizona

Commerce Bank c/o the FDIC in Denver, Colorado (the original

Forms 1099-G).3   The original Forms 1099-G disclosed the employer

identification number (EIN) of the issuer of such forms as 86-

0381653.   The other two Forms 1099-G were marked "correction" and

were purportedly issued by "c/o" the FDIC in Denver, Colorado

(the corrected Forms 1099-G).   The corrected Forms 1099-G did not

disclose the EIN of the issuer of such forms.

     One of the original Forms 1099-G was issued to petitioner

and referenced account number 2495-2495000186271AB, whereas the

other such form was issued to "Eifert's Fashions/Shoes" and

referenced account number 2495-2495000186271AA.   Similarly, one

     3
       The record does not disclose what relationship, if any,
Arizona Commerce Bank may have had to Moncor Bank.
                               - 5 -

of the corrected Forms 1099-G was issued to petitioner and

referenced account number 2495-2495000186271AB, whereas the other

such form was issued to "Eifert's Fashions/Shoes" and referenced

account number 2495-2495000186271AA.

     On or about January 31, 1994, petitioner also received two

letters dated January 28, 1994, from the FDIC in Dallas, Texas.

One letter was addressed to petitioner and the other letter was

addressed to "Eifert's Fashions & Shoes".     Each letter referenced

account number 2495000186271 and the FDIC office in Denver,

Colorado.   Both letters stated as follows:

          You will, or have already received Internal
     Revenue Service form 1099G which reports to IRS the
     full or partial discharge of your indebtedness with
     respect to the debt obligation noted above. The filing
     of this report with the IRS is required by section
     6050P of the Internal Revenue Code of 1986. The
     reporting requirement applies to all debts discharged
     in full or in part, on or after the effective date of
     August 10, 1993. The amount discharged may or may not
     be taxable income to you, depending upon your own
     circumstances. You should consult with your tax
     advisor to determine whether you must report this
     amount as taxable income.

     In 1993, a Form 1099-G was used to report certain government

payments.   In particular, box 5 of such form was used to report

discharge of indebtedness by a Federal government agency, such as

the FDIC.   See sec. 6050P(c)(1)(B).   The "Instructions for

Recipient" for box 5 provided in pertinent part as follows:

     Box 5.--Shows your indebtedness to a Federal government
     agency that was discharged this year as no longer
     collectible. This debt generally becomes taxable
     income to you at the time the debt is discharged.
                                - 6 -

     There are exceptions to this rule--for example, if you
     are insolvent or have declared bankruptcy.

    Upon receipt of the Forms 1099-G, petitioner contacted her

bankruptcy attorney, who advised her to disregard the Forms 1099-

G because petitioner had previously been granted a discharge in

bankruptcy in September 1986.   Petitioner accepted her bankruptcy

attorney's advice and did not, at that time, pursue the matter

any further.

     Petitioner did not file a Federal income tax return for the

taxable year 1993 because her income for that year did not exceed

the filing threshold.   See sec. 6012(a)(1).

     Information returns (i.e., Forms 1099-G) reporting the

receipt of discharge-of-indebtedness income by petitioner for the

taxable year 1993 were filed with respondent (the information

returns).   Data from the information returns, as compiled by

respondent, revealed the following:


    Payor               Payor's EIN      Payee              Amount
(1) Stockmen's Bk &                      Eifert's
    Tr Co. c/o FDIC1    XX-XXXXXXX       Fashions/Shoes   $251,203

(2) Stockmen's Bk &                      Eifert's
    Tr Co. c/o FDIC     XX-XXXXXXX       Fashions/Shoes     251,203

                                         Eifert's
(3) FDIC                XX-XXXXXXX       Fashions/Shoes     251,203

(4) FDIC                XX-XXXXXXX       Petitioner         251,203

     1
       The record does not disclose what relationship, if
     any, Stockmen's Bank and Trust Co. may have had to
     Moncor Bank.
                                - 7 -

     On or about November 20, 1995, respondent's service center

in Austin, Texas (the Austin service center) sent a 30-day letter

to petitioner (the 30-day letter).      The 30-day letter stated that

respondent had no record of receiving an income tax return from

petitioner for the taxable year 1993.     The 30-day letter then

proposed a deficiency in petitioner's income tax and additions to

tax for 1993 based on income reported to respondent by third

parties.    Such income included discharge-of-indebtedness income

in the amount of $1,004,812, i.e., the sum of the amounts

appearing on the information returns as set forth above.4     The

30-day letter stated that petitioner could appeal "the proposed

assessment" to the IRS Appeals Office.

     The 30-day letter was mailed to petitioner at her former

address in Albuquerque, New Mexico (the Albuquerque address).5

The Albuquerque address was petitioner's address as it appeared

in respondent's computer records at the time that the 30-day

letter was sent (i.e., on or about November 20, 1995).     Prior

thereto, on October 23, 1995, petitioner filed a Federal income

tax return for the taxable year 1994.     Petitioner listed her

address on her 1994 return as P.O. Box 405, Hobbs, New Mexico

     4
       The proposed deficiency was also based on $5,003 of
unreported interest, dividends, and gain from the sale of
securities. A single individual having only such amount of
income in 1993 was not required to file an income tax return for
that year. Sec. 6012(a)(1).
     5
         Petitioner moved from the Albuquerque address in June
1993.
                                 - 8 -

88240 (the Hobbs address).     Respondent did not post the Hobbs

address to respondent's computer records until December 25, 1995.

     Petitioner did not receive the 30-day letter.

     On March 29, 1996, the Austin Service Center mailed a notice

of deficiency to petitioner at both the Hobbs address and the

Albuquerque address.     The notice of deficiency determined a

deficiency in petitioner's income tax and additions to tax in the

same amounts, and on the same basis, as proposed in the 30-day

letter.     Thus, the notice of deficiency determined a deficiency

in petitioner's income tax for the taxable year 1993 in the

amount of $377,365 and additions to tax in the amounts of

$94,341.25 under section 6651(a) and $15,809.68 under section

6654(a).6

     Petitioner received the notice of deficiency shortly after

it was mailed to her.7    Petitioner promptly contacted an IRS

representative at the "800" number set forth on the notice of

deficiency.    Petitioner explained that the amounts reported on

the Forms 1099-G referred to a single debt owed by petitioner to

Moncor Bank and that such debt was discharged by the bankruptcy


     6
       The notice of deficiency also advised petitioner that she
was liable for interest (calculated through Dec. 20, 1995) in the
amount of $74,934. Thus, according to the notice, the total
amount due from petitioner (calculated through Dec. 20, 1995) was
$562,450.
     7
       Petitioner received the copy of the notice of deficiency
that was mailed to her at the Hobbs address. The other copy was
returned to respondent by the Postal Service as undeliverable.
                                - 9 -

court in September 1986.   The IRS representative told petitioner

that petitioner needed to "respond" to the notice of deficiency

in order to "correct the problem" and avoid assessment of the

deficiency, additions to tax, and interest.

     Thereafter, petitioner contacted her accountant and asked

him to resolve the matter for her.      The accountant ultimately

advised petitioner to retain a lawyer.

     Petitioner contacted several lawyers but ultimately decided

to retain Leland Franks (petitioner's counsel).

     On May 29, 1996, petitioner's counsel telephoned the Austin

service center and spoke with Molly Ramirez (Ms. Ramirez), a tax

examiner.   Petitioner's counsel advised Ms. Ramirez that the

notice of deficiency erroneously determined income for 1993 in

respect of the Moncor Bank debt that had been discharged in

bankruptcy in September 1986.    Immediately following the

conversation, petitioner's counsel faxed two documents to Ms.

Ramirez:    (1) a Form 2848 (Power of Attorney and Declaration of

Representative) authorizing petitioner's counsel to represent

petitioner before the IRS, and (2) the Final Decree from

petitioner's bankruptcy proceeding.8

     8
       The fax log report generated by petitioner's counsel's fax
machine indicates that the Final Decree was in fact transmitted
to Ms. Ramirez. Respondent's counsel states that a copy of the
Final Decree was not received by Ms. Ramirez. However, in view
of the fact that Ms. Ramirez never contacted petitioner's counsel
to advise that she had not received all of the documents that had
been transmitted, and because respondent's counsel's statement is
unsupported in the record, we do not accept it.
                              - 10 -

     On or about June 5, 1996, petitioner mailed to the Court a

petition for redetermination (the petition) in respect of the

notice of deficiency.   The petition was received and filed by the

Court on June 12, 1996.

     In the petition, petitioner alleged, in part, that the Forms

1099-G were duplicates of a single indebtedness owed by

petitioner and that such indebtedness had been discharged in

petitioner's prior bankruptcy case.

     At the time that the petition was filed, petitioner's net

worth did not exceed $2,000,000.

     On June 18, 1996, petitioner's counsel contacted Pat Joiner,

an employee of the FDIC, and requested a letter explaining the

Forms 1099-G that had been sent to petitioner.

     On June 19, 1996, Marsha Kish (Ms. Kish), a tax examiner at

the Austin service center to whom petitioner's case had been

assigned, contacted petitioner's counsel.   Petitioner's counsel

explained that the discharge of indebtedness reflected on the

Forms 1099-G represented a single debt incurred by petitioner to

Moncor Bank and that this debt was discharged in bankruptcy in

September 1986.   Petitioner's counsel told Ms. Kish that he had

requested the FDIC to send him a letter explaining the Forms

1099-G.   Ms. Kish asked petitioner's counsel to send her a copy

of such letter as soon as possible; petitioner's counsel agreed

to forward her a copy upon receipt.
                               - 11 -

     Also on June 19, 1996, petitioner's counsel faxed Ms. Kish a

copy of the Discharge of Debtor that the bankruptcy court had

issued in September 1986 and a copy of the bankruptcy schedule on

which petitioner had set forth all of her liabilities.    On the

fax transmittal page, petitioner's counsel directed Ms. Kish's

attention to the Moncor Bank debt.

     As of July 3, 1996, Ms. Kish had not received a copy of the

anticipated FDIC letter.    On that date she telephoned the office

of petitioner's counsel and stated that she was unable to retain

the file in petitioner's case any longer.    Ms. Kish then

transferred the file so that it would be available to

respondent's District Counsel office in Phoenix, Arizona, for

preparation of an answer to the petition.

     On July 22, 1996, respondent filed an answer (the answer).

In the answer, respondent denied all of the substantive

allegations made in the petition.

     As of August 9, 1996, petitioner's counsel had not received

the FDIC letter that he had requested on June 18, 1996.

Accordingly, petitioner's counsel telephoned Pat Joiner and again

requested that the FDIC send him a letter explaining the

relationship of the Forms 1099-G to the Moncor Bank debt.

     On August 12, 1996, petitioner's counsel sent a letter to

Alfonso Romero (Mr. Romero), the Appeals Officer in respondent's

Appeals Office in Albuquerque, New Mexico, to whom petitioner's

case had been assigned.    Petitioner's counsel attached to his
                              - 12 -

letter copies of the Discharge of Debtor, the bankruptcy schedule

on which petitioner had set forth all of her liabilities, the

Forms 1099-G, and the letters dated January 28, 1994, from the

FDIC.

     On August 14, 1996, petitioner's counsel received a

communication dated August 9, 1996, from the FDIC regarding the

relationship of the Forms 1099-G to the Moncor Bank debt.    The

FDIC communication, in the form of a "Corrected Paid Information

Statement", confirmed that indebtedness in the amount of

$251,203.73 was discharged in 1993 and that such indebtedness

related to Moncor Bank.   The FDIC letter offered no explanation

why petitioner had received four Forms 1099-G; it offered no

explanation why petitioner had received those forms more than 7

years after the Moncor Bank debt had been discharged in

bankruptcy; and it offered no explanation why 1993 was identified

as the year in which the indebtedness was discharged.9

     Attached to the FDIC communication was a "corrected" Form

1099-C (Cancellation of Debt) for the taxable year 1995 that had

been altered by hand to reference the taxable year 1993.    That

     9
       The FDIC first became subject to the reporting
requirements relating to the cancellation of indebtedness in
1993. See sec. 6050P, as enacted by sec. 13252(a), Omnibus
Budget Reconciliation Act of 1993 (OBRA), Pub. L. 103-66, 107
Stat. 312, 531-532. Insofar as the FDIC was concerned, reporting
was only required in respect of indebtedness discharged after
Aug. 10, 1993, the date of OBRA's enactment. OBRA sec.
13252(d)(2), 107 Stat. 532. Prior to the enactment of sec.
6050P, the FDIC did not report the cancellation of indebtedness.
H. Conf. Rept. 103-213, 1993-3 C.B. 393, 549.
                               - 13 -

form showed that a debt in the amount of $251,203.73 was canceled

in 1993.    That form also identified: (1) The creditor as the FDIC

(as receiver for Moncor Bank); (2) the creditor's EIN as 85-

0096874; (3) the debtor as Eifert's Fashions & Shoes/Carolyn Sue

Eifert: and (4) the account number as 2495-00018627-1.

       By letter dated August 16, 1996, petitioner's counsel sent

Mr. Romero a copy of the FDIC communication dated August 9, 1996.

       By letter dated August 26, 1996, Mr. Romero sent

petitioner's counsel a form of decision for the latter's review

and signature.    The form of decision provided that petitioner was

not liable for any deficiency in income tax or additions to tax

for the taxable year 1993.

       Upon receipt, petitioner's counsel promptly signed the form

of decision and, by letter dated August 29, 1996, returned it to

Mr. Romero.

       A supervisor in respondent's District Counsel office in

Phoenix, Arizona, signed the form of decision on October 8, 1996.

The form of decision was then mailed to the Court in Washington,

D.C.

       On October 16, 1996, the Court entered a decision in this

case (the decision) utilizing the form of decision furnished by

the parties.
                               - 14 -

     On November 8, 1996, petitioner submitted her motion for

costs.10   Thereupon, by Order dated November 19, 1996, the Court

vacated the decision previously entered and filed the form of

decision as a stipulation of settlement.   See Rule 232(f).


                              OPINION

     We apply section 7430 as amended by the Technical and

Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, sec.

6239(a), 102 Stat. 3342, 3743-3746.11

     Under section 7430(a), a judgment for costs may only be

awarded if a taxpayer: (1) Is the "prevailing party"; (2) has

exhausted his or her administrative remedies within the IRS with

respect to an award of litigation costs; and (3) did not

unreasonably protract the proceedings.   Sec. 7430(a), (b)(1),

     10
       In her motion, petitioner prayed for an award of costs in
the amount of $4,419.91. Petitioner subsequently revised this
amount to include actual costs incurred after the motion was
filed. Petitioner now requests an award of costs in the amount
of $4,577.22, consisting of the following:

     Attorney's fees (32.4 hours at $130/hour)    $4,212.00
     Filing fee/other costs and expenses             365.22
                                                   4,577.22
     11
       Technical and Miscellaneous Revenue Act of 1988, (TAMRA)
Pub. L. 100-647, sec. 6239(d), 102 Stat. 3746 is generally
applicable to proceedings commenced after Nov. 10, 1988. TAMRA
sec. 6239(d), 102 Stat. 3746. Congress amended sec. 7430 most
recently in the Taxpayer Bill of Rights 2 (TBOR2), Pub. L. 104-
168, secs. 701-704, 110 Stat. 1452, 1463-1464. However, the
amendments made by TBOR2 apply only in the case of proceedings
commenced after July 30, 1996. TBOR2 secs. 701(d), 702(b),
703(b), and 704(b), 40 Stat. 1463-1464. Inasmuch as the petition
was filed on June 12, 1996, the amendments made by TBOR2 do not
apply in the present case.
                                - 15 -

(4).    A taxpayer must satisfy each of these three requirements in

order to be entitled to a judgment under section 7430.      Rule

232(e).

I. Prevailing Party

        In order to qualify as the "prevailing party", a taxpayer

must establish: (1) The position of the United States in the

proceeding was not substantially justified; (2) the taxpayer has

substantially prevailed with respect to the amount in controversy

or the most significant issue or set of issues presented; and (3)

the taxpayer satisfies the applicable net worth requirement.

Sec. 7430(c)(4)(A).

       Respondent concedes that petitioner substantially prevailed

with respect to the amount in controversy.     See sec.

7430(c)(4)(A)(ii)(I).     However, respondent contends that the

position taken by respondent in both the administrative and court

proceedings was substantially justified.     Respondent also

contends that petitioner must prove that she satisfies the

applicable net worth requirement.

       A.   Respondent's Position in the Administrative and Court

Proceedings

       Petitioner bears the burden of proving that respondent's

position in the administrative and court proceedings was not

substantially justified.     Rule 232(e); Dixson Corp. v.

Commissioner, 94 T.C. 708, 714-715 (1990); Ganter v.
                               - 16 -

Commissioner, 92 T.C. 192, 197 (1989), affd. 905 F.2d 241 (8th

Cir. 1990).

     Whether respondent's position is substantially justified is

a question of fact.    We resolve such issue by the application of

a reasonableness standard.    See Pierce v. Underwood, 487 U.S.

552, 565 (1988) (construing similar language in the Equal Access

to Justice Act (EAJA), 28 U.S.C. sec. 2412 (1988)); see also

Sokol v. Commissioner, 92 T.C. 760, 763 n.7 (1989); Sher v.

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

1988).    In considering the reasonableness of respondent's

position, we take into account what respondent knew at the time

that she took the position based on the information available to

her at that time.    See Rutana v. Commissioner, 88 T.C. 1329, 1334

(1987).

     As relevant herein, the position of the United States that

must be examined against the substantial justification standard

with respect to the administrative proceeding is the position

taken by the Commissioner as of the date of the notice of

deficiency.    Sec. 7430(c)(7)(B)(ii).   The position of the United

States that must be examined against the substantial

justification standard with respect to the court proceeding is

the position taken by the Commissioner in her answer to the

petition.    Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir.

1991); Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir.

1988), affg. 89 T.C. 79 (1987); see sec. 7430(c)(7)(A).
                               - 17 -

     In this case, respondent's position on each of these dates

was the same.    More specifically, until Mr. Romero conceded the

case in response to the FDIC communication dated August 9, 1996,

the position of respondent was that the discharge of indebtedness

reported on the information returns filed with respondent

represented taxable income to petitioner.

            (1) The Administrative Proceeding

     We begin with petitioner's contention that respondent's

position was not substantially justified at the time that the

notice of deficiency was issued.    Respondent contends to the

contrary.    We agree with petitioner.

     Our conclusion that respondent's position was not

substantially justified at the time that the notice of deficiency

was issued is not based on any one particular factor; rather, our

conclusion is based on the totality of the facts and

circumstances present in this case.      The following facts and

circumstances are those that we think are particularly

significant in cumulatively tipping the scales in petitioner's

favor.

     The deficiency determined by respondent in the notice of

deficiency is predicated on an adjustment to income in the amount

of $1,009,815.    Virtually all of this amount, i.e., $1,004,812,

represents discharge-of-indebtedness income.      Such discharge-of-

indebtedness income originates from four Forms 1099-G, each of

which is for the exact same amount, i.e., $251,203.      Under these
                              - 18 -

circumstances, respondent should have regarded the Forms 1099-G

with skepticism.

     In addition, the Forms 1099-G showed the payor as the FDIC

in combination with different financial institutions having

different EINs, notwithstanding the fact that each Form 1099-G

reported exactly the same amount of income.   Again, respondent

should have regarded such forms with skepticism.

     Moreover, two of the four Forms 1099-G were "corrected"

forms.   At the very least, this fact constituted evidence of a

duplication, and respondent should have regarded the Forms 1099-G

with skepticism.

     We also think that respondent should have taken into account

the identity of the issuer of the Forms 1099-G and the character

of the "income" reported therein.   First, box 5 of Form 1099-G

was used to report discharge of indebtedness by a Federal

government agency.   There is nothing in the record to suggest why

respondent, the Commissioner of Internal Revenue, could not have

contacted the Federal government agency that issued the Forms

1099-G in order to determine the basis on which such forms were

issued given the dubious nature of such forms.

     Second, section 108(a)(1) excludes from gross income an

amount otherwise includable therein if the discharge of

indebtedness occurs in a bankruptcy case or when the taxpayer is

insolvent.   Indeed, the "Instructions for Recipient" for box 5 of

Form 1099-G expressly acknowledged this provision.   Again, there
                              - 19 -

is nothing in the record to suggest why respondent could not have

contacted the FDIC in order to determine the basis on which the

Forms 1099-G were issued given the dubious nature of such forms.

     Further, respondent issued the notice of deficiency after

only one attempt to contact petitioner.   We again take note of

the fact that the notice determined a million dollar adjustment

to petitioner's income.   As a consequence of this million dollar

adjustment, the notice determined a deficiency in petitioner's

income tax in the amount of $377,365, and additions to tax under

sections 6651(a) and 6654(a) in the amounts of $94,341.25 and

$15,809.68, respectively.   The notice also advised petitioner

that she was liable for interest (calculated through December 20,

1995) in the amount of $74,934.   Thus, according to the notice,

the total amount due from petitioner (calculated through December

20, 1995) was $562,450.   Given a liability of this magnitude, and

in view of the dubious nature of the Forms 1099-G, we question

whether respondent should have issued the notice of deficiency

after making only one attempt to contact petitioner.

     Indeed, we take note of the fact that respondent originally

proposed the liability of $562,450 in the 30-day letter that was

sent to petitioner in November 1995.   Again, given the magnitude

of such liability, and in view of the dubious nature of the Forms

1099-G, we question whether respondent should have even proposed
                                - 20 -

such a liability without first attempting to contact

petitioner.12

     In view of the foregoing, we conclude that it was

unreasonable for respondent, in the context of this case and

without further investigation, to determine a million dollar

adjustment to petitioner's income.       We therefore hold that

respondent's position was not substantially justified at the time

that the notice of deficiency was issued.

     (2) The Court Proceeding

     We also hold that respondent's position was not

substantially justified at the time that the answer was filed.

Again, our holding is based on the totality of the facts and

circumstances present in this case.       In addition to the factors

that we have already discussed, the facts and circumstances that

support our holding are as follows:

     Shortly after receiving the notice of deficiency, petitioner

contacted an IRS representative at the "800" number set forth on

the notice of deficiency and explained that the amounts reported

on the Forms 1099-G referred to a single debt and that such debt

was discharged in a bankruptcy proceeding in September 1986.


     12
       In any event, we suspect that if respondent had processed
petitioner's 1994 income tax return more promptly, petitioner
would have received and responded to the 30-day letter. Here it
should be recalled that petitioner listed the Hobbs address on
her 1994 income tax return, and that respondent did not post the
Hobbs address to respondent's computer records until after the
1994 return had been processed.
                                - 21 -

The IRS representative told petitioner that petitioner needed to

"respond" to the notice of deficiency in order to "correct the

problem".

     In May 1996, petitioner's counsel spoke with Ms. Ramirez and

advised her that the notice of deficiency erroneously determined

income for 1993 in respect of a debt that had been discharged in

bankruptcy in September 1986.     Petitioner's counsel also

transmitted by facsimile: (1) A power of attorney authorizing him

to represent petitioner before the IRS; and (2) the Final Decree

from petitioner's bankruptcy proceeding.     Ms. Ramirez took no

action, but waited instead for petitioner's counsel to furnish

additional evidence.

     Despite the foregoing contacts and the information furnished

by petitioner and petitioner's counsel, as well as the

infirmities evident on the face of the Forms 1099-G, and

notwithstanding the fact that the statute of limitations on

assessment for 1993 had not yet even begun to run, see sec.

6501(c)(3), respondent did not offer to rescind the notice of

deficiency.   See sec. 6212(d).

     After petitioner filed the petition but before respondent

filed the answer, petitioner's counsel transmitted to Ms. Kish a

copy of the Discharge of Debtor that the bankruptcy court had

issued in September 1986 and a copy of the bankruptcy schedule on

which petitioner had set forth all of her liabilities,

specifically including the Moncor Bank debt.     Petitioner's
                             - 22 -

counsel directed Ms. Kish's attention to the latter.

Nevertheless, Ms. Kish took no action, and instead transmitted

the file, presumably including the foregoing documents, to

respondent's District Counsel office for preparation of the

answer.

     When respondent filed the answer in July 1996, respondent

should have been aware of all of the infirmities, as previously

described, that were evident on the face of the Forms 1099-G.

Respondent should also have been aware of petitioner's position

that the Forms 1099-G related to a single debt that had been

discharged by the bankruptcy court in September 1986.     Indeed,

respondent's administrative file should have included the

operative documents related to petitioner's bankruptcy case.

Nevertheless, respondent denied all of the substantive

allegations made in the petition and thereby permitted this case

to proceed.

     Finally, we observe that respondent did not concede this

case until after petitioner's counsel furnished the FDIC

communication dated August 9, 1996.   Although the FDIC

communication did confirm the existence of indebtedness owed by

petitioner to Moncor Bank, the FDIC continued to maintain that

indebtedness in the amount of $251,203.73 was discharged in 1993.

We question, therefore, whether the FDIC communication was

actually the definitive piece of evidence that "allowed"

respondent to concede.
                                 - 23 -

      B.   Petitioner's Net Worth

      The record demonstrates that petitioner satisfies the

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

Here we note that petitioner attached to her motion for costs an

affidavit averring that she satisfied such net worth requirement.

Petitioner subsequently furnished an additional affidavit in

which she set forth her assets and liabilities.   Respondent has

never challenged or otherwise questioned either of petitioner's

affidavits.

      Based on petitioner's affidavits, as well as the record as a

whole, we have found as a fact that petitioner's net worth did

not exceed $2,000,000 at the time that the petition was filed.

We therefore hold that petitioner satisfies the applicable net

worth requirement.

      C.   Conclusion

      In view of the foregoing, we hold that petitioner was the

prevailing party in both the administrative and court

proceedings.

II.   Exhaustion of Administrative Remedies

      Respondent contends that petitioner failed to exhaust

administrative remedies because petitioner failed to appeal the

proposed deficiency to the IRS Appeals Office as stated in the

30-day letter.    We disagree.

      The short answer to respondent's contention is that

petitioner never received the 30-day letter because the letter
                                    - 24 -

was sent to an address where petitioner no longer lived.13        We

infer that petitioner would have appealed the proposed deficiency

if petitioner had known about it.        Taking into account the fact

that petitioner did not receive the 30-day letter, we reject

respondent's contention that petitioner failed to exhaust

administrative remedies.         See sec. 301.7430-1(e)(2), Proced. &

Admin. Regs.

III.    Protraction of Proceedings

       Respondent contends that petitioner unreasonably protracted

the court proceeding because petitioner failed to provide

"relevant information immediately after the issuance of the

Notice of Deficiency".      In respondent's view, if petitioner had

provided such information, then respondent could have rescinded

the notice of deficiency.

       As previously discussed, respondent did not offer to rescind

the notice of deficiency in spite of (1) the infirmities evident

on the face of the Forms 1099-G, and (2) the information

furnished by petitioner and petitioner's counsel after the notice

was issued.      Thus, we reject respondent's contention that

petitioner unreasonably protracted the court proceeding.

IV.    Reasonableness of the Amount of Costs Claimed




       13
            See supra note 12.
                                - 25 -

     In her motion, petitioner prays for an award of costs in the

amount of $4,577.22.14    Respondent suggests that an award of

attorney's fees at a rate in excess of $75 per hour (plus the

appropriate COLA) would be unreasonable.     Respondent does not

suggest that the number of hours billed by petitioner's counsel

is unreasonable, nor does respondent suggest that the other costs

and expenses that petitioner seeks to recover are either

unrecoverable or unreasonable in amount.

     Section 7430(c)(1) defines reasonable costs, in part, as

reasonable fees paid or incurred for the services of attorneys in

connection with the administrative and court proceedings.

Section 7430(c)(1)(B)(iii) limits the hourly rate for attorney's

fees to $75, with allowances for an increase in the cost of

living and other special factors.

     This Court's position is that the cost of living adjustment

(COLA) applicable to an award of attorney's fees should be

measured from October 1, 1981, i.e., the same date from which

COLA's are measured under the EAJA.      Bayer v. Commissioner, 98

T.C. 19 (1992); see Harris v. Railroad Retirement Board, 990 F.2d

519, 521 (10th Cir. 1993)(applying the EAJA analogously).

Inasmuch as petitioner's counsel billed petitioner at the rate of

$130 per hour for 1996 and 1997, we award petitioner attorney's




     14
          See supra note 10 for the breakdown of this amount.
                              - 26 -

fees at that rate.   See Austin v. Commissioner, T.C. Memo. 1997-

157, (slip op. at 24).

V.   Conclusion

      In summary, we hold that petitioner qualifies as a

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

and that she is entitled to an award of costs under section 7430

in the amount of $4,577.22.




      In order to reflect the foregoing,



                                           An appropriate order and

                                    decision will be entered for

                                    petitioner.
