                          T.C. Memo. 1995-564



                        UNITED STATES TAX COURT



        HENRY P. AND DARLENE C. BRANTLEY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10128-94.              Filed November 28, 1995.



     William J. Irvin and Stephen Gregory Reardon, for petitioners.

     Scott Anderson, John C. Donovan, and Thomas D. Moffitt, for

respondent.



                          MEMORANDUM OPINION

     JACOBS,   Judge:      This   matter    is    before   the   Court   on

petitioners'   Motion    for   Litigation   and    Administrative    Costs

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

to the Internal Revenue Code in effect for the matter under
                                    -2-

consideration, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

     The substantive issue which gave rise to petitioners' motion

involves the 1990 cancellation of a $228,000 note owed by Henry P.

Brantley (petitioner) to Elite Coatings Company, Inc. (Elite), and

whether such cancellation resulted in discharge of indebtedness

income to petitioners pursuant to section 61(a)(12).                Respondent

conceded this issue when this case was called for trial on March

20, 1995, in Richmond, Virginia.

     The parties have submitted affidavits and memoranda supporting

their positions.     Neither party requested an evidentiary hearing.

We decide the matter before us based on petitioners' Motion for

Litigation and Administrative Costs, respondent's objection to

petitioners'    motion,   petitioners'       response       and   supplemental

response   to   respondent's       objection,      respondent's      reply      to

petitioners' response, and the affidavits and exhibits provided by

the parties.    See Rule 232(a)(3).

     Petitioners     failed   to   present   the    facts    surrounding       the

cancellation    of   Henry    P.   Brantley's      debt     to    Elite   in     a

comprehensive manner.     Nevertheless, we attempt to succinctly set

forth below those pertinent facts (as we understand them) required

to resolve the motion before us.          In doing so, we have simplified

a complex series of events with regard to petitioner's acquisition

of Elite stock and the ultimate cancellation of petitioner's debt

to Elite in connection with such stock acquisition.
                                      -3-

Background

       Petitioners Henry P. and Darlene C. Brantley resided in

Milledgeville, Georgia, at the time they filed their petition in

this case.

       Petitioner is a chemical engineer.              He was employed at all

relevant times by Elite, a Georgia corporation that produced and

sold paint and allied products.

       In June 1985, petitioner wrote two checks totaling $72,000

(one to Hargis Enterprises, Inc. (H. Enterprises) and the other to

Gary     W.    Hargis)    with   respect    to    a    "business     agreement".

Apparently,      this    "business   agreement"       related   to   petitioner's

prospective ownership in Elite.             At the time the checks were

issued, H. Enterprises and Mr. Hargis owned all of the stock of

Elite. Mr. Hargis was sole shareholder, president, and director of

H. Enterprises.

       In the latter part of 1987, petitioner acquired 49 percent of

the outstanding stock of Elite.            The record does not reveal from

whom (H. Enterprises, Mr. Hargis, or Elite) petitioner acquired the

stock.        Petitioner paid $300,000 for his 49-percent ownership

interest.      This amount consisted of $72,000 (which he had paid to

Mr. Hargis and H. Enterprises in 1985) and a $228,000 promissory

note to Elite.

       At the time of the acquisition, representations were made to

petitioner that Elite's value exceeded $600,000 and that its plant

was in good physical condition.              These representations proved
                                       -4-

false; at the time petitioner acquired the stock, Elite had a

negative net worth and its plant was in poor physical condition.

     On April 2, 1990, H. Enterprises, Mr. Hargis, Elite, and

petitioner entered into an agreement pursuant to which, among other

matters, petitioner purchased an additional 2 percent of Elite

stock from H. Enterprises.             As part of the agreement, Elite

forgave all debts owed it by H. Enterprises, Mr. Hargis, and

petitioner, including petitioner's $228,000 note to Elite.

     Subsequently, on April 19, 1990, Elite redeemed all of its

stock owned by H. Enterprises.           As a result of this redemption,

petitioner owned 100 percent of Elite stock.

     Furthermore, on April 19, 1990: (1) H. Enterprises and Mr.

Hargis     sold   to   Elite   their   interest   in   patents,   trademarks,

servicemarks, logos, trade names, formulas, and paint formulations;

and (2) Mr. Hargis entered into a noncompetition agreement with

Elite.

Administrative Proceeding

     The examination of petitioners' 1990 Federal income tax return

began as an offshoot of an audit of H. Enterprises and Elite.             The

revenue agent questioned whether petitioners should have reported

the cancellation of the $228,000 debt as income on their 1990

return.1

     1
          Gross income includes income from the discharge of
indebtedness. Sec. 61(a)(12). A taxpayer may realize discharge
of indebtedness income by paying an obligation at less than its
                                                   (continued...)
                                        -5-

     Throughout          the   administrative           proceeding,       petitioners

maintained that they did not receive income from the cancellation

of the $228,000 note.          They stated that the revenue agent erred

when he determined that the cancellation of petitioner's note to

Elite on April 2, 1990, was connected to Elite's redemption of its

stock    from    H.     Enterprises    on       April   19,       1990.   Petitioners

contended that the cancellation of petitioner's debt to Elite was,

in essence, a reduction of the $300,000 purchase price for Elite's

stock    to   reflect     Elite's     correct      value      pursuant    to   section

108(e)(5)2 or as a setoff for damages because of misrepresentations

     1
      (...continued)
face value. United States v. Kirby Lumber Co., 284 U.S. 1
(1931). A reduction in debt without a corresponding reduction in
assets causes an economic gain and income to the debtor because
assets are no longer encumbered. Generally, a cancellation of
indebtedness produces income to the debtor in an amount equal to
the difference between the amount due on the obligation and the
amount paid for the discharge. If no consideration is paid for
the discharge, then the entire amount of the debt is in most
circumstances considered the amount of income that the debtor
must include in income. Sec. 61(a)(12); Babin v. Commissioner,
23 F.3d 1032, 1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.
     2
              Sec. 108(e)(5) provides:


SEC. 108.       INCOME FROM DISCHARGE OF INDEBTEDNESS.

                    *      *     *          *       *         *       *

     (e) General Rules for Discharge of Indebtedness (Including
     Discharges Not in Title 11 Cases or Insolvency).--For
purposes of this title--

                    *      *     *          *       *         *       *

              (5)     Purchase-money debt reduction for solvent debtor
                                                          (continued...)
                                      -6-

made       to   petitioner.   Alternatively,   petitioners   argued   that

petitioner was insolvent at the time the note was discharged, and,

as a result, the amount of the discharged indebtedness was not

includable in income pursuant to section 108(a)(1)(B).3

       2
        (...continued)
       treated as price reduction.--If--

                     (A) the debt of a purchaser of property to
                the seller of such property which arose out of the
                purchase of such property is reduced,

                      (B) such reduction does not occur--
                           (i)   in a title 11 case, or
                           (ii) when the purchaser is insolvent,
                and

                     (C) but for this paragraph, such reduction
                would be treated as income to the purchaser from
                the discharge of indebtedness,

       then such reduction shall be treated as a purchase price
       adjustment.

     Sec. 108(e)(5) was enacted "to eliminate disagreements
between the Internal Revenue Service and the debtor as to
whether, in a particular case to which the provision applies, the
debt reductions should be treated as discharge income or a true
price adjustment." S. Rept. 96-1035 (1980), 1980-2 C.B. 620,
628. In order for a reduction in the amount of a debt to be
treated as a purchase price adjustment pursuant to sec.
108(e)(5), the following conditions must be met: (1) The debt
must be that of a purchaser of property to the seller that arose
out of the purchase of such property; (2) the taxpayer must be
solvent and not in bankruptcy when the debt reduction occurs; and
(3) except for section 108(e)(5), the debt reduction would
otherwise have resulted in discharge of indebtedness income.
Sec. 108(e)(5); 1 Bittker & Lokken, Federal Taxation of Income,
Estates and Gifts, pp. 6-40 to 6-41 (2d ed. 1989); Juister v.
Commissioner, T.C. Memo. 1987-292, affd. without published
opinion 875 F.2d 864 (6th Cir. 1989).
       3
          Gross income does not include discharge of indebtedness
income if the discharge occurs when the taxpayer is insolvent.
                                                   (continued...)
                                        -7-

     The revenue agent requested petitioners to produce pertinent

information   regarding     the   stock       transfer   and   cancellation   of

indebtedness,   as   well    as   the    circumstances     surrounding   these

events.    Petitioners failed to do so.

     The   revenue   agent    did   not       possess    sufficient   facts   to

understand the 1987 and 1990 transactions that transferred stock

ownership of Elite from Mr. Hargis to petitioner. The documentary

evidence that the agent possessed indicated that after the two

April 1990 transactions, petitioner was the owner of all the

outstanding Elite stock and no longer was indebted to Elite.

     Because the parties were unable to reach an agreement with

respect to the discharge of indebtedness income, respondent issued

a notice of deficiency on March 11, 1994.            Respondent determined a

$70,355 deficiency in petitioners' 1990 Federal income tax and a

$14,071 accuracy-related penalty pursuant to section 6662(a).



     3
      (...continued)
Sec. 108(a)(1)(B). The amount of discharge of indebtedness
income excluded from gross income may not exceed the amount of
the taxpayer's insolvency. Sec. 108(a)(3). A taxpayer is
insolvent when his liabilities exceed the fair market value of
his assets immediately before the discharge. Sec. 108(d)(3). If
an insolvent taxpayer's debt is discharged, no income is realized
because the discharge of indebtedness does not make assets
available to the debtor. Quinn v. Commissioner, 31 B.T.A. 142,
145 (1934); cf. United States v. Kirby Lumber Co., 284 U.S. 1
(1931). However, a debtor who is insolvent before the discharge
realizes income to the extent such discharge renders him solvent.
Conestoga Transp. Co. v. Commissioner, 17 T.C. 506, 513 (1951);
Texas Gas Distrib. Co. v. Commissioner, 3 T.C. 57, 61-62 (1944).
                                    -8-

Judicial Proceeding

     Petitioners filed a petition in this Court on June 14, 1994.4

Their petition reiterated the arguments enunciated during the

administrative proceeding.

     On June 22, 1994, an attorney in respondent's Richmond,

Virginia, office was assigned this case.             Respondent's answer,

filed on July 22, 1994, denied petitioners' allegations for lack of

sufficient information.

     On February 1, 1995, respondent's counsel sent a letter to

petitioners' counsel summarizing respondent's position that (1)

section 108(a)(1)(B) is not applicable because petitioner was not

insolvent in April 1990, and (2) the debt forgiveness does not

qualify as a section 108(e)(5) purchase price adjustment.             In the

letter,    respondent's   counsel    asked    that    the   parties   begin

stipulating facts, and stated that the documents provided by

petitioners    "present   a   confusing      picture"   with   regard    to

petitioner's acquisition of Elite stock.

     Petitioners' claim of insolvency at the time the stock was

transferred was based on a financial statement petitioners prepared

as of April 1990.   That statement reflects a negative net worth of

$229,700. However, respondent's counsel did not agree with certain

aspects of the financial statement: (1) Petitioner's Elite stock is

valued at only $100, while the full amount of his $228,000 note to

     4
           The petition was timely mailed on June 9, 1994.            Sec.
7502(a).
                                       -9-

Elite is shown as a liability; and (2) petitioner's half-interest

in petitioners' residence is listed as an asset, while the full

amount of     the   residential    mortgage    is   shown   as   a   liability.

Respondent's counsel contended that an accurate financial statement

would show that petitioner was in fact solvent in April 1990

because    Elite     owned   valuable    equipment,      patents,    and     real

property.5

     Respondent's counsel was uncertain whether section 108(e)(5)

applied because it was not clear from whom petitioner acquired his

Elite stock.    Petitioners never provided respondent's counsel with

Elite's stock record book.          Respondent's counsel believed that

section 108(e)(5) would apply only if Elite had sold the stock to

petitioner.     In addition, section 108(e)(5) requires petitioner to

have been solvent in April 1990.

     Finally,       respondent's   counsel     believed     that     petitioner

acquired all of the Elite stock through a series of agreements in

which valuable property and rights to property were transferred to

Mr. Hargis and entities that he controlled in exchange for his

Elite stock. Petitioners' claim that the Elite stock was worthless

was belied by the hard-bargained series of deals.

     On February 16, 1995, counsel for petitioners and respondent

met to discuss the case.       Petitioners' counsel for the first time

provided     respondent's    counsel    with   factual   background     to   the

     5
          An Oct. 3, 1989, letter states that Elite was worth
approximately $1,250,000.
                                   -10-

documents that petitioners had earlier presented.         Petitioners'

counsel related the following information to respondent's counsel

during the meeting.

     1.     Petitioner is a chemical engineer whose specialty is

paint. In 1990 he was employed by Elite, a company that developed,

produced,   and   sold   special   application   paints   for   bridges,

ironwork, and railroad rolling stock.        Until 1987, Elite was a

wholly owned subsidiary of H. Enterprises.

     2.     Prior to 1987, petitioner had loaned funds or had not

received salary so that Elite essentially owed him $72,000.          In

1987, Elite issued petitioner 49 percent of the outstanding stock.

In return, petitioner contributed $72,000 to Elite and signed an

interest-bearing note for $228,000. Petitioner expected to pay the

note with future Elite dividends.         However, Elite did not pay

dividends because its excess cash was "siphoned off" by Mr. Hargis.

As a result of the transfer of stock in 1987, Elite was no longer

able to file a consolidated return and began to file its own income

tax returns.

     3.     Through two separate agreements entered into in April

1990, Elite canceled the $228,000 note, and petitioner acquired the

remaining outstanding shares of Elite stock. Central to the change

in ownership, but not part of the agreements, was a refinancing

arrangement whereby the financial backer of the corporation was

replaced.
                                      -11-

     4.     Petitioner was the engineer who ran Elite.                He believed

that he could make a profit selling specialty paint.                   Mr. Hargis

and his various enterprises were "siphoning off" a great deal of

Elite's profit.        By 1990, petitioner "wanted out".            Mr. Hargis was

financially unstable and was pressured by the financial backer to

personally repay Elite's line of credit.             The new financial backer

agreed to provide financing for the corporation only if Mr. Hargis

was no longer involved in the operation.              The agreements through

which petitioner acquired the remaining Elite stock was a way for

petitioner to "get rid" of Mr. Hargis by transferring real and

personal    property     Elite   owned    with   a   value    of    approximately

$150,000.     Mr. Hargis received the property in return for his

remaining interest in a corporation that was not going to survive

without new working capital (which was unavailable while he was an

owner).     As a result of the presence of the new financial backer,

Mr. Hargis was relieved of his personal guarantee of Elite's loans.

     5.     In   exchange     for   taking   over    Elite's       debt,   the   new

financial backer received a steady source of a product he needed

from a more stable company run and owned by a person he admired and

trusted.    The new financial backer believed that petitioner would

be required to guarantee the new financial backer's loans to Elite

but due to a mistake, petitioner was not asked for his guarantee

until after      the    new   financial   backer     came    into    the   picture.

Petitioner then refused to become a guarantor.
                                        -12-

     Petitioners'        counsel      informed      respondent's   counsel     that

petitioner and the new financial backer would testify to the above

facts. Respondent's counsel determined that no one was available to

contradict petitioners' position.

     Thus,   it    was    at    the    February      16,   1995,   meeting     that

respondent's counsel "was presented with a logical explanation" for

the first time as to why Mr. Hargis "gave" petitioner 51 percent of

the Elite stock.    Also, on February 24, 1995, petitioners provided

respondent with numerous documents.

     After considering the explanation offered at the February 1995

meeting and the newly acquired documents, respondent's counsel

decided to settle the case by allowing petitioners to treat the

cancellation of indebtedness as a purchase-money debt reduction

pursuant to section 108(e)(5) so that petitioner's basis in the

stock of Elite would be $72,000. Respondent's counsel informed

petitioners of the concession on March 13, 1995.

     Respondent's counsel settled this case on March 13, 1995, for

the following reasons:         (1) Petitioners' counsel's explanation of

the transactions in February 1995, together with the recently

acquired   documents,      provided      a   more    complete   account   of   the

transactions; (2) respondent's counsel did not have any evidence

other than the documents to refute petitioners' explanation; (3) it

was unclear that the Court would not consider Elite rather than H.

Enterprises to be the seller of the stock and apply section

108(e)(5) to treat the cancellation of indebtedness as a reduction
                                      -13-

in   purchase     price;    and     (4)   the   "hazards   of    litigation".

Accordingly, when this case was called for trial on March 20, 1995,

respondent's counsel informed the Court that a basis for settlement

had been reached and that respondent was conceding the case.

     On June 8, 1995, petitioners filed a Motion for Litigation and

Administrative Costs in the total amount of $19,483.51, and a $60

filing fee.

Discussion

     A prevailing party may be awarded a judgment for reasonable

litigation costs incurred in connection with a Court proceeding

pursuant     to   section   7430,    as   amended   by   the    Technical   and

Miscellaneous Revenue Act of 1988, Pub. L. 100-647, sec. 6239, 102

Stat. 3342, 3743-3746 (applicable to petitions filed after November

10, 1988).    See also Rule 231.      The petition in this case was filed

on June 14, 1994.

     An individual taxpayer must meet seven requirements in order

to be awarded reasonable litigation and administrative costs under

section 7430.      The taxpayer must:

     (1)     Timely file a motion for litigation and administrative

costs.     Rule 231(a).     Petitioners met this requirement.

     (2)     Substantially prevail in the proceeding in this Court.

Sec. 7430(c)(4)(A)(ii).        Respondent concedes that petitioners met

this requirement.
                                      -14-

        (3)    Not unreasonably protract the administrative proceeding

or the proceeding in this Court.             Sec. 7430(b)(4).         Respondent

concedes that petitioners met this requirement.

        (4)    Establish     that    respondent's        positions     in    the

administrative proceeding and the proceeding in this Court were not

substantially justified in law or in fact.          Sec. 7430(c)(4)(A)(i),

(7)(A) and (B); Pierce v. Underwood, 487 U.S. 552, 564-565 (1988);

Huffman v. Commissioner, 978 F.2d 1139, 1143-1147 (9th Cir. 1992),

affg. in part, revg. in part on other grounds, and remanding T.C.

Memo. 1991-144; Sliwa v. Commissioner, 839 F.2d 602, 606 (9th Cir.

1988); Powers v. Commissioner, 100 T.C. 457, 470 (1993).                      As

discussed      below,   we   hold   that   petitioners    did   not   meet   this

requirement.

        (5)    Exhaust any administrative remedies available in the

IRS.6       Sec. 7430(b)(1).   Respondent concedes that petitioners met

this requirement.

        (6)    Have a net worth that did not exceed $2 million at the

time the petition was filed in the case.          Sec. 7430(c)(4)(A)(iii);

28 U.S.C. sec. 2412(d)(2)(B) (1988).             Respondent concedes that

petitioners met this requirement.

        (7)    Establish that the amount of costs claimed is reasonable.

Sec. 7430(a), (c)(1) and (2).              Because of our disposition of

petitioners' motion, we do not reach this issue.

        6
          This requirement only applies to a judgment for an
award of reasonable litigation costs. Sec. 7430(b)(1).
                                     -15-

     Petitioners must establish all of the above requirements

before the Court may award litigation and administrative costs

under section 7430.        Minahan v. Commissioner, 88 T.C. 492, 497

(1987); Han v. Commissioner, T.C. Memo. 1993-386. Petitioners have

the burden of proof with respect to each and every requirement.

Rule 232(e); Welch v. Helvering, 290 U.S. 111, 115 (1933); Gantner

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

Cir. 1990).

     The "not substantially justified" standard under section 7430

is applied as of the separate dates that respondent took positions

in the administrative proceeding and the proceeding in this Court.

Sec. 7430(c)(7)(A) and (B); Huffman v. Commissioner, supra; Han v.

Commissioner,     supra.      For     purposes    of      the    administrative

proceeding, respondent took a position on March 11, 1994, the date

of the notice of deficiency.        Sec. 7430(c)(7)(B).          For purposes of

the proceeding in this Court, respondent took a position on July

22, 1994, the date respondent filed the answer.                  See Huffman v.

Commissioner, supra at 1148.          These two positions are virtually

identical; there is no evidence in the record that respondent's

position changed from the time she issued the notice of deficiency

until after the February 1995 meeting when petitioners provided

respondent    with   pertinent   facts      surrounding    the    transactions.

Whether or not this position was substantially justified will

determine     whether   petitioners      are   entitled     to    an   award   of

reasonable litigation and administrative costs.
                                   -16-

       In 1986, Congress changed the language describing the position

of the United States from "unreasonable" to "not substantially

justified", the standard applicable to the Equal Access to Justice

Act, 28 U.S.C. sec. 2412 (1988).       Tax Reform Act of 1986, Pub. L.

99-514, sec. 1551, 100 Stat. 2752; H. Conf. Rept. 99-841, at II-801

(1986), 1986-3 C.B. (Vol. 4) 801.           This Court has held that the

substantially justified standard does not represent a departure

from the reasonableness standard.         Sher v. Commissioner, 89 T.C.

79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988), and cases cited

therein; see also Pierce v. Underwood, supra at 563-565.

       "Substantially justified" means "justified to a degree that

could satisfy a reasonable person" both as a matter of fact and

law.   Pierce v. Underwood, supra at 565.       That interpretation also

applies   to   motions   for   litigation    costs   under   section   7430.

William L. Comer Family Equity Pure Trust v. Commissioner, 958 F.2d

136, 139-140 (6th Cir. 1992), affg. per curiam T.C. Memo. 1990-316;

Norgaard v. Commissioner, 939 F.2d 874, 881 (9th Cir. 1991), affg.

in part and revg. in part T.C. Memo. 1989-390.          For a position to

be substantially justified, there must be "substantial evidence" to

support it.    Pierce v. Underwood, supra at 564-565.          In deciding

whether the Commissioner's position was substantially justified,

the Court will consider not only the basis of the Commissioner's

legal position, but also the manner in which the Commissioner

maintained that position.      Wasie v. Commissioner, 86 T.C. 962, 969

(1986).
                                       -17-

     Respondent      argues     that     her    administrative      and     judicial

position regarding petitioner's 1990 discharge of indebtedness was

substantially justified.          Petitioners disagree.

     With regard to the administrative proceeding, the revenue

agent encountered several significant factual inconsistencies.

Petitioners bore the burden of establishing that the section

108(a)(1)(B) or (e)(5) exception applied.                  Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933).                Because it was unclear whether

petitioner was insolvent at the time the debt was canceled, it was

impossible    to    determine     whether      section    108(a)(1)(B)      applied.

Neither were there sufficient facts to establish that section

108(e)(5)    applied.      If   petitioner        was    solvent,   there    was   no

evidence that the reduced debt was the debt "of a purchaser of

property to the seller of such property".                  Sec. 108(e)(5).

     In effect, petitioners acted as if the burden of establishing

the facts of the case were on respondent.                 It is not unreasonable

for the Commissioner to require a taxpayer to corroborate its

claims regarding a dispositive and unresolved fact.                       Baker v.

Commissioner, 83 T.C. 822, 830 (1984), vacated and remanded on

another     issue    787   F.2d    637      (D.C.       Cir.   1986);   Fallin     v.

Commissioner, T.C. Memo. 1993-332; Caparaso v. Commissioner, T.C.

Memo. 1993-255.      The Commissioner was not required to concede this

case before she received the requested documentation necessary to

prove petitioners' contentions.             See Brice v. Commissioner, T.C.

Memo. 1990-355, affd. without published opinion 940 F.2d 667 (9th
                                           -18-

Cir. 1991). In sum, we hold that respondent's position in the

administrative         proceeding,        i.e.,      issuance    of    the    notice      of

deficiency, was substantially justified.

       Respondent's position in the judicial proceeding also was

substantially justified. As of the date she filed the answer (July

22, 1994), respondent had not received any further information from

petitioners. It was reasonable for respondent's answer to reassert

the position taken in the notice of deficiency. Petitioners had to

prove that the discharge of indebtedness did not create gross

income.     Rule 142(a).         However, as of July 22, 1994, they had not

developed       the    facts     necessary      to    show     that    either      section

108(a)(1)(B) or (e)(5) applied.                 It was not until February 1995

that petitioners more fully presented their case. At that time,

respondent's counsel reevaluated the case, weighing the evidence

presented as well as the costs of litigation.                    After reviewing the

additional information offered by petitioners, respondent's counsel

expeditiously         conceded      the   case.       Having    considered         all   the

evidence before us, we hold that there was sufficient doubt as to

the applicability of the mutually exclusive section 108(a)(1)(B)

and    (e)(5)     to    substantially         justify    the    position       taken      by

respondent      in     both   the    notice    of    deficiency       and    the   answer.

Petitioners have failed to prove that respondent's position was not

substantially justified.

       The fact that the Commissioner eventually loses or concedes a

case   is   not       sufficient     to   establish      that   a     position      is   not
                                     -19-

substantially justified.     Sokol v. Commissioner, 92 T.C. 760, 767

(1989).    To rule otherwise would "not only distort the truth but

penalize and thereby discourage useful settlements."             Pierce v.

Underwood, supra at 568.    The reasonableness of the Commissioner's

position necessarily requires considering what the Commissioner

knew at the time.     Cf. Rutana v. Commissioner, 88 T.C. 1329, 1334

(1987); DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

        Respondent's position was reasonable in light of the issue

presented and the information that was available to her during the

administrative and judicial proceedings.          See, e.g., Harrison v.

Commissioner, 854 F.2d 263 (7th Cir. 1988)(concession approximately

6 months after answer filed, after respondent had an opportunity to

verify information, held reasonable), affg. T.C. Memo. 1987-52;

Wickert v. Commissioner, 842 F.2d 1005 (8th Cir. 1988) (concession

10 days after filing of answer, although it took several months to

draft the stipulation of settlement, held to be reasonable), affg.

T.C. Memo. 1986-277; Ashburn v. United States, 740 F.2d 843 (11th

Cir.   1984)(11-month   delay   in    conceding   case   not   unreasonable

because the issues were not simple); White v. United States, 740

F.2d 836, 842 (11th Cir. 1984)(concession of issue 3 months after

issue raised was reasonable).

       In conclusion, we hold that respondent's administrative and

judicial position was substantially justified; i.e., respondent's

position    had   a   reasonable     basis   in   both    fact   and   law.
                                 -20-

Consequently, we will deny petitioners' Motion for Litigation and

Administrative Costs pursuant to section 7430 and Rule 231.

     To reflect the foregoing,


                                            An appropriate order

                                        and decision will be entered.
