                          T.C. Memo. 1998-26



                       UNITED STATES TAX COURT



         JOHN F. AND TRACY L. BARFORD, ET AL.,1 Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20514-91, 20515-91,           Filed January 22, 1998.
                 20516-91, 20517-91,
                 20518-91.

     Stephen T. Link, for petitioners.

     Jillena A. Warner, for respondent.



                          MEMORANDUM OPINION

     PAJAK, Special Trial Judge:     This matter is before the Court

pursuant to petitioners' motions for award of reasonable

litigation costs under section 7430 and Rules 230 through 232.

     1
           Cases of the following petitioners are consolidated
herewith for purposes of trial, briefing, and opinion: Marcus R.
Messman, docket No. 20515-91; Davis W. Messman, docket No.
20516-91; Marcus R. Messman, docket No. 20517-91; and Stephen A.
Messman, docket No. 20518-91.
                                      -2-


Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the years in issue.       All Rule

references are to the Tax Court Rules of Practice and Procedure.

     No party has requested a hearing on petitioners' motions.

Accordingly, we rule on petitioners' motions on the basis of the

parties' submissions and the record in this case.       The underlying

issues raised in the petitions were settled by stipulations of

settlement.      At the time their petitions were filed all of the

petitioners resided in the State of Illinois.

     By notices of deficiency, respondent determined deficiencies

in petitioners' Federal income taxes as follows:

Year        John F. & Tracy       Marcus R. Davis W.    Stephen A.
Ended        L. Barford           Messman   Messman     Messman

12/31/79     $   ---              $  5,981   $   ---    $  ---
12/31/80         ---                 7,420      3,710     1,934
12/31/81        3,254                 ---       5,353     5,378
12/31/82         ---                 1,715      3,556    11,625
12/31/83      419,987              418,124    424,317   413,677
12/31/84       30,084               36,139     19,327    15,911

Petitioners filed individual petitions and their cases were

consolidated.

        The four equal shareholders of TMC Resources, Inc. (TMC

Resources) were Davis W. Messman, Marcus R. Messman, Stephen A.

Messman, and Tracy L. Barford (petitioners).

        Prior to 1983, TMC Resources was the parent corporation of

a consolidated group of corporations and owned 100 percent of

the stock of the following corporations: RAM Drilling Company
                                 -3-


(RAM Drilling); TMC Farms, Inc. (TMC Farms); TMC Oil Company

(TMC Oil); Marco Oil, Inc. (Marco Oil); and Sentry Investment

Company (Sentry).

     On January 25, 1982, Marco Oil made two loans, one to RAM

Drilling for $2,700,000, and another to TMC Farms for $420,000,

both at the stated interest rate of 14 percent.    The notes to

Marco Oil from RAM Drilling and TMC Farms were later assigned to

TMC Resources upon the liquidation of Marco Oil.    All payments

on the loans to RAM Drilling and TMC Farms were applied 100

percent to principal.    None of the loan payments was applied to

any accrued interest.    On October 29, 1982, the stated interest

rate was eliminated, and thereafter the loans of the principal

balance and subsequent advances accrued no interest.

     On March 25, 1983, TMC Resources contributed its Sentry

stock to RAM Drilling.   On March 26, 1983, TMC Resources

contributed its TMC Farms stock to RAM Drilling.    On March 28,

1983, TMC Oil and Marco Oil were liquidated, and all of their

assets and liabilities were distributed to TMC Resources.    On

the same date, Sentry was liquidated by RAM Drilling.

     On March 31, 1983, TMC Resources was liquidated pursuant to

section 337 with all of its assets and liabilities distributed

to petitioners, its four equal shareholders.   As part of the TMC

Resources liquidation distribution, petitioners received the

notes originally given to Marco Oil by RAM Drilling and TMC
                                -4-


Farms.   On the same date they received the notes, petitioners

assigned the notes to their partnership, TMC Enterprises.     TMC

Enterprises was a general partnership in which petitioners were

equal partners during the years in issue.

     On April 1, 1984, the debts owed by RAM Drilling and TMC

Farms to TMC Enterprises were restructured as zero percent

convertible subordinated debentures in the total amounts of

$3,195,285 and $1,655,000, respectively.

     In the notices of deficiency, respondent determined, among

other things, that petitioners were liable for additional taxes

as a result of: (1) Imputed interest income on promissory notes

from RAM Drilling and TMC Farms pursuant to section 482, and

(2) the incorrect valuation of the RAM Drilling stock for

purposes of the section 337 liquidation of TMC Resources.     (This

second issue was not in the notice of deficiency for 1979 and

1984 for Marcus R. Messman.   Marcus R. Messman received two

notices of deficiency.)   Petitioners raised only these two

issues in their petitions.

     The parties eventually settled the issue of the value of

RAM Drilling stock for purposes of the section 337 liquidation

of TMC Resources.   On March 10, 1993, the case proceeded to

trial on the remaining section 482 imputed interest income

issue.
                                 -5-


     This Court entered five separate Decisions pursuant to the

stipulated settlement agreements by the parties.    Thereafter,

this Court granted petitioners' motions to vacate or revise the

aforementioned Decisions, and petitioners' motions for award of

reasonable litigation costs were filed.    Respondent's notices of

objection to petitioners' motions for costs and a memorandum

were filed.    Petitioners' notices of filing additional

evidentiary materials and briefs in opposition were filed.    In

their briefs in opposition, petitioners conceded that the

litigation costs in these cases are not severable and cannot be

reasonably allocated between the two issues raised by

petitioners.    Accordingly, we shall not so allocate.

     Section 7430(a) authorizes an award of reasonable

litigation costs to the "prevailing party".    To qualify as a

prevailing party petitioners must establish: (1) That the

position of the United States in the proceeding was not

substantially justified; (2) that they substantially prevailed

with respect to the amount in controversy, or with respect to

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

that they satisfied the net worth requirements of 28 U.S.C.

section 2412(d)(2)(B) (1991) on the date each petition was

filed.   Sec. 7430(c)(4)(A).   Petitioners must also establish

that they have exhausted the administrative remedies available

to them within the Internal Revenue Service, that they did not
                                  -6-


unreasonably protract the proceedings, and that the costs

claimed are reasonable.    Sec. 7430(b) and (c).   Petitioners must

establish all of these conjunctive elements in order to recover

litigation costs.     Minahan v. Commissioner, 88 T.C. 492, 497

(1987).

     Respondent agrees that petitioners have: (1) Substantially

prevailed in this case, (2) exhausted the administrative

remedies available to them within the Internal Revenue Service,

and (3) not unreasonably protracted the Court proceeding.

Respondent also agrees that respondent had taken a position that

was not substantially justified on the issue of the valuation of

RAM Drilling stock.    However, respondent contends that

respondent's position regarding the imputation of interest

income under section 482 was substantially justified.

Respondent further contends petitioners have not met the net

worth requirements, and that the costs claimed are unreasonable.

     We first consider whether petitioners have established that

the position of the United States was not substantially

justified.   Sec. 7430(c)(4)(A)(i).     This Court has held that the

substantially justified standard is the same as the

reasonableness standard.     Sher v. Commissioner, 89 T.C. 79, 84

(1987), affd. 861 F.2d 131 (5th Cir. 1988).     The determination

of reasonableness must be based upon all the facts and

circumstances surrounding the proceeding.      Wasie v.
                                 -7-


Commissioner, 86 T.C. 962, 968-969 (1986).   Petitioners bear the

burden of proof on this issue.   Rule 232(e); Coastal Petroleum

Refiners, Inc. v. Commissioner, 94 T.C. 685, 688 (1990).

Respondent's litigation position is substantially justified if

it has a reasonable basis in both law and fact.   Pierce v.

Underwood, 487 U.S. 552, 565 (1988).   We believe the record in

this case establishes the overall reasonableness of respondent's

position with regard to the section 482 adjustment.

     Petitioners argue that respondent's position regarding the

imputation of interest income under section 482 was not

substantially justified.   Petitioners argue that: (1) The

deficiencies totaled $1,827,492, and the decisions of the Court

as to such deficiencies totaled $47,761.53; (2) after 12 years

of administrative proceedings and litigation, respondent

capitulated and agreed that the valuations of RAM Drilling stock

were 10 times too high; and   (3) respondent conceded that the

interest on certain corporate notes should not have been 14

percent, and that respondent later conceded this issue in its

entirety, and stipulated that no interest should be imputed.     In

essence, petitioners contend that because they prevailed so

overwhelmingly, they should be allowed to recover their full

costs.   We disagree.

     This Court has consistently held that a concession by

respondent is not determinative as to whether respondent's
                                 -8-


position was not substantially justified.    Swanson   v.

Commissioner, 106 T.C. 76, 94 (1996); Sokol v. Commissioner, 92

T.C. 760, 767 (1989).    Notwithstanding petitioners' ability to

convince respondent to make "overwhelming" concessions, we

believe respondent's position with regard to the section 482

adjustment nevertheless had a reasonable basis in law and fact.

     Section 1.482-2(a)(1), Income Tax Regs., provides where one

member of a group of controlled entities makes a loan to another

member of the same group, and charges no interest, respondent

may make appropriate allocations to reflect an arm's-length

interest rate.   This is in order to prevent evasion of taxes or

to clearly reflect income.    Sec. 482.

     In the instant case, Marco Oil made loans to RAM Drilling

and TMC Farms.   They were all members of the same group of

controlled entities.    The loans had an initial interest rate of

14 percent.    That interest rate was subsequently eliminated, and

the loans of the principal balance and subsequent advances

accrued no interest.    In 1983, Marco Oil assigned the notes to

TMC Resources.   Upon the liquidation of TMC Resources (the

parent corporation that controlled, among other subsidiaries,

Marco Oil, Ram Drilling, and TMC Farms), the notes were assigned

to petitioners, who, on that same date, assigned the notes to

TMC Enterprises, a wholly owned partnership owned equally by the

petitioners.
                                -9-


     In these circumstances, we believe that respondent's

position that the loans fall within the ambit of section 482 had

a reasonable basis in law and fact, especially given the nature

of the relationship of the companies and the subsequent

forgiveness of interest.

     Petitioners argue the loans were not bona fide

indebtedness, but were mere transfers between the companies, and

that the notes were simply used to keep track of what was being

transferred between these companies.    Petitioners further argue

that because the transfers were not bona fide indebtedness,

section 482 was inapplicable.   In support of their argument,

petitioners point out that there were no maturity dates on the

notes and no repayment schedule.

     Regardless of whether respondent was correct in classifying

the loans as bona fide indebtedness, we believe respondent was

substantially justified in so doing.    The record indicates that

for several years, petitioners made payments on the notes, and

kept a schedule of these payments.    When petitioners assigned

the notes, they took great care to do it formally by documenting

the notices to the debtors.   Moreover, petitioners treated the

loan from Marco Oil to RAM Drilling as a "Notes Payable"

liability when they valued RAM Drilling for purposes of their

liquidating distribution from TMC Resources in 1983.
                                - 10 -


     Given these facts, we believe respondent was substantially

justified when respondent imputed interest income under section

482 for the two loan transactions.       Because petitioners have not

proved that respondent's position on that issue was not

substantially justified, and because petitioners have conceded

that the litigation costs are not severable or allocable between

that issue and the other issue raised in their petitions (the

valuation of the RAM Drilling Stock), petitioners are not

entitled to awards of fees.    Therefore, we need not reach the

other issues under section 7430.

     Accordingly, petitioners' motions for award of reasonable

litigation costs are denied.

                                              Appropriate orders and

                                         decisions will be entered.
