                        T.C. Memo. 1998-311



                      UNITED STATES TAX COURT



        CALIFORNIA MARINE CLEANING, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19476-96.             Filed August 24, 1998.



     William P. Shannahan, for petitioner.

     Christine V. Olsen, for respondent.



                        MEMORANDUM OPINION

     COLVIN, Judge:   This matter is before the Court on

petitioner’s motion for litigation and administrative costs under
                                 2

section 74301 and Rule 231.2   Respondent concedes that petitioner

substantially prevailed, exhausted its administrative remedies,

meets the net worth requirements, and did not unreasonably

protract the administrative or Court proceedings.   Sec.

7430(b)(1), (3), and (c)(4)(A)(i) and (ii).   The remaining issues

for decision are:

     (1)   Whether respondent’s position in the underlying

proceeding was substantially justified.   We hold that it was not.

     (2)   Whether a special factor as defined in section

7430(c)(1)(B)(iii) was present in this case which would justify

an award of attorney's fees higher than $110 per hour.     We hold

that no special factor was present.


     1
        Section references are to the Internal Revenue Code in
effect for the years in issue. References to sec. 7430 are to
that section as amended by sec. 1551 of the Tax Reform Act of
1986, Pub. L. 99-514, 100 Stat. 2752 (effective for proceedings
commenced after Dec. 31, 1985), and by sec. 6239(a) of the
Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647,
102 Stat. 3743 (effective with respect to proceedings commenced
after Nov. 10, 1988). Sec. 7430 was further amended by the
Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 701, 110 Stat.
1463 (1996), effective with respect to proceedings commenced
after July 30, 1996. The amendments to that section shifted to
the Commissioner the burden of proving that the position of the
United States was substantially justified, sec. 7430(c)(4)(B),
and changed the hourly rate for attorney's fees to $110, sec.
7430(c)(1)(B)(iii).
     A judicial proceeding is commenced in this Court with the
filing of a petition. Rule 20(a). Petitioner filed its petition
on Sept. 9, 1996. Accordingly, the 1996 amendments to sec. 7430
apply here. See Maggie Management Co. v. Commissioner, 108 T.C.
430 (1997).
     2
       Rule references are to the Tax Court Rules of Practice and
Procedure.
                                  3

     (3)   Whether the number of hours billed by petitioner's

counsel and accountant and petitioner's other litigation costs

were reasonable.   We hold that they were to the extent set out

below.

     The parties submitted memoranda and affidavits supporting

their positions.   We decide the motion on the basis of those

memoranda and affidavits.   Neither party requested a hearing.    We

conclude that a hearing is not necessary to decide this motion.

Rule 232(a)(3).

                            Background

A.   Petitioner

     Petitioner is a corporation the principal place of business

of which was in San Diego, California, during the years in issue

and when it filed its petition.   Petitioner reports its income

using the cash method of accounting.     Petitioner is in the

business of cleaning military and civilian ships.

B.   Petitioner's 1992, 1993, and 1994 Tax Returns

     Petitioner timely filed U.S. corporate income tax returns

(Forms 1120) for its tax years ending on September 30, 1992,

1993, and 1994,3 on which it reported the following:




     3
       Petitioner's 1992, 1993, and 1994 fiscal years ended on
Sept. 30.
                                   4

                       FY 1992          FY 1993      FY 1994

Gross receipts        $2,839,130       $2,905,192   $2,822,943
Compensation of          165,223          272,000      269,000
 officers
Salaries and wages     1,086,926          991,749    1,018,735
Repairs                   26,605           26,459       15,651
Rents                     59,338           32,807       33,336
Taxes                    152,664          139,273      137,015
Interest                   5,179            2,605        3,286
Contributions              4,325            7,745        9,591
Depreciation              75,988           63,943       54,550
Pensions, profit-                         172,804       88,663
 sharing plans
Other deductions1        995,464          976,003    1,050,076
Unappropriated         1,149,031        1,230,404    1,197,598
 retained earnings
     1
       Petitioner's other deductions included expenses for
subcontractors, materials and supplies, equipment rental,
chemical analysis, waste disposal, trucks, insurance, travel,
office, legal and accounting services, permits, telephone, and
utilities.

     Petitioner paid no dividends and had no inventory in fiscal

years 1992, 1993, and 1994.

C.   The Audit and Respondent's Determination

     In 1995, respondent audited petitioner's 1992, 1993, and

1994 fiscal years (FY).   The record does not indicate who

respondent talked to or what documents respondent saw during the

audit.

     On May 15, 1996, respondent notified petitioner, pursuant to

section 534(b), that respondent intended to issue a notice of

deficiency determining that petitioner is liable for the

accumulated earnings tax under section 531 for FY 1992, 1993, and

1994.    Petitioner had 60 days to file a section 534(c) statement.

Sec. 534(c); sec. 1.534-2(d)(2), Income Tax Regs.   On June 13,
                                     5

1996, respondent sent a notice of deficiency to petitioner.    In

it, respondent determined that petitioner had deficiencies in

income tax (including accumulated earnings tax) of $100,548 for

FY 1992, $68,286 for FY 1993, and $50,678 for FY 1994.

Respondent determined that petitioner had accumulated taxable

income of $289,736 in FY 1992, $205,937 in FY 1993, and $160,203

in FY 1994.

     Respondent determined petitioner's accumulated earnings4 as

of the close of the prior year as follows:

                           9/30/92         9/30/93         9/30/94

Accrual basis            $1,149,031      $1,230,404      $1,197,598



Accounts receivable        (985,378)       (852,526)       (655,925)

Tax refund receivable                        (16,474)       (42,197)

Accounts payable              1,818            2,080          1,676

Deferred taxes              117,643           67,687          7,684

Income taxes payable         56,867



Cash basis                  339,981          431,171        508,836

     Respondent computed petitioner's accumulated earnings

credit5 in the notice of deficiency as follows:

     4
       A corporation's accumulated earnings are the earnings it
accumulates rather than distributes. See United States v.
Donruss Co., 393 U.S. 297, 303 (1969).
     5
         The accumulated earnings credit is generally the amount of
                                                     (continued...)
                                 6

            Computation of Accumulated Earnings Credit

                                9/30/92       9/30/93     9/30/94

Minimum credit                 $250,000      $250,000     $250,000
Less: Accumulated earnings
 as of close of prior year      339,981       431,171     508,836
Allowable minimum credit
 (sec. 535(c)(2))                 -0-           -0-            -0-
Current earnings and profits
 retained for reasonable needs
 of business
 (sec. 535(c)(1)(A))              -0-           -0-            -0-
Less: Deduction for LTCG
 (sec. 535(b)(6))                  --            --             --
Allowable credit
 (sec. 535(c)(1))                 -0-           -0-            -0-

     Respondent's only explanation for determining that

petitioner was liable for accumulated earnings tax was that

petitioner was "formed or availed of for the purpose of [its]

shareholders avoiding income tax".

     Respondent did not state the basis for determining that

petitioner had no reasonable needs to retain earnings for the

years at issue.   The notice of deficiency contained no Bardahl6

computation or other analysis of petitioner's need for working

capital.   Respondent issued the notice of deficiency before


     5
      (...continued)
the taxpayer's earnings and profits for the taxable year that is
retained for the reasonable needs of the business. Sec.
535(c)(1). The accumulated earnings credit is subtracted from
the taxpayer's taxable income in calculating accumulated taxable
income. Sec. 535(a).
     6
       A Bardahl computation is an estimate of a taxpayer's
working capital needs based on its business needs for one
operating cycle. Bardahl Manufacturing Corp. v. Commissioner,
T.C. Memo. 1965-200.
                                 7

petitioner filed a section 534(c) statement or requested an

Appeals Office conference.

D.   Petitioner's Section 534(c) Statement

     On July 12, 1996, petitioner filed a timely section 534(c)

statement identifying the grounds on which it relied to establish

that it did not unreasonably accumulate earnings.     Petitioner

asserted that it had 11 grounds to accumulate earnings:     (1) To

provide a reserve for Federal income tax and interest; (2) to

provide working capital; (3) to expand to additional port cities;

(4) to replace equipment; (5) to provide loans to customers or

suppliers; (6) to meet competition; (7) to provide insurance; (8)

to provide a litigation reserve; (9) to prepare for unsettled

business conditions; (10) to make pension and profit sharing plan

contributions; and (11) to respond to the possible loss of its

principal customer, the U.S. Navy.

     Petitioner filed its petition in this case on September 9,

1996.   On April 9, 1997, this case was calendared for trial at

the September 15, 1997, session of this Court at San Diego,

California.

     On April 24, 1997, respondent filed a motion for a ruling

that petitioner's section 534(c) statement was insufficient to

shift the burden of proof to respondent.     On July 22, 1997, we

held that petitioner's section 534(c) statement did not contain

enough facts to shift the burden of proof to respondent.
                                  8

E.   Postpetition Conferences

     Petitioner's case was assigned to an Appeals officer

sometime after petitioner filed its petition.    Respondent's

revenue agent Bruce Zaer (Zaer) met with petitioner's counsel on

May 15 and July 11, 1997, to discuss petitioner's case.    At the

July 11 meeting, petitioner's counsel told Zaer that petitioner

had erroneously reported earnings and profits on an accrual basis

rather than on a cash basis on its 1991 tax return.    As a result

of the error, petitioner erroneously included accounts receivable

of about $662,000 in accumulated earnings.    Petitioner reported

on its 1991 return that its accumulated earnings were $853,837,

while in fact they were only about $190,000.    Around July 17,

1997, petitioner's accountant prepared a corrected analysis of

petitioner's accumulated taxable income for FY 1986 to 1994.7     He

concluded that petitioner had accumulated taxable income of

$340,611 for FY 1992, $501,955 for FY 1993, and $615,005 for FY

1994.    Respondent's Appeals officer reviewed the accountant's

analysis and agreed with it.    On August 14, 1997, respondent

conceded the accumulated earnings tax issue.

F.   Settlement of the Case

     At the calendar call on September 15, 1997, the parties

announced that they had reached a basis of settlement.    The


     7
       In his corrected analysis, petitioner's accountant
concluded that petitioner's accumulated earnings for fiscal year
1991 were about $110,000.
                                9

parties stipulated that petitioner had deficiencies in income tax

of $18,208 for FY 1992, $8,124 for FY 1993, and $6,388 for FY

1994, that petitioner is not liable for accumulated earnings tax

for those years, and that petitioner is not liable for additions

to tax for those years.

G.   Petitioner's Litigation Costs

     Petitioner filed a motion for an award of litigation and

administrative costs on September 15, 1997.   Petitioner incurred

attorney's fees and other costs for services performed in this

matter from June 14, 1996, to December 12, 1997, as follows:

Date of services          Fee   Attorney hours       Costs

1996:
  June   5-21         $1,650           5.5            --
  June   28-July 17    3,540          11.8            --
  July   20-Aug. 16    1,110           3.7            --
  Aug.   27-29         1,050           3.5          $144.48
  Nov.   8-21            900           3.0            --
  Dec.   11-16         1,170           3.9            --

1997:
  Jan. 6                  90            .3            --
  Jan. 27                 30            .1            --
  Apr. 15-25             510           1.7            --
  Apr. 28-May 23       7,740          25.8            --
  May 27-June 24       3,870          12.9            --
  June 26-July 16      4,530          15.1            --
  July 30-Aug. 25        570           1.9            --
  Aug. 26-Sept. 26     9,060          30.2            --
  Sept. 29-Oct. 18     1,080           3.6            --
  Nov. 10-18             480           1.6            --
  Nov. 26-Dec. 12      3,600          12.0            --
  Total               40,980         136.6           144.48
                                    10

Date of services            Fee          Accountant hours

June 1996-
     Sept. 1997         $2,462.50             98.5


                              Discussion

A.   Motion for Litigation and Administrative Costs: Introduction

     Generally, a taxpayer who has substantially prevailed in

a Tax Court proceeding may be awarded reasonable administrative

and litigation costs.   Sec. 7430(a), (c).    To be entitled to an

award, the taxpayer must:

     1.   Exhaust administrative remedies.8     Sec. 7430(b)(1).

Respondent concedes that petitioner meets this requirement.

     2.   Substantially prevail with respect to the amount in

controversy.   Sec. 7430(c)(4)(A)(i)(II).    Respondent concedes

that petitioner meets this requirement.

     3.   Be an individual whose net worth did not exceed $2

million, or an owner of an unincorporated business, or any

partnership, corporation, etc., the net worth of which did not

exceed $7 million, when the petition was filed.      Sec.

7430(c)(4)(A)(ii); 28 U.S.C. sec. 2412(d)(2)(B) (1988).

Respondent concedes that petitioner meets this requirement.




     8
       This requirement does not apply to an award for reasonable
administrative costs. Sec. 7430(b)(1).
                                 11

       4.   Show that the taxpayer did not unreasonably protract

the proceedings.    Sec. 7430(b)(3).   Respondent concedes that

petitioner meets this requirement.

       5.   Establish that the amounts of costs and attorney's fees

claimed by the taxpayer are reasonable.     Sec. 7430(a), (c)(1) and

(2).    Respondent disputes the number of hours of legal services

claimed by petitioner.    Petitioner also claimed that it was

entitled to more than $110 per hour adjusted for inflation.

Respondent disputes that contention.

       For proceedings beginning after July 30, 1996, the taxpayer

is not entitled to an award for reasonable administrative and

litigation costs if the Commissioner shows that the position of

the United States in the action was substantially justified.

Sec. 7430(c)(4)(B)(i).    Respondent bears the burden of proving

that respondent's position was substantially justified.     Id.

Respondent contends that respondent has made this showing.

B.     Position of the United States and Substantially Justified
       Standard

       1.   Position of the United States

       The Commissioner takes a position in an administrative

proceeding as of the earlier of the date the taxpayer receives an

Internal Revenue Service (IRS) Appeals decision or the

Commissioner sends the notice of deficiency.     Sec. 7430(c)(7)(B).

Respondent's position in the administrative proceeding was
                                12

established on June 13, 1996, when the notice of deficiency was

sent.

     The position taken by the United States, for purposes of an

award of litigation costs, is the position of the United States

in a judicial proceeding.   Sec. 7430(c)(7)(A).   Respondent took a

position in the judicial proceeding in this case on November 12,

1996, when respondent's answer was filed.    See Huffman v.

Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,

revg. in part and remanding T.C. Memo. 1991-144.

     2.   Substantially Justified Standard

     The parties dispute whether respondent's position in the

administrative and judicial proceedings was substantially

justified.

     The Commissioner's position is substantially justified if

that position could satisfy a reasonable person.    Pierce v.

Underwood, 487 U.S. 552, 565 (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); Swanson v. Commissioner, 106

T.C. 76, 86 (1996); Powers v. Commissioner, 100 T.C. 457, 470,

473 (1993), affd. on this issue, revd. in part and remanded on

other issues 43 F.3d 172 (5th Cir. 1995).    To be substantially

justified, the Commissioner's position must have a reasonable

basis in both law and fact.   Pierce v. Underwood, supra; Hanover

Bldg. Matls., Inc. v. Guiffrida, 748 F.2d 1011, 1015 (5th Cir.
                                13

1984); Powers v. Commissioner, supra.    For a position to be

substantially justified, there must be substantial evidence to

support it.   Pierce v. Underwood, supra at 564-565; Powers v.

Commissioner, supra at 473.

     The fact that the Commissioner eventually loses or concedes

a case does not establish that a taxpayer is entitled to an award

of reasonable litigation and administrative costs.    Wilfong v.

United States, 991 F.2d 359, 364 (7th Cir. 1993); Hanson v.

Commissioner, 975 F.2d 1150, 1153 (5th Cir. 1992); Sokol v.

Commissioner, 92 T.C. 760, 767 (1989).   However, it is a factor

to be considered.   Estate of Perry v. Commissioner, 931 F.2d

1044, 1046 (5th Cir. 1991); Powers v. Commissioner, supra at 471.

C.   Whether Respondent's Position in the Notice of Deficiency
     Was Substantially Justified

     1.    Background--Accumulated Earnings Tax

     A taxpayer is liable for accumulated earnings tax if it is

formed or availed of to avoid income tax for its shareholders by

permitting earnings and profits to accumulate instead of being

divided or distributed.   Sec. 532(a); Hughes, Inc. v.

Commissioner, 90 T.C. 1, 15 (1988).   However, the accumulated

earnings tax does not apply if a corporation lacks the proscribed

purpose.   Technalysis Corp. v. Commissioner, 101 T.C. 397, 403

(1993); Pelton Steel Casting Co. v. Commissioner, 28 T.C. 153,

173 (1957), affd. 251 F.2d 278 (7th Cir. 1958).
                                 14

     2.     Basis in Fact

            a.   Whether Facts Known by Respondent Provide a Basis
                 in Fact

     Respondent argues that respondent's position was

substantially justified on the basis of the following information

which respondent knew or reasonably believed when respondent sent

the notice of deficiency:    (a) Petitioner was in the business of

cleaning ships; (b) petitioner was a cash basis taxpayer; (c)

petitioner reported unappropriated retained earnings of

$1,149,031 for FY 1992, $1,230,404 for FY 1993, and $1,197,598

for FY 1994; (d) petitioner reported gross receipts or sales of

$2,839,130 for FY 1992, $2,905,192 for FY 1993, and $2,822,943

for FY 1994; (e) petitioner reported total deductions of

$2,571,712 for FY 1992, $2,685,388 for FY 1993, and $2,679,903

for FY 1994; (f) petitioner paid no dividends in FY 1992, 1993,

and 1994; and (g) petitioner had no inventory in FY 1992, 1993,

and 1994.

     These facts do not provide a basis in fact for respondent’s

position that petitioner intended to avoid tax for its

shareholders.    Section 1.533-1(a)(2), Income Tax Regs., lists

factors to be considered in deciding whether a corporation

intended to avoid income tax of its shareholders, including:      (1)

Dealings between the corporation and its shareholders for the

personal benefit of the shareholders; for example, personal
                                 15

loans; (2) corporate investment of undistributed assets in

unrelated businesses or investments; and (3) the corporation's

dividend history.   Respondent has not shown that respondent had

any reason to believe that there were dealings between petitioner

and its shareholders for their personal benefit or that

petitioner had invested in unrelated businesses.   Respondent knew

that petitioner did not pay dividends in the years in issue but

cites no authority that the absence of dividends, in isolation,

triggers liability for accumulated earnings tax.

     The record does not show what respondent did, or learned

about petitioner, during the audit of this case.   Petitioner's

returns suggest that petitioner had a significant ongoing

business.   Petitioner's returns do not provide a basis in fact

for respondent's position that petitioner was formed or availed

of for the proscribed purpose.   Respondent does not claim to have

had any information about the merits of the case other than

petitioner's returns before adopting the position at issue here.

See Powers v. Commissioner, supra at 472.

     It has been held that the Government does not have a

reasonable basis in both fact and law if it does not diligently

investigate a case.   United States v. Estridge, 797 F.2d 1454,

1458 (8th Cir. 1986) (award for litigation costs granted where

Commissioner did not diligently investigate which of several

persons was liable for tax of an employer under section 6672(a));
                                  16

Powers v. Commissioner, supra at 473.     Respondent lacked a basis

in fact for determining that petitioner was liable for the

accumulated earnings tax because respondent apparently had no

facts about petitioner's business plans and did not show whether

the case was diligently investigated.

            b.   Petitioner's Error in Reporting Accounts
                 Receivable

       Petitioner erroneously included accounts receivable of

$662,000 in accumulated earnings on its tax return for 1991.

Respondent contends that petitioner's error led respondent to

determine that petitioner was liable for the accumulated earnings

tax.    Respondent contends that, if petitioner had reviewed its

books and records earlier, it might have been possible to avoid

the determination or resolve the issue earlier.

       We disagree.   Respondent did not explain why the

determination that petitioner was liable for accumulated earnings

tax was substantially justified (e.g., that petitioner

accumulated income with the purpose of avoiding shareholder

taxes) even if petitioner had retained earnings of $1,149,031 in

FY 1992, $1,230,404 in FY 1993, and $1,197,598 in FY 1994.

            c.   Whether Events Occurring After Respondent Took the
                 Position Provide a Basis in Fact for Respondent's
                 Position

       Respondent argues that respondent's position is

substantially justified because of events occurring after that
                                17

position was taken; that is, after the notice of deficiency was

issued.   For example, respondent argues that:    (1) Respondent was

substantially justified because respondent promptly settled the

accumulated earnings tax issue soon after petitioner told

respondent about petitioner's error, and (2) respondent's

position had a basis in fact because petitioner's section 534(c)

statement was insufficient to shift the burden of proof to

respondent.

     We disagree.   Respondent must have a basis in fact when

respondent issues the notice of deficiency.      Powers v.

Commissioner, 100 T.C. at 473, 477-478; Kingston v. Commissioner,

T.C. Memo. 1998-119; Grimland v. Commissioner, T.C. Memo. 1993-

367; see Pierce v. Underwood, 487 U.S. at 564-565.     We do not

consider events occurring after respondent's position was

adopted, such as respondent's prompt concession or petitioner's

failure to allege specific facts in its section 534(c) statement,

in deciding whether that position was substantially justified.

Powers v. Commissioner, supra at 477.

     3.    Conclusion

     Respondent has not shown that respondent had a basis in fact

for the position that petitioner unreasonably accumulated

earnings for FY 1992, 1993, and 1994 when respondent sent the

notice of deficiency or filed the answer.
                                  18

     The substantially justified standard requires that the

Government's position have a reasonable basis in both law and

fact.     Pierce v. Underwood, supra at 563-564.    We need not decide

whether respondent had a basis in law because respondent did not

have a basis in fact.     Thus, we hold that respondent's position

was not substantially justified when respondent sent the notice

of deficiency and filed the answer, and that petitioner is

entitled to an award under section 7430 for its reasonable

administrative and litigation costs.

D.      Reasonable Administrative and Litigation Costs

     Petitioner seeks an award for its attorney's fees of

$40,980, miscellaneous costs of $144.48, and accountant's fees of

$2,462.50.     We must decide whether the number of hours billed,

the rate at which those hours were billed, and the miscellaneous

costs are reasonable as claimed by petitioner.

     1.      Applicable Hourly Rate for Attorney's Fees

     Petitioner's attorney, William Shannahan (Shannahan), billed

at an hourly rate of $300 for his work in this case.      Respondent

objects to our basing an award for litigation costs on

Shannahan's rate to the extent it exceeds $110.

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

attorney's fees to $110, increased by the cost of living and

other special factors.     The cost of living increase is rounded to

the nearest multiple of $10.     Sec. 7430(c)(1).   The allowable fee
                                  19

for services ($110) indexed from 1996 to 1997 is $113.       Human v.

Commissioner, T.C. Memo. 1998-65.       Thus, Shannahan's allowable

fee for 1997 is $110.

     2.     Whether a Special Factor Is Present

     We next decide whether a special factor is present that

justifies an award of attorney's fees at a rate higher than $110

per hour.    Sec. 7430(c)(1)(B)(iii).    Petitioner contends that the

issues involved in this case were very complex and that

petitioner's counsel's expertise warrants an award of fees at a

rate higher than $110.    We disagree.

     The prevailing hourly rate in an area, and the fact that no

attorney would have performed the work for $110 an hour, are not

special factors under section 7430(c)(1)(B)(iii).       Cozean v.

Commissioner, 109 T.C. 227 (1997); Cassuto v. Commissioner, 93

T.C. 256, 269 (1989), affd. in part, revd. in part and remanded

on other issues 936 F.2d 736 (2d Cir. 1991); see Pierce v.

Underwood, 487 U.S. 552 (1988).    Tax expertise of a taxpayer’s

lawyer alone is not a special factor under section

7430(c)(1)(B)(iii).     Cassuto v. Commissioner, 936 F.2d at 743;

see Bode v. United States, 919 F.2d 1044, 1050 (5th Cir. 1990);

Cozean v. Commissioner, supra at 232-233.       We conclude that

petitioner has not shown that any special factor is present which

warrants an increase in the $110 maximum hourly rate.
                                 20

     3.   Amounts of Reasonable Administrative and Litigation
          Costs

     We next decide whether the amounts of petitioner's

administrative and litigation costs were reasonable.      Reasonable

costs include (a) administrative fees or similar charges imposed

by the IRS, (b) reasonable expenses of expert witnesses, (c)

reasonable costs of studies, analyses, engineering reports,

tests, or projects that are necessary to prepare the taxpayer's

case, and (d) reasonable fees paid or incurred for the services

of attorneys.   Sec. 7430(c)(1) and (2).     Petitioner bears the

burden of proving that these costs are reasonable.      Rule 232(e).



                      a.   Attorney's Fees

     Petitioner seeks attorney's fees based on 136.6 hours billed

by its counsel.

     Respondent argues that petitioner's counsel's invoices do

not show the number of hours he spent for each activity he

performed for petitioner, and that they contain billings for some

services that do not relate to petitioner.      Petitioner submitted

a revised affidavit from Shannahan in an attempt to show the

number of hours he spent working on this case.      We agree with

respondent in part.   Shannahan billed 13.1 hours to prepare the

Tax Court petition for petitioner's shareholder, to prepare S

corporation elections, to write letters to the California
                                    21

Franchise Tax Board, and to finalize a will.      That work was not

related to this case.      We do not award fees for these hours.

Bode v. United States, supra at 1047-1048.       Shannahan billed

123.5 hours for services related to this case.       We find this to

be reasonable.       Thus, we award petitioner attorney's fees of

$13,585 (123.5 hours at $110 per hour).

             b.     Accountant's Fees

     Petitioner's accountant billed 98.5 hours at $25 per hour to

analyze accounts receivable, earnings and profits, accumulated

earnings, petitioner’s Bardahl computation, petitioner's cash

deposit journal relating to dividends, and rent expenses, and to

meet and correspond with petitioner and petitioner's counsel.

Respondent contends that some of the accountant's activities are

unrelated to petitioner's accumulated earnings tax issue.      We

agree with respondent in part.      Petitioner's accountant billed 12

hours to analyze rent expenses and to "return minutes book to

attorney".    These services were apparently not related to this

case.   We do not award fees for these hours.      Bode v. United

States, supra at 1047-1048.       Petitioner's accountant billed 86.5

hours for services related to this case.      We find this to be

reasonable.       We award petitioner accountant's fees of $2,162.50

(86.5 hours at $25 per hour).

     Petitioner also seeks reimbursement of $144.48 for other

costs ($60 for the filing fee and $84.48 for registered mail and
                                22

postage).   Respondent does not contend that these costs were

unreasonable.   We treat this as respondent's concession that

these costs were reasonable.

     Thus, we award petitioner attorney's fees in the amount of

$13,585, accountant's fees of $2,162.50, and costs in the amount

of $144.48.

                                          An appropriate order will

                                     be issued, and decision will

                                     be entered.
