                        T.C. Memo. 2009-277



                      UNITED STATES TAX COURT



         JAMES T. AND TIFFANY A. MANNING, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 30112-07.               Filed November 30, 2009.



     Farley P. Katz and Charles J. Muller, III, for petitioners.

     Daniel N. Price, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This case is before the Court on

petitioners’ motion for litigation costs, as supplemented.

Petitioners seek attorney’s fees and costs under section 7430 and

Rule 231 as well as excessive costs and sanctions against

respondent under section 6673(a)(2).1


     1
      All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
                                 -2-

     We must decide whether petitioners are entitled to recover

more than $250,000 of litigation costs under either section 7430

or 6673.   We hold that they are not.

                              Background

     The underlying facts of this case are set out in detail in

Manning v. Commissioner, T.C. Memo. 2009-157.     We summarize the

factual and procedural background briefly to rule on the instant

motion.    Petitioners are husband and wife who resided in Texas at

the time they filed the petition.

     James Manning (petitioner) operated the Austin, Texas,

office of Assent, LLC (Assent) through his wholly owned entity,

James T. Manning, LLC, a disregarded entity.    Petitioners

deducted large commission adjustments paid to the Warrior Fund

(Warrior) on their Federal income tax return.    Warrior was owned

by petitioner’s brother and was operated out of the United States

Virgin Islands (USVI).   The IRS investigated Warrior in

connection with an alleged abusive tax shelter.    As a result of

that investigation, respondent examined petitioners’ tax return

and issued a deficiency notice disallowing the commission-

adjustment deductions.   Respondent also determined, among other

things, that petitioners were liable for an accuracy-related

penalty.

     Respondent disallowed deductions for the payments to Warrior

under several theories involving the relationship between

petitioner and his brother.    Respondent’s primary argument was

that petitioner’s payments to Warrior were not deductible under
                                  -3-

section 162(a) because the payments were not ordinary and

necessary business expenses.     Respondent also made two

alternative arguments against deductibility.     Respondent argued

that the payments were nondeductible illegal payments under

section 162(c)(2).    Respondent also argued that the payments were

not deductible because the transactions lacked economic

substance.

       Petitioners conceded that they had mistakenly deducted

$100,000 of commission adjustments in 2003.     After trial we held

that petitioners were entitled to the other deductions at issue,

that they did not have $208,329 in unreported income, and that

they were not liable for the accuracy-related penalty.

Petitioners then filed a motion for litigation costs, as

supplemented.    Petitioners seek to recover more than $250,000 in

litigation costs from respondent, including their attorney’s

fees.

                              Discussion

       We now address whether petitioners may recover any of their

litigation costs.    The prevailing party may be awarded reasonable

litigation costs in any court proceeding brought by or against

the United States involving the determination or collection of

tax.    Sec. 7430(a)(2).   A prevailing party must establish, to

obtain such an award, that (1) the party has exhausted the

administrative remedies available; (2) the party has

substantially prevailed in the controversy; (3) the party

satisfies certain net worth requirements; (4) the party has not
                                     -4-

unreasonably protracted the proceedings; and (5) the amount of

costs is reasonable.     Sec. 7430(b) and (c).    The failure to

satisfy any one of the requirements precludes an award of costs.

See sec. 7430(b) and (c); see also Rule 232(e); Swanagan v.

Commissioner, T.C. Memo. 2000-294.

       Respondent acknowledges that petitioners “substantially

prevailed” with respect to the amount in controversy and the most

significant issue or set of issues presented.       Sec.

7430(c)(4)(A)(I).     Respondent argues, nonetheless, that

petitioners should not be deemed the prevailing party because

respondent’s positions in the judicial proceedings were

substantially justified and petitioners failed to establish that

they met the net worth limitations.        See sec. 7430(c)(4)(A)(ii),

(B).    We agree.

       The moving party will not be treated as having prevailed, if

the Government establishes that its position was substantially

justified.     Sec. 7430(c)(4)(B).    The Commissioner’s position is

substantially justified if, based on all the facts and

circumstances and relevant legal precedents, the Commissioner

acted reasonably.     See Pierce v. Underwood, 487 U.S. 552, 565

(1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861

F.2d 131 (5th Cir. 1988).     The Commissioner’s position may be

incorrect yet substantially justified if the Commissioner’s

position had a reasonable basis in law and fact.        See Pierce v.

Underwood, supra at 566 n.2; sec. 301.7430-5(c)(1), Proced. &

Admin. Regs.    A position has a reasonable basis in fact if there
                                  -5-

is relevant evidence that a reasonable mind might accept as

adequate to support a conclusion.       Pierce v. Underwood, supra at

564-565; Huffman v. Commissioner, 978 F.2d 1139, 1147 n.8 (9th

Cir. 1992), affg. in part, revg. in part and remanding T.C. Memo.

1991-144.

     All the facts and circumstances surrounding a dispute must

be considered in analyzing whether the Government’s position is

substantially justified.2    Nalle v. Commissioner, 55 F.3d 189,

191 (5th Cir. 1995), affg. T.C. Memo. 1994-182.       That respondent

loses on an issue is not determinative of the reasonableness of

respondent’s position.     See Wasie v. Commissioner, 86 T.C. 962,

968-969 (1986); DeVenney v. Commissioner, 85 T.C. 927, 930

(1985).     It remains a factor, however, to be considered.    Estate

of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991).

Further, relevant factors include whether an issue is novel or

difficult.     Nalle v. Commissioner, supra at 192.

     Respondent’s position was that petitioners were not entitled

to deduct the commission adjustments paid to Warrior.      Respondent

first argued that the payments were not ordinary and necessary

business expenses under section 162(a).      Respondent also argued


     2
      The Court looks to whether the Commissioner’s position was
reasonable given the available facts and circumstances at the
time the Commissioner took his position. See Maggie Mgmt. Co. v.
Commissioner, 108 T.C. 430, 442 (1997); DeVenney v. Commissioner,
85 T.C. 927, 930 (1985). The Commissioner’s position in a
judicial proceeding is generally the position the Commissioner
took in the answer to the petition. Sec. 7430(c)(7)(A); Huffman
v. Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in
part, revg. in part and remanding T.C. Memo. 1991-144.
                                  -6-

that the expenses were nondeductible illegal payments under

section 162(c)(2).   Finally, respondent argued that the payments

lacked economic substance.

     We found that petitioners were entitled to the deductions.

See Manning v. Commissioner, T.C. Memo. 2009-157.       We also find

that respondent was substantially justified in arguing that they

were not deductible.    The payments were between family members

and family controlled businesses.       Such transactions present

greater possibilities for abuse and require closer scrutiny for

purposes of determining whether they are ordinary and necessary

business expenses.     Tulia Feedlot, Inc. v. United States, 513

F.2d 800, 805 (5th Cir. 1975).    These payments were also for

large amounts.    In addition, petitioner’s brother was being

investigated for allegedly participating in an offshore tax

shelter.    We find that respondent’s position was substantially

justified given the relationship between James Manning and his

brother.3   We further conclude that respondent’s position

regarding the accuracy-related penalty was substantially

justified for similar reasons.    See Uddo v. Commissioner, T.C.

Memo. 1998-276.    Accordingly, we conclude that petitioners are

not the prevailing party for this purpose and may not recover any

     3
      We also note that petitioners have failed to satisfy this
Court that they met the net worth requirements of sec.
7430(c)(4)(A)(ii). Petitioners bear the burden of proof with
respect to this requirement. Rule 232(e); Polyco, Inc. & Subs.
v. Commissioner, 91 T.C. 963, 966 (1988); Jensen v. Commissioner,
T.C. Memo. 2000-341. We find that petitioners failed to provide
adequate supporting information to establish their net worth or
the net worth of their unincorporated business at the time they
filed the petition.
                                 -7-

litigation costs.   See sec. 7430(c)(4)(B).    In light of this

holding, we need not decide whether petitioners exhausted their

administrative remedies or whether the legal costs petitioners

claim are reasonable.

     Petitioners also seek fees under section 6673(a)(2), which

allows this Court to award attorney’s fees and costs when a

Government attorney has multiplied the proceedings in any case

unreasonably and vexatiously.    Respondent’s counsel has not done

so, and petitioners are not entitled to fees pursuant to section

6673(a)(2).

     To reflect the foregoing,


                                            An order will be issued

                                       denying petitioners’ motion

                                       for litigation costs, as

                                       supplemented.
