                       T.C. Memo. 2007-281



                     UNITED STATES TAX COURT



         RICHARD EDWIN AND EVA RUTH ELDER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7218-06.             Filed September 17, 2007.



     Richard E. Elder, for petitioners.

     Margaret A. Martin, for respondent.



                        MEMORANDUM OPINION

     PANUTHOS, Chief Special Trial Judge:    This matter is before

the Court on petitioners’ motion for an award of administrative

and litigation costs pursuant to section 7430 and Rule 231.1   For

the reasons discussed below, we shall deny petitioners’ motion.


     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect at relevant times, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 2 -

                            Background

     At the time the petition was filed, petitioners resided in

Moraga, California.   Petitioner Richard Elder is an attorney

admitted to practice before the Tax Court.    Petitioner Eva Elder

is not an attorney.

     In 2003, petitioners received distributions totaling $6,621

from Roth individual retirement accounts (Roth IRAs).2

Petitioners used the proceeds for first-time homebuyer expenses.

Petitioners did not report the distributions as taxable income on

their joint 2003 Federal income tax return.

     The Roth IRAs were held through E Trade Clearing LLC (E

Trade).   Forms 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc., issued by E Trade list “J” as the distribution code.

According to the instructions for the Form 1099-R for 2003,

distribution code J indicates:

     a distribution from a Roth IRA where * * * there are no
     known exceptions. For example, you may not know
     whether an exception under section 72(t) applies (such
     as medical expenses, first-time homebuyer, etc.) or
     whether the distribution is a qualified distribution



     2
       In general, contributions to a traditional individual
retirement account (IRA) are deductible when made, but
distributions from the IRA are subject to tax. See Orzechowki v.
Commissioner, 69 T.C. 750, 755 (1978), affd. 592 F.2d 677 (2d
Cir. 1979). In contrast, contributions to a Roth IRA are not
deductible, but qualified distributions generally are not subject
to tax. Sec. 408A(c)(1), (d). We discuss the taxation of Roth
IRA distributions in greater detail below.
                                - 3 -

     because the taxpayer qualifies as a first-time
     homebuyer under section 408A(d)(2).

     Respondent examined petitioners’ 2003 Federal income tax

return and issued a notice of proposed adjustments, commonly

referred to as a 30-day letter, in August 2005.   Respondent

proposed to include the distributions in gross income and impose

a 10-percent early withdrawal penalty.   The 30-day letter states

in part:    “Our records indicate that the full taxable amount of

your retirement distribution(s) as shown on Form 1099R was not

reported on your tax return.   Please complete and return a Form

8606, Nondeductible IRAs, as verification of the taxable amount

of the distribution(s).”

     Petitioners disagreed with the proposed adjustments and

indicated that they would provide respondent with Forms 8606,

Nondeductible IRAs.   As is relevant here, Form 8606 asks

taxpayers to provide the total distributions from Roth IRAs,

including distributions for qualified first-time homebuyer

expenses.   The taxpayer then subtracts from this amount his basis

in his Roth IRA contributions and his qualified first-time

homebuyer expenses.   Form 8606 indicates that the remainder, if

any, is the amount of taxable Roth IRA distributions.

     In their response to the 30-day letter, petitioners stated

that they were moving and that some of their records were in

storage.    Petitioners also questioned the need to provide basis

information for their Roth IRA contributions.   Petitioners
                                 - 4 -

indicated that if basis information was not necessary, they could

provide the Forms 8606 sooner.

     Respondent did not receive the Forms 8606 from petitioners

and issued a notice of deficiency in January 2006 determining a

deficiency of $2,681 in petitioners’ joint income tax for 2003.

Respondent determined that the Roth IRA distributions were

includable in gross income and asserted a 10-percent early

withdrawal penalty.

     In a letter dated April 1, 2006, petitioners enclosed Forms

8606 indicating that no portion of the Roth IRA distributions was

taxable.   The letter states that petitioners used the Roth IRA

distributions for qualified first-time homebuyer expenses.   The

letter also states that petitioners had been attempting to

complete the Forms 8606 for some time but had been unable to

obtain basis information.   Petitioners wrote in part that

“figuring out what [they] spent on stocks [they] bought as far

back as 1996 has been difficult to impossible.”

     The petition herein was filed on April 14, 2006.

Petitioners’ case was assigned to an Appeals officer on May 16,

2006.   After reviewing the file and performing research, the

Appeals officer concluded on May 18, 2006, that the notice of

deficiency was correct because a distribution from a Roth IRA

could not qualify for the first-time homebuyer expense exception.
                               - 5 -

     On July 6, 2006, Mr. Elder and the Appeals officer spoke by

telephone.   In a letter dated and sent by facsimile the same day,

Mr. Elder memorialized the conversation.    Mr. Elder indicated

that he would perform additional legal research, although he did

not state when he expected to complete the research.

     On July 10, 2006, Mr. Elder again spoke to the Appeals

officer by phone and memorialized the conversation in a letter

sent via facsimile the same day.    The letter states in part:

     I believe that your interpretation of the law is
     incorrect and that if you would provide me with a day
     or two to complete the research that I have started, I
     believe I can present you with authorities from the
     code and/or regulations which would convince you to
     drop the case. * * *

     If the foregoing does not comport with your
     recollection * * *, please advise.

     On the same day, the Appeals officer closed petitioners’

case and gave the administrative file to her manager.    On July

11, 2006, petitioners sent a letter to the Appeals officer

discussing in detail the Internal Revenue Code provisions and

Treasury regulations that govern distributions from Roth IRAs for

first-time homebuyer expenses (July 11 letter).    The analysis in

the letter indicates, inter alia, that a distribution from a Roth

IRA can satisfy the exception for first-time homebuyer expenses.

The July 11 letter was date stamped received by the Internal

Revenue Service on July 17, 2007.    It is not clear whether the

Appeals officer ever saw the July 11 letter.
                               - 6 -

     Petitioners’ case was assigned to an attorney for respondent

on December 5, 2006.   Over the next 2 weeks, the parties

exchanged correspondence.   In a letter dated December 19, 2006,

respondent’s counsel indicated she had read and agreed with the

legal analysis set forth in petitioners’ July 11 letter.

Respondent’s counsel also stated, however, that factual issues

remained unresolved.   Respondent’s counsel asked for evidence

establishing that petitioners had held the Roth IRAs for 5 years

and that petitioners had incurred first-time homebuyer expenses.

Petitioners provided the requested information, and on January

10, 2007, respondent conceded that the distributions were not

taxable.

     On January 24, 2007, Mr. Elder filed an entry of appearance.

In February 2007, petitioners filed the motion for an award of

administrative and litigation costs.     Respondent filed an

objection to the motion, and petitioners filed a reply.

                            Discussion

I.   In General

     Section 7430(a) allows a taxpayer to recover reasonable

administrative and litigation costs.     Recoverable costs include

reasonable court costs, postage expenses, and attorney’s fees.

Sec. 7430(c)(1) and (2); Dunaway v. Commissioner, 124 T.C. 80

(2005).
                                - 7 -

     Administrative and litigation costs may be awarded if the

taxpayer (1) is the prevailing party, (2) exhausted available

administrative remedies, (3) did not unreasonably protract the

court proceedings, and (4) claimed reasonable litigation costs.

Sec. 7430(a), (b)(1), (b)(3), (c)(1).    The requirements of

section 7430 are conjunctive, and failure to satisfy any one of

the requirements precludes an award of costs.    Goettee v.

Commissioner, 124 T.C. 286, 289 (2005), affd. 192 Fed. Appx. 212

(4th Cir. 2006).    Furthermore, section 7430 is a waiver of

sovereign immunity and must be strictly construed in the

Government’s favor.    Estate of Cervin v. Commissioner, 200 F.3d

351, 355 (5th Cir. 2000), affg. T.C. Memo. 1998-176; Simpson v.

Commissioner, T.C. Memo. 1995-194.

     To be the prevailing party, the taxpayer must substantially

prevail with respect to either the amount in controversy or the

most significant issue, or set of issues, presented.     Sec.

7430(c)(4)(A)(i).    In addition, the taxpayer must meet certain

net worth requirements.    Sec. 7430(c)(4)(A)(ii).   The taxpayer

will not be treated as the prevailing party, however, if the

Commissioner establishes that the Commissioner’s position was

substantially justified.    Sec. 7430(c)(4)(B); see also Pierce v.

Underwood, 487 U.S. 552, 565 (1988).

     Respondent concedes that petitioners exhausted all

administrative remedies, did not unreasonably protract the court
                               - 8 -

proceedings, prevailed with respect to the amount in controversy,

and met the net worth requirements.    Respondent contends,

however, that (1) his position was substantially justified, (2)

petitioners did not pay or incur attorney’s fees, and (3) to the

extent petitioners did pay or incur attorney’s fees, the amounts

claimed are not reasonable.

II.   Whether Respondent’s Position Was Substantially Justified

      The Commissioner’s position is substantially justified if,

based on all of the facts and circumstances and the legal

precedents relating to the case, the Commissioner acted

reasonably.   Pierce v. Underwood, supra; Sher v. Commissioner, 89

T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988).    The

Commissioner bears the burden of proving his position had a

reasonable basis in both fact and law.    Sec. 7430(c)(4)(B);

Pierce v. Underwood, supra; 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).

      We adopt an issue-by-issue approach to the awarding of costs

under section 7430, apportioning the requested award of fees

among the issues according to whether the Commissioner’s position

on a particular issue was substantially justified.    See Swanson

v. Commissioner, 106 T.C. 76, 102 (1996); Hennessey v.

Commissioner, T.C. Memo. 2007-131.     Although the notice of

deficiency contained other adjustments, the parties’ disagreement
                               - 9 -

centered on the taxation of the Roth IRA distributions.    We

therefore limit our discussion to this issue.3

     To decide whether the Commissioner’s position was

substantially justified, we first identify the point in time at

which the United States is considered to have taken a position

and then decide whether the position taken from that date forward

was substantially justified.   Maggie Mgmt. Co. v. Commissioner,

108 T.C. 430, 442 (1997).   The fact that the Commissioner

eventually concedes or loses a case does not establish that his

position was not substantially justified.     Estate of Perry v.

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

Commissioner, 115 T.C. 366, 373 (2000).     However, the

Commissioner’s concession is a factor to be considered.      Estate

of Perry v. Commissioner, supra.

     In general, we bifurcate our analysis and look separately at

the dates that the Government took a position in the

administrative proceeding and in the proceeding in this Court.

Sec. 7430(c)(7)(A) and (B); Huffman v. Commissioner, 978 F.2d



     3
       In his objection, respondent contends that the petition
did not make clear whether petitioners were also contesting the
other adjustments in the notice of deficiency because “the
petition alleged nothing with respect to [those] adjustments”.
The Appeals Case Memorandum states, however, that petitioners are
“not disputing these issues, as they are di minimus [sic] and the
real issue is the Roth [IRA] distribution.” Furthermore, we have
repeatedly held that issues not raised in the petition are deemed
to be conceded. See Nicklaus v. Commissioner, 117 T.C. 117, 120
n.4 (2001); Evan v. Commissioner, T.C. Memo. 2004-180 n.1.
                                - 10 -

1139, 1144 (9th Cir. 1992), affg. in part, revg. in part and

remanding T.C. Memo. 1991-144.    We therefore look at the date the

notice of deficiency was issued, sec. 7430(c)(7)(B)(ii), and the

date respondent’s counsel became involved in the case,4 Huffman

v. Commissioner, supra; Estate of Merchant v. Commissioner, 947

F.2d 1390, 1392 & n.6 (9th Cir. 1991), affg. T.C. Memo. 1990-160.

     A.   The Administrative Proceeding

     Respondent’s position in the administrative proceeding was

substantially justified.   Gross income includes all income from

whatever source derived unless excluded by a specific provision

of the Internal Revenue Code.    Sec. 61(a).   A distribution from a

Roth IRA is excluded from gross income to the extent that it is a

return of the owner’s contributions or if it is a qualified

distribution.   Sec. 408A(d)(1); Widemon v. Commissioner, T.C.

Memo. 2004-162; sec. 1.408A-6, Q&A-1(b), Income Tax Regs.    As is

relevant here, a qualified distribution is one that is made after

a 5-year period and meets the exception for first-time homebuyer




     4
       The Commissioner generally takes a position in the Court
proceeding when the answer is filed. Corson v. Commissioner, 123
T.C. 202, 206 (2004). This case was originally designated a
small tax case, and therefore no answer was required. See Rule
173(b) as in effect when the petition was filed. Respondent
conceded that the Roth IRA distributions were not taxable on Jan.
10, 2007. Upon petitioners’ motion, we removed the “S”
designation on Jan. 29, 2007. Respondent filed an answer on Apr.
13, 2007.
                                - 11 -

expenses.     Sec. 72(t)(2)(F); sec. 1.408A-6, Q&A-1(b), Income Tax

Regs.

     The Forms 1099-R do not list petitioners’ contributions to

their Roth IRAs and indicate that no known exception excluded the

distributions from gross income.     The 30-day letter, which was

issued in August 2005, asked petitioners to establish that the

distributions were nontaxable and to provide Forms 8606, which

petitioners agreed to do.     When petitioners failed to provide the

Forms 8606 by January 2006, respondent was substantially

justified in issuing the notice of deficiency.     See Uddo v.

Commissioner, T.C. Memo. 1998-276; sec. 301.7430-5(c)(1) and (h),

Example 1, Proced. & Admin. Regs.

     Petitioners concede they had not yet provided the Forms 8606

when the notice was issued.     But they contend that other

documents in respondent’s possession, such as prior years’ tax

returns and prior years’ Forms 5498, IRA Contribution

Information,5 “showed that the distributions were qualified

distributions, not income.”     Petitioners are incorrect.

        Section 6001 requires a taxpayer to maintain records that

are sufficient to enable the Commissioner to determine his or her

correct tax liability.     See also sec. 1.6001-1(a), Income Tax



     5
       A Form 5498, IRA Contribution Information, is issued by a
third party that maintains a Roth IRA for the taxpayer. As its
name suggests, the Form 5498 shows the amount of contributions
the taxpayer made during the taxable year to the Roth IRA.
                                     - 12 -

Regs.     The books or records required shall be kept at all times

available for inspection by authorized internal revenue officers

or employees.      Sec. 1.6001-1(e), Income Tax Regs.     Thus,

respondent was not required to maintain records on petitioners’

behalf.

     Furthermore, even if respondent did have prior years’

records indicating that the distributions were nontaxable, each

taxable year stands on its own, and the Commissioner may

challenge in a succeeding year what was overlooked in previous

years.       See Rose v. Commissioner, 55 T.C. 28, 31-32 (1970); Hahn

v. Commissioner, T.C. Memo. 2007-75.          Accordingly, respondent was

not required to accept information reported on previous years’

tax returns and Forms 5498.       We therefore conclude that

respondent’s position in the administrative proceeding was

substantially justified.

        B.    The Court Proceeding

        Costs incurred in connection with the filing of a petition

and costs incurred thereafter are considered litigation costs.

McGowan v. Commissioner, T.C. Memo. 2005-80; sec.

301.7430-4(c)(3) and (4), Example 2, Proced. & Admin. Regs.

Because petitioners dealt with the Office of Appeals after the

petition was filed, any costs relating to such activity are

litigation costs rather than administrative costs.         See Goertler
                                - 13 -

v. Commissioner, T.C. Memo. 2003-136 n.7; sec. 301.7430-4(c)(4),

Example 2, Proced. & Admin. Regs.

     In support of their view that respondent’s position was not

substantially justified, petitioners discuss at length the

Appeals officer’s actions and the erroneous legal conclusion that

she reached.   We are not unsympathetic to the delay and

frustration caused by the Appeals officer’s misinterpretation of

the law.   Furthermore, we agree with petitioners that it should

not be “[the taxpayer’s] job to help employees of the Internal

Revenue Service understand the tax code”, as petitioners

attempted to do in their July 11 letter.    Nevertheless, the

Government’s litigating position is formed only after the

Government’s attorney becomes involved in the case.    See Huffman

v. Commissioner, supra; Estate of Merchant v. Commissioner,

supra; Andary-Stern v. Commissioner, T.C. Memo. 2002-212.

Petitioners’ discussions with the Appeals officer occurred before

respondent’s counsel became involved in the case.    The Appeals

officer’s conclusion does not represent respondent’s litigating

position and does not prevent that position from being

substantially justified.   We therefore focus on the actions taken

by respondent’s counsel.

     As discussed above, respondent did not initially file an

answer.    See supra note 4.   Respondent’s counsel was assigned

this case on December 5, 2006.    Approximately 2 weeks later,
                               - 14 -

respondent’s counsel acknowledged the Appeals officer’s mistake

and requested additional substantiation.    Once petitioners

provided the requested information, respondent’s counsel promptly

conceded.   Under the circumstances, we conclude that respondent’s

position in the court proceeding was substantially justified.

See Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir. 1991)

(upholding the denial of litigation costs where the

Commissioner’s attorney settled the case “with reasonable

dispatch”); Andary-Stern v. Commissioner, supra (the Commissioner

is given a reasonable period of time to resolve factual issues

after receiving all relevant information); see also Estate of

White v. Commissioner, T.C. Memo. 2007-54 (and cases cited

therein).

     Because respondent’s position was substantially justified,

petitioners are not entitled to recover administrative costs or

litigation costs.   Accordingly, we need not decide whether

petitioners paid or incurred attorney’s fees or whether the

claimed fees are reasonable.   In reaching our holding, we have

considered all arguments made by the parties, and to the extent

not mentioned above, we find them to be moot, irrelevant, or

without merit.

     To reflect the foregoing,


                                      An appropriate order and

                                 decision will be entered.
