                                                           PUBLISH
              IN THE UNITED STATES COURT OF APPEALS

                     FOR THE ELEVENTH CIRCUIT

                     ________________________

                            No. 95-6951
                     ________________________

                  Tax Court Docket No. 22193-93



     DAVID L. and FAGALE D. GRANT,

                              Petitioners-Appellants,



                              versus



     COMMISSIONER OF INTERNAL REVENUE,

                              Respondent-Appellee.



                     ________________________

      Appeal from a Decision of the United States Tax Court
                    ________________________

                       (December 31, 1996)




Before KRAVITCH and ANDERSON, Circuit Judges, and HENDERSON, Senior
Circuit Judge.



PER CURIAM:
     This is an appeal by David L. and Fagale D. Grant from the

denial    of   their   motion   for   an    award    of   administrative    and

litigation costs resulting from a redetermination by the United

States Tax Court of a deficiency asserted by the Commissioner of

Internal Revenue ("Commissioner") in their 1990 taxes.               The Tax

Court entered judgment in their favor, from which judgment the

Commissioner did not file an appeal.                The Grants subsequently

submitted this motion for an award of administrative and litigation

costs pursuant to 26 U.S.C § 7430.              The Tax Court denied that

motion and this appeal followed.           For the reasons stated below, we

affirm.

                                   FACTS.

     The following facts are derived from the evidence constituting

the record in this case.        From 1982 to 1989, taxpayer David Grant

was employed by the State of Alaska ("State") and participated in

two State-sponsored retirement programs.                  One was the Alaska

Supplemental Annuity Plan ("SBS"), in which Grant had accumulated

over $46,000.00 when he left state service.                The other was the

Grants' Alaska Public Employees Retirement System ("PERS") account,

which had a balance of about $14,600.00 at that time.                      Upon

returning to Alabama where they had previously lived, the Grants

ran up debts of approximately $30,000.00 and experienced difficulty

in meeting their obligations.          After responding to a newspaper

advertisement concerning debt consolidation services, the Grants

began working with Eddie Johnson, a broker and insurance agent with

the Innovative Company ("Innovative"), in an effort to solve their

                                      2
financial problems.           Johnson agreed to help the Grants work out

their    troubles       and   to   consolidate    their    payments     to   their

creditors.       In January 1991, they began making monthly payments to

Innovative which, after deduction of a small fee, were to be

distributed among the various creditors.               On Johnson's advice, in

February, Grant rolled over the funds in his SBS account into an

annuity contract with Jackson National Life Insurance Company

("Jackson").       This strategy would permit him to immediately borrow

up to ten percent of the amount of the annuity from Jackson.

       Grant had decided not to withdraw or transfer the funds in his

PERS account because of the adverse tax consequences.                  Since the

State's contributions had not previously been taxed, that portion

of the fund, over $9,000.00, would be subject to taxation upon

withdrawal. This decision notwithstanding, a form was prepared and

sent to the State requesting the release of the funds in the PERS

account.      On October 24, 1990, a State employee wrote Grant

informing him that he would need his wife's consent to withdraw the

funds.    Fagale Grant went to Innovative and signed a consent form,

under the impression that it related to the SBS account.                The State

issued a check for the balance in the PERS account in November 1990

and mailed it to the address specified in the refund request, a

post    office    box    maintained    by    Maurice   Bailey,   the    owner   of

Innovative.       The check was deposited with the endorsement "For

Deposit Only Innovative Co." and what purported to be Grant's

signature.       No witness at the Tax Court hearing, however, could
account for the ultimate disposition of those funds.                   In January


                                         3
1991, the State filed a Form 1099-R with the Internal Revenue

Service ("IRS") reporting the lump sum distribution of Grant's PERS

account.    Bailey prepared the Grants' 1990 income tax return but

did not include as income the taxable portion of the distribution

from the PERS account.

       In March 1991, the Grants borrowed ten percent of the value of

their    annuity   from   Jackson.     Shortly      thereafter,    the   Grants

received a second check from Jackson for ten percent of the

remaining equity in their account.             Neither of the Grants had

requested this additional sum.             They contacted Johnson for an

explanation, and he told them he had filed the second application

because he thought the first one had been lost.          On his advice, the

Grants left this check with Johnson, who said he would return it to

Jackson.    Some time later, the Grants contacted Jackson and were

informed that the check had not been returned.          In the interim, the

Grants became suspicious that Innovative was misapplying some of

the    monthly   payments   they   were    making    because   they   received

complaints from their creditors that they were not being paid. The

Grants made their last monthly payment to Innovative in June, 1991.

They    subsequently      instituted   civil    proceedings       against   the

Innovative Company, Bailey, Johnson, and Jackson to recover the

second Jackson annuity payment and the misappropriated monthly

payments.    They obtained a consent judgment against Johnson for

$6,325.00 in December 1992.1

        1
       This judgment represented the amount of the second check
drawn against the annuity with Jackson, approximately $3900.00,
some amount for the misappropriated monthly payments, and the

                                       4
     In February 1993, the IRS notified the Grants that they had

improperly failed to include the taxable portion of the PERS

account lump sum distribution in their taxable income for 1990.

The Grants retained an attorney and contacted the State in an

attempt to clarify the situation.         They did not, however, at that

point   provide   any   information    which   would   permit   the   IRS   to

definitely conclude that its initial determination was in error.

Hearing nothing further, on July 12, 1993, the IRS issued a notice

of deficiency, seeking additional taxes of $2,340.00 and interest

of $403.00.

     By letter dated September 7, 1993, the Grants' attorney

informed the IRS that the withdrawal of funds from the PERS account

was the fraudulent act of an "insurance agent" retained by the

Grants to assist them in their financial matters.               The letter

further stated that the Grants had retained litigation counsel to

sue the agent and his company.        Also, according to the letter, the

State of Alaska was making a determination as to whether to pursue

a fraud claim against the bank which had cashed the check and was

planning to reinstate the funds to Grant's account. In a telephone

conversation and in a letter dated October 5, 1993, the IRS

initially indicated that it would accept this explanation of the

matter.


remainder was punitive damages, according to David Grant's
testimony.   Jackson apparently paid approximately $1000.00 to
settle the claim against it. Of that amount, Grant testified that
he received approximately $300.00; the remainder apparently went
for attorney's fees. This judgment did not include any amounts
relating to the PERS account, which the Grants did not yet know had
been withdrawn.

                                      5
     The Grants received no formal notification from the agency,

however, and filed a petition in the Tax Count challenging the

agency's deficiency assessment on October 15, 1993.                       By letter

dated October 27, 1993, the Accounting Services Manager for the

State of Alaska informed Grant that the State believed it had

handled the matter correctly, that both requests for refunds had

been signed by him and accompanied by a notarized signed spousal

waiver and that it had issued the checks for both accounts in his

name to the address specified in the refund requests.                      In that

official's view, the fact that the Form 1099-R with respect to the

PERS distribution sent to Grant's address had not been returned and

the fact that Grant had not inquired about the PERS account for

three years even though he did not receive the yearly statement or

quarterly    newsletter     sent    to   all   those      with   active    accounts

corroborated his view that the account had been properly closed by

the State.

     The    IRS   filed     its    answer    to    the    Grants'   petition     on

November 26, 1993.          The case was tried by the Tax Court on

April 25, 1994.       The Grants, Eddie Johnson and Maurice Bailey

testified. In a memorandum opinion issued following the trial, the

Tax Court found that Grant had not authorized the withdrawal of

funds from the PERS account, that Johnson had forged Grant's

signature    on   several    documents,      and   that    the   Grants    had   not

received any economic benefit from the amount withdrawn from the

PERS account.     Accordingly, the Grants were not required to report
that amount in their taxable income for 1990. The Commissioner did


                                         6
not appeal that determination.

     The   Grants   then    filed   a     motion    seeking    an   award   of

administrative and litigation costs under authority of I.R.C. §

7430 and Rule 231 of the Tax Court Rules of Practice and Procedure.

The Tax Court concluded that the government's position, in both the

administrative proceedings and the litigation, was substantially

justified and denied the motion.              The Grants then filed this

appeal.

                           STANDARD OF REVIEW.

     We    review   the    denial   of    a    motion    for   an   award   of

administrative and litigation expenses for an abuse of discretion.

In re Rasbury, 24 F.3d 159, 165-68 (11th Cir. 1994).

                               DISCUSSION.

     A taxpayer who prevails in an administrative or judicial

proceeding may be awarded his reasonable costs incurred in such a

proceeding.     26 U.S.C. § 7430(a).       Under the statute, a judgment

for costs may be entered in favor of the taxpayer if he 1) was the

"prevailing party," 2) has exhausted all available administrative

remedies and 3) did not unreasonably protract the proceedings.              In

this case, the Commissioner conceded that the Grants had exhausted

their administrative remedies and had not unreasonably protracted

the proceedings.    Therefore, the only issue remaining was whether

the Grants were the prevailing parties as defined in the statute.

     To qualify as a "prevailing party," a taxpayer must establish

that 1) the position of the government in the proceeding was not

substantially    justified,    2)   the       taxpayer   has   substantially

                                     7
prevailed and 3) the taxpayer satisfies the applicable net worth

requirements.    26 U.S.C. § 7430(c)(4)(A).   Again, the Commissioner

conceded that the Grants had substantially prevailed and that they

met the net worth requirements. The only disputed question was and

is whether the government's position was substantially justified.

     The government's position is substantially justified if there

is a reasonable basis for it both in law and in fact.     See Pierce

v. Underwood, 487 U.S. 552, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988).

That inquiry is directed to the government's position at two

distinct stages: the date the IRS issued the notice of deficiency

in the administrative proceedings, July 12, 1993, and the period

following the filing of the government's answer in the Tax Court

litigation, November 26, 1993. See 26 U.S.C. § 7430(c)(7); Huffman

v. C.I.R., 978 F.2d 1139, 1148 (9th Cir. 1992).     In this case, the

government's position at these two stages was essentially the same:

that the taxpayers had constructively received as income during

1990 the taxable portion of the distribution from the PERS account

because that amount had been paid to the taxpayers' agent at their

direction. The taxpayers bear the burden of proving that the IRS's

position in the proceeding was not substantially justified in law

and in fact.    See T.C.R. 232(e); Cooper v. U.S., 60 F.3d 1529, 1531
(11th Cir. 1995).

     On appeal, the Grants contend that the government's position

at the relevant times was unreasonable with respect to both law and

fact.   In their view, in formulating its legal position in this

case, the government ignored the fundamental rule that an amount is


                                   8
not to be included in gross income unless the taxpayer received

some benefit from the income item.               Further, they argue that the

government ignored those cases holding that funds received and

misappropriated by an agent do not constitute income for the

taxpayer when the taxpayer was unaware of the misappropriation and

received    no   benefit   from    the   funds.      Finally,     the    taxpayers

summarily urge that the factual record demonstrates that the

government's position was unreasonable in these circumstances.

     The    government,    on     the    other    hand,   maintains      that    the

taxpayers     have   waived       any    argument      regarding        the    legal

reasonableness of its position because they did not raise that

issue in the Tax Court.         It points to language in the Tax Court's

opinion on this motion which notes that "[p]etitioners have not

argued that respondent's position was not reasonable as a matter of

law."      Memorandum   Opinion     filed    Aug.    8,   1995,   at     10.     The

government appears to be correct in this instance.                 As a general

rule, a taxpayer may not address an issue on appeal which it has

not first presented to the Tax Court.              See, e.g., Estate of Quirk

v. C.I.R., 928 F.2d 751, 756-759 (6th Cir. 1991); Shades Ridge
Holding Co., Inc. v. U.S., 888 F.2d 725, 727-28 (11th Cir. 1989).

Further, assuming that this argument is not barred, it is without

merit.      Since the receipt and deposit of these funds in an

Innovative account for the use and benefit of the taxpayers would

have, as a matter of law, resulted in the receipt of taxable income

by the taxpayers, the IRS's position was legally reasonable.                     See

2 Mertens Law of Federal Income Taxation §§ 17.15-17 (1996).


                                         9
     The government also alleges that its position was clearly

factually reasonable in light of the information available to it on

the date it issued the notice of deficiency and the date it filed

its answer to the petition.      Following the IRS's initial contact

with the Grants in February 1993, the taxpayers informed the agency

that they had not authorized the release of the funds in the PERS

account and believed it to be the result of fraud.        They did not

provide the IRS with any documentation to support these claims

until the September 7, 1993, letter from their lawyer to the

service.   Therefore, since the agency was in possession of a

facially   valid   Form   1099-R   from   the   State   documenting   a

distribution from the PERS account to the Grants, it was plainly

reasonable for the agency to proceed to the next step and issue a

notice of deficiency on July 12, 1993.

     While, on initial receipt of the September 7, 1993, letter,

the service indicated that the information contained therein might

provide a basis for resolving the issue in the taxpayers' favor, it

soon became apparent that several of the representations contained

in the letter were inaccurate.     Specifically, the IRS learned that

the Grants had not filed a lawsuit against Johnson or Innovative

for recovery of the funds from the PERS account and that the State
was not pursuing a fraud claim against any bank and, further, was

not planning to reinstate the disbursed funds to Grant's PERS

account.   The agency also learned 1) that the taxpayers had

authorized Johnson to purchase an annuity with funds from Grant's

SBS account, 2) that the taxpayers had contracted with Innovative


                                   10
to receive money from them and distribute it among their creditors,

3) that the check issued to Grant for the amount in his PERS

account had apparently been endorsed by Grant and deposited in an

Innovative account and 4) that several documents filed with the

State in connection with the withdrawal of funds from the two

accounts contained what purported to be Grant's signature, as well

as the notarized signature of his wife.

     Given that these were the facts available to the IRS at the

time the government had to formulate its answer to the taxpayers'

Tax Court petition, its answer was clearly factually reasonable.

To an impartial observer, it could not have been clear at that time

who had authorized the withdrawal from the PERS account and on

whose behalf those funds had and were being used.   Indeed, it was

not until the trial of this case, at which time the judge found the

testimony of the Grants to be credible and that of Eddie Johnson

not to be credible, that this matter could properly be resolved in

the taxpayers' favor. 2   Since the judge who heard this testimony

and had to clear up the conflicting accounts of the events here

        2
         Appellants contend in their brief that they supplied
additional information to the government on December 20, 1993,
which rendered the government's position in the litigation
unreasonable. (Appellants' Brief at 17). Their only citation for
this proposition is to the motion for administrative and litigation
expenses signed by their attorney.         No documents allegedly
submitted to the respondent on that date are attached to the
motion. ( See R1-9).     As the Tax Court observed, "petitioners
failed to establish what information was actually provided to
respondent on that date.      Therefore, the Court is unable to
determine if the information provided to respondent at that time
was sufficient to warrant respondent's concession of the issue.
After December 20, 1993, respondent did not receive any other
information from petitioners until the trial on April 25, 1994."
(Order filed August 8, 1995, at 12).

                                 11
also    ultimately   found   that   the   government's     position   was

substantially   justified,   that   conclusion   carries    considerable

weight.    Therefore, we conclude that the Tax Court did not abuse

its discretion in denying the petitioners' motion for an award of

administrative and litigation expenses.

       Accordingly, the judgment of the Tax Court is AFFIRMED.




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