                  T.C. Memo. 2002-320



                UNITED STATES TAX COURT



            LINDA A. FIELDS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 16206-99.          Filed December 30, 2002.



     R determined deficiencies in tax, additions to
tax, and penalties for fraud with respect to P’s 1991,
1992, and 1993 tax years. P filed a petition for
redetermination, and R subsequently conceded the entire
fraud penalty. P seeks recovery of litigation costs
pursuant to sec. 7430 in the amount of $47,640.98 or,
in the event a special factor is present, $92,822.98.

     1. Held: R’s assertion of the fraud penalty was
substantially justified, within the meaning of sec.
7430(c)(4)(B)(i), with respect to one adjustment but
was not substantially justified with respect to the
balance of the adjustments.

     2. Held, further, R’s disparate treatment of P
and her ex-husband with respect to the fraud penalty
does not constitute a special factor within the meaning
of sec. 7430(c)(1)(B)(iii).
                               - 2 -

          3. Held, further, P is entitled to recover costs
     in the amount of $28,800.



     Lawrence W. Sherlock, for petitioner.

     Susan M. Pinner, for respondent.



                        MEMORANDUM OPINION


     HALPERN, Judge:   This case is before the Court on

petitioner’s motion for an award of litigation costs pursuant to

section 7430 and Rules 230 through 233 (the motion).    Respondent

objects.   Unless otherwise indicated, all section references are

to the Internal Revenue Code of 1986, as amended, and all Rule

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

     Petitioner seeks to recover costs in the amount of

$47,640.98 (or, in the event we determine that a special factor

is present, $92,822.98) incurred in connection with respondent’s

determination of deficiencies, additions to tax, and penalties

with respect to her Federal income tax liabilities for her 1991,

1992, and 1993 taxable (calendar) years.     Neither party requested

an evidentiary hearing, and we conclude that such a hearing is

not necessary for the proper disposition of the motion.    See Rule

232(a)(2).   The issues for decision are (1) whether respondent’s

assertion of the fraud penalty under section 6663 was

substantially justified within the meaning of section
                              - 3 -

7430(c)(4)(B)(i); and, if not, (2) whether respondent’s disparate

treatment of petitioner and her ex-husband with respect to the

fraud penalty constitutes a special factor within the meaning of

section 7430(c)(1)(B)(iii); and (3) the amount of costs

petitioner is entitled to recover under section 7430.

                Factual and Procedural Background1

Introduction

     During the years at issue, petitioner was married to Calvin

Fields (sometimes, collectively, the Fieldses).    Mr. Fields

operated a plumbing contracting business as a sole proprietorship

under the trade name Builders Interior Contractors (BIC).    The

Fieldses also operated other businesses, including a tanning

salon, which they operated through Fields & Fields, Inc. (FFI).

     In the late 1980s, the Fieldses developed a business

relationship with an individual, Robert Carcasi, who did business

as “R&M Accounting & Tax Service”.    Mr. Carcasi prepared the

Fieldses’ personal and business-related tax returns, performed

certain accounting services with respect to the Fieldses’

business ventures, and served as a general business adviser to

the Fieldses.




     1
        Because the parties appear to agree on the underlying
facts relevant to dispose of the motion, there are no factual
disputes to resolve, and we shall proceed on the basis of the
parties’ submissions.
                              - 4 -

     Plumbing Claims Group, Inc. (PCG) was a joint claims

operation formed by certain manufacturers of polybutylene

plumbing materials to process damage claims made against such

manufacturers, arising out of the failure of plumbing materials

installed in residences in the 1970s and 1980s.   BIC was one of

several contractors engaged to do plumbing repair work for PCG.

Beginning in 1991, Mr. Fields participated in a scheme to defraud

PCG by submitting fictitious BIC invoices to PCG for repair work

that Mr. Fields did not perform.   From 1991 to 1993, PCG paid

almost $350,000 of false BIC invoices, and Mr. Fields made

payments of approximately $46,000 and $87,000 to or for the

benefit of Mr. Fields’ two co-conspirators.

The Fieldses’ 1991 and 1992 Returns

     The Fieldses made a joint return of Federal income tax for

1991 by filing a Form 1040, U.S. Individual Income Tax Return

(the initial 1991 return) prepared by Mr. Carcasi.   On Schedule C

of the initial 1991 return (Profit or Loss from Business (Sole

Proprietorship)), the Fieldses reported gross receipts of

$484,010 and a net profit of $40,125 with respect to BIC.    The

Fieldses reported the $40,125 net profit as “business income” on

line 12 of the initial 1991 return.

     The Fieldses made a joint return of Federal income tax for

1992 by filing a Form 1040, U.S. Individual Income Tax Return

(the initial 1992 return) prepared by Mr. Carcasi.   In
                                 - 5 -

furtherance of Mr. Carcasi’s plan to offset a portion of BIC’s

1992 income with a loss generated by the Fieldses’ corporation,

FFI, Mr. Carcasi prepared the initial 1992 return under the

premise that BIC operated as a division of FFI, rather than as a

sole proprietorship.     Accordingly, the Fieldses did not attach a

Schedule C to the initial 1992 return and did not report any

“business income” on line 12 of that return.     The Fieldses did

report $100,000 of wage income for Mr. Fields from FFI on line 7

of the initial 1992 return.    In addition, FFI made a $300,000

estimated tax payment in December 1992.

Commencement of Respondent’s Examination

     In May 1994, respondent commenced an examination of the

initial 1991 return.     In March 1995, respondent’s revenue agent

obtained BIC’s 1991 bank statements from Mr. Carcasi.     Those bank

statements revealed that Mr. Fields had understated BIC’s 1991

receipts by approximately $500,000.      In subsequent conversations

with PCG personnel, the revenue agent learned of the false

invoice scheme and that Mr. Fields was under FBI investigation

for his role therein.2

     In at least one interview with the revenue agent, Mr.

Carcasi claimed that petitioner had expressed concern that the

amount Mr. Carcasi had initially planned to report as BIC’s gross


     2
        Mr. Fields eventually pleaded guilty to one count of
conspiracy to commit mail fraud.
                                - 6 -

receipts on the Fieldses’ 1991 Schedule C was too low.    Mr.

Carcasi also told the revenue agent that he had prepared the

Fieldses’ 1991 Schedule C without the benefit of any bank deposit

slips.

The Fieldses’ 1993 Return

     In July 1995, after respondent had commenced his examination

for 1991, the Fieldses made a joint return of Federal income tax

for 1993 by filing a Form 1040, U.S. Individual Income Tax Return

(the 1993 return).    The 1993 return was prepared by Mike

Marshall, a certified public accountant engaged by the tax

attorney the Fieldses had hired (in Mr. Carcasi’s stead) to

represent them in connection with respondent’s examination for

1991.    On the 1993 return, the Fieldses reported taxable income

of approximately $2.8 million and tax of approximately $1.1

million.

Amended Returns

     In October 1995, the Fieldses amended the initial 1991

return and the initial 1992 return by filing a Form 1040X,

Amended U.S. Individual Income Tax Return, with respect to each

such year (the amended 1991 return and the amended 1992 return,

respectively). Mr. Marshall prepared both of the amended returns.

On the amended 1991 return, the Fieldses reported $487,591 of

additional business income from BIC.    On the amended 1992 return,

the Fieldses reported $1,123,263 of business income from BIC and
                               - 7 -

$14,881 of additional interest income.   Of the $14,881 of

additional interest income, the Fieldses reported that $13,881

derived from BIC’s commercial checking account.    The Fieldses

paid the resulting additional tax of approximately $500,000

(approximately $150,000 for 1991 and $350,000 for 1992) with the

amended returns, apparently deriving approximately $450,000 of

such amount from refunds of erroneous FFI estimated tax payments,

including FFI’s $300,000 1992 estimated tax payment.

Conclusion of Respondent’s Examination

     In February 1997, the revenue agent notified the Fieldses

that, for 1991, 1992, and 1993, she proposed (1) a reduction of

business expense deductions for all 3 years, (2) the fraud

penalty for 1991 and 1992, and (3) certain other penalties.      The

case then went to respondent’s Appeals Office.    As part of a

written settlement offer dated June 2, 1999, respondent’s Appeals

officer offered to concede 25 percent of the fraud penalty.      The

Appeals officer characterized such proposed concession as a

50-percent concession of petitioner’s 50-percent share of the

penalty.   The Fieldses rejected that offer.

     By notice of deficiency dated July 29, 1999, respondent

determined deficiencies, additions to tax, and penalties with

respect to the Fieldses’ income taxes for 1991, 1992, and 1993 as

follows:
                               - 8 -

                               Additions to Tax and Penalty
     Year      Deficiency      Sec. 6651(a)(1)     Sec. 6663
     1991       $14,505              –-             $129,158
     1992        43,026             2,307            299,461
     1993        25,376             6,344             19,032

The deficiencies resulted from disallowed deductions for (1)

commissions, fees, and contract labor expense consisting of

payments to Mr. Fields’ co-conspirators and certain family

members, and (2) travel and entertainment expenses.   The notice

of deficiency also provided that the accuracy-related penalty

under section 6662 (for negligence or disregard of rules or

regulations) would apply in the event the fraud penalty did not

apply.

Petitioner’s Counsel

     In August 1999, petitioner’s present counsel, Lawrence

Sherlock, notified petitioner and Mr. Fields (who by that time

had divorced) that he could no longer jointly represent them in

view of their conflicting interests with regard to the fraud

issue, as evidenced by the Appeals officer’s June 2, 1999,

settlement offer.   Petitioner and Mr. Fields agreed that Mr.

Sherlock would continue to represent petitioner and that Mr.

Fields would retain separate counsel.
                               - 9 -

The Petition and Proceedings to Date

     By the petition, petitioner assigned error to respondent’s

determination of deficiencies, additions to tax, and penalties.3

She set forth as an affirmative defense her claim to relief from

joint and several liability under section 6015(c).   Respondent

denied that he had erred and denied her claim under section

6015(c), and the case was set for trial at the Court’s trial

session commencing on December 4, 2000, in Houston, Texas.

     The parties reached a tentative settlement just prior to

trial.   When the case was called from the trial calendar, the

parties filed a stipulation of settled issues, pursuant to which

(1) respondent conceded the fraud penalty for all years and the

accuracy-related penalty for 1992 and 1993, (2) petitioner

conceded the accuracy-related penalty for 1991 and the additions

to tax for late filing for 1992 and 1993, and (3) each party

conceded portions of the business expense issues (subject, in

petitioner’s case, to her claim for section 6015(c) relief).

Petitioner also filed a motion for continuance at that time with

regard to the remaining business expense and section 6015(c)

issues, pending Mr. Fields’ payment of the deficiencies resulting

from his concession of such business expense issues in his

companion case.


     3
        At the time of the filing of the petition, petitioner
resided in Katy, Texas.
                                 - 10 -

      When it eventually became apparent that payment from Mr.

Fields would not be forthcoming, petitioner’s case was reset for

trial at the Court’s trial session commencing on December 3,

2001, in Houston, Texas.    When the case was called from the trial

calendar, the parties filed a supplemental stipulation of settled

issues, pursuant to which (1) respondent conceded 50 percent of

the remaining business expense deductions at issue, (2)

petitioner conceded the section 6015(c) issue, and (3) petitioner

reserved her right to file a motion for litigation costs under

section 7430.

                            Discussion

I.   Overview of Section 7430

      A.   Relevant Provisions

      Section 7430 provides that, if certain conditions are met, a

taxpayer who prevails against the United States in any tax

proceeding (administrative or judicial) may recover reasonable

costs incurred in connection with such proceeding.4   Section

7430(c)(4)(B) provides that a taxpayer shall not be treated as

the prevailing party in any such proceeding if the United States

establishes that its position in the proceeding was substantially

justified.    In his objection to the motion, respondent seeks to

establish that his position in this litigation was substantially


      4
        Petitioner does not seek costs incurred in connection
with the administrative phase of this case.
                               - 11 -

justified.    Respondent also objects to the amount of costs

claimed by petitioner.    Respondent concedes that petitioner

satisfies all other requirements for recovery under section 7430.

     B.   Position of the United States

     In the context of a claim for litigation costs, the position

of the United States with respect to any issue is that set forth

in the Commissioner’s answer in the judicial proceeding.     E.g.,

Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997).     In

the instant case, the underlying controversy between the parties

presented several issues, including (1) the propriety of certain

business expense deductions claimed by the Fieldses under section

162, (2) the availability of relief under section 6015(c), (3)

the applicability of the fraud penalty under section 6663 or, in

the alternative, the accuracy-related penalty under section 6662

(for negligence or disregard of rules or regulations), and (4)

the applicability of the late filing penalty under section

6651(a)(1).   Petitioner does not assert that respondent’s

position with respect to each of those issues was not

substantially justified; rather, petitioner essentially limits

her claim in that regard to respondent’s position with respect to

the fraud penalty.5

     5
        In her reply to respondent’s objection to the motion,
petitioner also claims, within the context of her argument that
her costs are reasonable in amount, that respondent’s alternative
position with respect to the accuracy-related penalty was not
                                                   (continued...)
                                  - 12 -

      C.    Substantial Justification

      A position of the United States in a judicial proceeding is

substantially justified if it has a reasonable basis in law and

fact.      E.g., Maggie Mgmt. Co. v. Commissioner, supra at 443.     We

determine the reasonableness of respondent’s position in this

case based upon the facts available to respondent at the time he

took the position (i.e., at the time of the filing of the answer)

and the controlling legal precedent at such time.         Id.   The fact

that respondent conceded the fraud issue does not, by itself,

establish that his position with respect thereto was

unreasonable.      Id.   However, it is a factor that may be

considered.      Id.

II.   Application of the “Substantially Justified” Standard

      A.    General Considerations

      Section 6663(a) imposes a 75-percent penalty with respect to

any portion of an underpayment of tax that is attributable to

fraud.      Respondent bears the burden of proving fraud by clear and

convincing evidence.       Rule 142(b).    In the case of a joint


      5
      (...continued)
substantially justified. Because the accuracy-related penalty is
mentioned in only three of the time entries submitted by
petitioner’s counsel (none of which establishes the amount of
time devoted solely to that issue), we do not think that a
separate analysis of respondent’s substantial justification for
each of his alternative positions would be fruitful. We
therefore do not address the procedural ramifications, if any, of
petitioner’s failure to make her claim with respect to
respondent’s alternative position in the motion.
                                - 13 -

return, a spouse is not liable for the fraud penalty unless some

portion of the underpayment is attributable to that spouse’s

fraudulent conduct.   See sec. 6663(c).

     In the context of Federal tax law, fraud entails intentional

wrongdoing with the purpose of evading a tax believed to be

owing.   E.g., Neely v. Commissioner, 116 T.C. 79, 86 (2001).   As

stated by the Court of Appeals for the Fifth Circuit:

     ‘Fraud implies bad faith, intentional wrongdoing and a
     sinister motive. It is never imputed or presumed and
     the court should not sustain findings of fraud upon
     circumstances which at most create only suspicion.’
     * * * ‘Negligence, whether slight or great, is not
     equivalent to the fraud with intent to evade tax named
     in the statute. The fraud meant is actual, intentional
     wrongdoing, and the intent required is the specific
     purpose to evade a tax believed to be owing. Mere
     negligence does not establish either.’ * * *

Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968) (quoting

Carter v. Campbell, 264 F.2d 930, 935-936 (5th Cir. 1959)), affg.

T.C. Memo. 1966-81.

     To succeed in the instant case, respondent must show that he

had a reasonable basis for believing that he could prove his

allegation of petitioner’s fraud by clear and convincing

evidence.   See, e.g., Rutana v. Commissioner, 88 T.C. 1329, 1337-

1338 (1987).   More particularly, he must show that he had a

reasonable basis for believing that he could prove by clear and

convincing evidence that petitioner willfully intended to evade a

tax she believed to be owing.
                               - 14 -

     In the answer, respondent averred that petitioner

fraudulently (1) understated business income on the initial 1991

return, (2) understated business income and interest income on

the initial 1992 return, and (3) overstated business expense

deductions on the amended 1991 return, the amended 1992 return,

and the 1993 return.   Because each of the enumerated averments

involves different circumstances, we address respondent’s fraud

allegation with respect to each such item separately.

     B.   Understatement of 1991 Income

     Respondent averred that petitioner fraudulently understated

business income on the initial 1991 return by $487,591.      Although

the Fieldses claimed that they relied completely on Mr. Carcasi

to prepare the return properly, there are times when, in light of

all the circumstances, “[t]he gap between the income received and

that reported * * * is simply too substantial” to support a

taxpayer’s claim that he was a “mere innocent beneficiary” of a

return preparer’s misfeasance.   Estate of Temple v. Commissioner,

67 T.C. 143, 163-164 (1976).   In addition to the negative

inference that respondent properly could have drawn from the

existence of the large, unexplained understatement of income on

the initial 1991 return, there was some evidence indicating that

petitioner may have known that Mr. Fields’ income with respect to

BIC was understated on that return to some extent.   There was

also some evidence that the Fieldses may not have supplied Mr.
                                - 15 -

Carcasi with all of the information he needed to prepare the

initial 1991 return properly.    Bearing in mind that we are

evaluating the reasonableness of respondent’s assertion of the

fraud penalty in that context, rather than the ultimate

applicability of the penalty itself, we find that respondent’s

position in that regard was reasonable (i.e., that respondent had

a reasonable basis for believing that he could prove by clear and

convincing evidence that petitioner intended to evade a tax that

she believed to be owing).6

     C.   Understatement of 1992 Income

     Respondent also averred that petitioner fraudulently

understated business income and interest income on the initial

1992 return by $1,123,263 and $14,881, respectively.    However,

the circumstances of the understatement of 1992 income differ

markedly from those of the understatement of 1991 income.      The

understatement of business income on the initial 1992 return

plainly resulted from Mr. Carcasi’s (not petitioner’s) plan to

treat BIC as a division of FFI, as did substantially all of the

understatement of interest income on that return.    More

significantly, we are convinced by FFI’s $300,000 estimated tax

payment in 1992 that petitioner did not intend to evade tax on


     6
        Compare Gutierrez v. Commissioner, T.C. Memo. 1995-569,
in which we concluded that, although the taxpayer prevailed on
the fraud issue at trial, it was reasonable for the Commissioner
to put the taxpayer’s credibility before the finder of fact.
                               - 16 -

BIC’s 1992 income.7   Without the BIC income, FFI apparently had

no taxable income in 1992; indeed, the Fieldses apparently used

the refund of FFI’s $300,000 estimated tax payment to pay almost

all of their 1992 underpayment of approximately $350,000 that

resulted from Mr. Carcasi’s botched plan.    In effect, the

Fieldses simply made a payment to the wrong tax account in 1992.

On those facts, respondent had no reasonable basis for asserting

the fraud penalty against petitioner with respect to the

understatement of income on the initial 1992 return.

     D.   Disallowed Business Expense Deductions

     Respondent averred that petitioner fraudulently overstated

business expenses (1) on the amended 1991 return by $46,790, (2)

on the amended 1992 return by $138,795, and (3) on the 1993

return by $64,081.    Respondent’s position in that regard is

particularly puzzling, since the Fieldses filed those returns

after respondent had commenced his examination of the years in

question.8   In effect, respondent took the position that

petitioner committed fraud with respect to those returns even

though she knew that respondent would immediately examine them.


     7
        The size of that estimated tax payment indicates that the
amount of BIC’s income that was sheltered by FFI’s losses in
accordance with Mr. Carcasi’s plan was, in fact, insubstantial.
     8
        Petitioner alleges that the revenue agent who examined
the returns never relied on the disallowed deductions to sustain
a finding of fraud, an allegation that is supported by the
revenue agent’s report (Form 886-A) with respect to this case.
                              - 17 -

We find that difficult to believe.     Furthermore, the Fieldses

undeniably incurred the expenditures in question; the issue was

simply whether the amounts were properly deductible as trade or

business expenses under section 162.     The Fieldses’ new return

preparer (whom the Fieldses’ attorney had engaged in connection

with respondent’s examination) determined that the expenditures

were deductible, and respondent eventually conceded a significant

portion of the deductions.   In light of the foregoing, we have

little difficulty concluding that respondent had no reasonable

basis for asserting the fraud penalty against petitioner with

respect to such amounts.

     E.   Conclusion

     We find that respondent’s assertion of the fraud penalty

with respect to the understatement of business income on the

initial 1991 return was substantially justified.     We find that

respondent’s assertion of the fraud penalty with respect to (1)

the understatement of business income and interest income on the

initial 1992 return, and (2) the overstatement of business

deductions on the amended 1991 return, the amended 1992 return,

and the 1993 return was not substantially justified.     In that

regard, we agree in large part with petitioner that respondent

placed too much emphasis on the criminal activity of petitioner’s

ex-husband in pursuing his fraud case against petitioner.
                                  - 18 -

III.       Amount of Recoverable Costs

       A.     The “Special Factor” Issue

       Section 7430(c)(1)(B)(iii) provides that attorney’s fees

recoverable under section 7430 shall not exceed $125 per hour

(adjusted annually for inflation) “unless the court determines

that a special factor, such as the limited availability of

qualified attorneys for such proceeding, the difficulty of the

issues presented in the case, or the local availability of tax

expertise, justifies a higher rate.”       Petitioner argues that the

circumstances of this case warrant the determination of

recoverable costs without regard to the statutory rate cap.9

Specifically, petitioner argues that respondent’s disparate

treatment of petitioner and her ex-husband with regard to the

fraud penalty, as evidenced by the Appeals officer’s June 2,

1999, settlement offer, should qualify as a “special factor” in

that such action necessitated the retention of separate counsel,

effectively precluding her from sharing the cost of her defense

with her ex-husband.

       In Estate of Cervin v. Commissioner, 200 F.3d 351, 355-358

(5th Cir. 2000), affg. T.C. Memo. 1998-176, the Court of Appeals

for the Fifth Circuit rejected the taxpayer’s contention that the

       9
        Petitioner raised the “special factor” argument for the
first time in her reply to respondent’s objection to the motion.
Because we reject the substance of petitioner’s argument, we do
not address the procedural ramifications, if any, of petitioner’s
failure to raise the “special factor” issue in the motion.
                                 - 19 -

finding of a special factor for purposes of section 7430 could be

based on the alleged misconduct of the Commissioner.     The Court

agreed with the Court of Appeals for the Second Circuit that, in

a case in which an award of costs is warranted under section

7430, “the Commissioner’s conduct has already been taken into

account”.     Id. at 357 (quoting Cassuto v. Commissioner, 936 F.2d

736, 744 (2d Cir. 1991), affg. in part and revg. in part 93 T.C.

256 (1989)).      We agree with both courts that the finding of a

special factor based on the alleged misconduct of the

Commissioner would amount to an award of punitive damages,

contrary to the purposes of section 7430.      Estate of Cervin v.

Commissioner, supra at 357; Cassuto v. Commissioner, supra at

744.10    We therefore reject petitioner’s contention that we

should treat respondent’s conduct in this case as a special

factor for purposes of section 7430.

     B.     Adjustments to Claimed Costs

             1.   Attorney’s Fees Relating to Underlying Dispute

     Respondent argues, and we agree, that petitioner is not

entitled to recover fees that are attributable to issues other


     10
        The version of sec. 7430 at issue in Estate of Cervin
and Cassuto listed only “the limited availability of qualified
attorneys” as an example of a special factor. The subsequent
addition of “the difficulty of the issues presented in the case”
and “the local availability of tax expertise” as special factor
examples reinforces the conclusion of the courts in those cases
that the Commissioner’s conduct is not the type of circumstance
that can qualify as a special factor under sec. 7430.
                              - 20 -

than the fraud issue (i.e., issues with respect to which

petitioner did not challenge the reasonableness of respondent’s

position).   Further, in light of our finding that respondent’s

assertion of the fraud penalty was substantially justified in

part, petitioner is not entitled to recover all of the fees that

we allocate to the fraud issue.

          a.   Allocation of Fees to the Fraud Issue

     We have reviewed the attorney time entries submitted by

petitioner’s counsel and have divided the entries relating to the

underlying dispute into three categories:   (1) entries pertaining

solely to the fraud issue (55.6 hours), (2) entries pertaining

solely to nonfraud issues (14.35 hours), and (3) all other

entries relating to the underlying dispute (202.8 hours).    Based

on the statutory rate caps applied by petitioner,11 the amount of

potentially recoverable attorney’s fees attributable to the

entries in those three categories is $7,784 (55.6 x $140), $1,997

([1.25 x $130] + [13.1 x $140]), and $28,217 ([17.5 x $130] +

[185.3 x $140]), respectively, for a total of $37,998.12    We

allocate the $28,217 of residual (category 3) fees between the

     11
        The statutory rate cap for fees incurred by petitioner
in 1999 is $130. Rev. Proc. 98-61, 1998-2 C.B. 811, 816. The
rate cap for fees incurred in 2000 and 2001 is $140. Rev. Proc.
99-42, 1999-2 C.B. 568, 572; Rev. Proc. 2001-13, 2001-1 C.B. 337,
341. The rate cap for fees incurred in 2002 is $150. Rev. Proc.
2001-59, 2001-2 C.B. 623, 628.
     12
        For convenience, we round all monetary calculations to
the nearest dollar.
                               - 21 -

fraud issue and the nonfraud issues based on the relative dollar

amounts at issue.   Per the notice of deficiency, the total amount

in dispute was $539,209, of which $447,651, or approximately 83

percent, was attributable to the fraud issue.    Based on that

percentage, we allocate $23,420 of the $28,217 of residual

(category 3) fees to the fraud issue.   Adding that figure to the

$7,784 of category 1 fees, we find that $31,204 of petitioner’s

$37,998 of potentially recoverable attorney’s fees are allocable

to the fraud issue (the fraud defense amount).

          b.   Subtraction of Nonrecoverable Portion of Fraud
               Defense Amount

     We have found that respondent’s assertion of the fraud

penalty with respect to 1991, but not 1992 or 1993, was

substantially justified in part (justified with respect to the

business income omission on the initial 1991 return but not

justified with respect to the business deductions overstatement

on the amended 1991 return).   Accordingly, in order to determine

the portion of the fraud defense amount that petitioner is not

entitled to recover, we must first allocate a portion of such

amount to the 1991 fraud issue.   The total of respondent’s fraud

penalties for 1991 through 1993 is $447,651.    Based on the

relative amounts of such penalties for 1991 ($129,158), 1992

($299,461), and 1993 ($19,032), we allocate 29 percent, or

$9,049, of the $31,204 fraud defense amount to the 1991 fraud

issue.   Next, we must allocate that $9,049 between the two 1991
                                 - 22 -

adjustments with respect to which respondent applied the fraud

penalty.    As stated, we have found that respondent was

substantially justified in applying the fraud penalty to his

adjustment of the initial, but not the amended, 1991 return.

Based on the relative amounts of those adjustments ($487,591 and

$46,790, respectively), we allocate 91 percent, or $8,235, of the

$9,049 amount to respondent’s adjustment of the initial 1991

return.    Petitioner is therefore entitled to recover $22,969 of

the fraud defense amount ($31,204 ! $8,235).

            2.   Attorney’s Fees Relating to the Motion

     For purposes of section 7430, reasonable litigation costs

may include reasonable fees incurred in connection with the

section 7430 proceeding itself, see Powers v. Commissioner, 100

T.C. 457, 492 (1993), affd. in part and revd. in part on another

issue 43 F.3d 172 (5th Cir. 1995), regardless of the

reasonableness of the Commissioner’s position in the section 7430

proceeding.      Bayer v. Commissioner, T.C. Memo. 1991-282 at n.5

(citing Commissioner, I.N.S. v. Jean, 496 U.S. 154, 158-166

(1990).    Based on our review of the attorney time entries

submitted by petitioner and the application of the statutory rate

caps, we find that petitioner incurred $8,575 of potentially

recoverable attorney’s fees in prosecuting the motion ([20 x

$140] + [38.5 x $150]).     We further conclude that petitioner is

entitled to recover such fees in proportion to her recovery of
                              - 23 -

other attorney’s fees in this case.    As determined above,

petitioner is entitled to recover $22,969, or approximately 60

percent, of her $37,998 of potentially recoverable attorney’s

fees relating to the underlying dispute.    Applying that

percentage to the $8,575 of fees relating to the prosecution of

the motion, we find that petitioner is entitled to recover $5,145

of such fees.

          3.    Other Costs

     Petitioner claims additional litigation costs of $1,068.48.

Of that amount, $318.50 is attributable to paralegal and legal

assistant time entries pertaining solely to the fraud issue.13

We conclude that petitioner is entitled to recover such fees in

proportion to her recovery of the fraud defense amount.     As

determined above, petitioner is entitled to recover $22,969, or

approximately 74 percent, of the $31,204 fraud defense amount.

Applying that percentage to the $318.50 of paralegal and legal

assistant fees, we find that petitioner is entitled to recover

$236 of such fees.

     We are unable to discern from the record the portion of

petitioner’s remaining costs of $749.98 that is attributable to

the fraud issue.   Applying the 60 percent “success ratio” that we



     13
        Petitioner actually included the paralegal and legal
assistant fees in her claim for attorney’s fees. We treat such
claim as a claim for litigation costs other than attorney’s fees.
See O’Bryon v. Commissioner, T.C. Memo. 2000-379 at n.2.
                               - 24 -

utilized to determine petitioner’s recoverable motion-related

fees, we conclude that petitioner is entitled to recover $450 of

her remaining costs.

      C.   Summary

      There is no special factor present in this case that would

justify the determination of petitioner’s recoverable attorney’s

fees without regard to the applicable statutory rate caps.

Petitioner is entitled to recover $22,969 of attorney’s fees

relating to the underlying dispute, $5,145 of attorney’s fees

relating to her prosecution of the motion, $236 of paralegal and

legal assistant costs, and $450 of remaining costs, for a total

recoverable amount of $28,800.

IV.   Conclusion

      The motion is granted in part; petitioner shall be awarded

litigation costs of $28,800.

      To reflect the foregoing,


                                         An appropriate order and

                                    decision will be entered.
