                         T.C. Memo. 2002-220



                       UNITED STATES TAX COURT



                      BERNARDO PAZ, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10942-00.                Filed September 3, 2002.



     Gerald V. Walsh, for petitioner.

     Robert B. West, W. Robert Abramitis, and William Blagg, for

respondent.



                          MEMORANDUM OPINION


     COLVIN, Judge:    This matter is before the Court on

petitioner’s motion for litigation costs under section 7430 and

Rule 231.1    After concessions, the sole issue for decision is


     1
        Petitioner seeks an award of attorney’s fees of $6,980,
accounting fees of $2,250, and court costs of $60.
                               - 2 -

whether respondent’s position in the underlying proceeding was

substantially justified.   We hold that it was.   Thus, we hold

that petitioner is not entitled to an award for litigation costs.

     Unless otherwise specified, section references are to the

Internal Revenue Code as amended.   Rule references are to the Tax

Court Rules of Practice and Procedure.

                            Background

     Petitioner resided in Florida when he filed his petition.

A.   Petitioner’s Lottery Winnings and The Divorce Proceedings

     In April 1992, petitioner won $7 million in the Florida

lottery, payable to him in 20 annual installments of $350,000.

     Petitioner’s wife filed for divorce before petitioner

received the fourth lottery payment (due on May 15, 1995).    At

the request of petitioner’s wife, the Circuit Court of the

Eleventh Judicial District of Dade County, Florida, Family

Division, ordered that the May 15, 1995, payment be placed in

escrow pending an agreement between petitioner and his wife or a

court order regarding disposition of the payment.

     On November 2, 1995, petitioner and his wife agreed to a

marital settlement and equitable division of property.    Under

that agreement, $3,000 of the funds in the escrow account was

paid to petitioner’s wife’s attorney for expert fees, and the

balance was divided equally between petitioner and his wife.

Petitioner and his wife agreed that petitioner would receive
                                - 3 -

53.97 percent of the future lottery payments and his wife would

receive 46.03 percent.   Petitioner and his wife were divorced in

December 1995.   Petitioner reported $175,000 (i.e., one-half) of

the $350,000 lottery payment in his 1995 return.

B.   The Notice of Deficiency

     On August 2, 2000, respondent sent a notice of deficiency to

petitioner in which respondent determined that petitioner was

taxable on the entire $350,000 lottery payment in 1995.

Respondent also determined that petitioner failed to include all

of his interest income in 1995 and that petitioner was liable for

the addition to tax for failure to timely file his 1995 return.

C.   Settlement of the Case

     The parties settled the case before trial.    Respondent

conceded the lottery payment issue, and petitioner conceded the

interest income and late filing issues.

                              Discussion

A.   Motion for Litigation Costs:    Background

     To be entitled to an award for litigation costs, the

taxpayer must:

     1.   Exhaust administrative remedies.   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)(I).   Respondent concedes that

petitioner meets this requirement.
                                - 4 -

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

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.

     4.   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 are reasonable.    Sec. 7430(a), (c)(1).    Respondent

concedes that the amounts petitioner claimed are reasonable.

     In addition, the taxpayer is not entitled to an award for

reasonable litigation costs if the Commissioner shows that the

position of the United States in the proceeding was substantially

justified.    Sec. 7430(c)(4)(B)(i).

B.   Whether Respondent’s Position Was Substantially Justified

     The parties dispute whether respondent’s position in the

underlying proceeding 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).      To be substantially

justified, the Commissioner’s position must have a reasonable

basis in both law and fact.    Id.; Hanover Bldg. Matls., Inc. v.

Guiffrida, 748 F.2d 1011, 1015 (5th Cir. 1984); Powers v.

Commissioner, 100 T.C. 457, 470, 473 (1993), affd. on this issue,
                                - 5 -

revd. in part and remanded on other issues 43 F.3d 172 (5th Cir.

1995).    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 Commissioner’s concession in the underlying proceeding

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

reasonable litigation costs.    Wilfong v. United States, 991 F.2d

359, 364 (7th Cir. 1993); Hanson v. Commissioner, 975 F.2d 1150,

1153 (5th Cir. 1992).    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.

     1.     Whether Respondent Had a Reasonable Basis in Law

     Petitioner contends that respondent did not have a

reasonable basis in law for respondent’s position that petitioner

is liable for tax on the entire $350,000 lottery payment in 1995.

We disagree.

     The Commissioner has a reasonable basis in law if the

Commissioner’s position is based on relevant legal precedents.

Pierce v. Underwood, supra; Maggie Mgmt. Co. v. Commissioner, 108

T.C. 430, 443 (1997); Coastal Petroleum Refiners, Inc. v.

Commissioner, 94 T.C. 685, 688 (1990).    Respondent contends that

Smith v. IRS, 75 AFTR 2d 95-2253, 94-2 USTC par. 50,503 (S.D.N.Y.

1994), provides a reasonable basis in law for respondent’s

position.    The facts of Smith are similar to those in the instant
                                - 6 -

case.    In Smith, the taxpayer won the New York State lottery in

1985, payable to him in 21 annual installments of $30,989.    The

taxpayer and his spouse were divorced in 1988.   Incident to the

divorce, the State court ordered the taxpayer and his spouse to

divide the lottery winnings equally.    The taxpayer filed a claim

for refund of the taxes that he had paid on his wife’s share of

the lottery income.   The District Court in Smith held that a

taxpayer who wins a lottery and then assigns part of the winnings

to his or her spouse under a divorce decree is liable for tax on

the entire amount.

     Petitioner makes no attempt to distinguish Smith.     Instead,

petitioner contends that Smith does not provide a reasonable

basis in law for respondent’s position because the District Court

in Smith incorrectly applied section 1041.2   We disagree.


     2
         Sec. 1041 provides in part:

     SEC. 1041. TRANSFERS OF PROPERTY BETWEEN SPOUSES OR
             INCIDENT TO DIVORCE.

          (a) General Rule.--No gain or loss shall be
     recognized on a transfer of property from an individual
     to (or in trust for the benefit of)--

                 (1) a spouse, or

                 (2) a former spouse, but only if the transfer
            is incident to the divorce.

          (b) Transfer Treated as Gift; Transferee Has
     Transferor’s Basis.--In the case of any transfer of
     property described in subsection (a)--
                                                   (continued...)
                              - 7 -

This is not the appropriate forum to relitigate Smith.     The issue

before us is whether respondent had a reasonable basis in law,

not whether Smith was correctly decided.    See Or. Natural Res.

Council v. Madigan, 980 F.2d 1330, 1332 (9th Cir. 1992).     Smith

provides a basis in law for respondent’s position,3 especially

because there is no contrary authority.    Thus, we conclude that

respondent had a reasonable basis in law for contending that

petitioner was liable for tax on the entire $350,000 lottery

payment in 1995.

     2.   Whether Respondent Had a Reasonable Basis in Fact

     We next consider whether respondent had a reasonable basis

in fact for respondent’s position that petitioner was liable for

tax on the entire $350,000 lottery payment in 1995.   When

respondent issued the notice of deficiency, respondent knew that

petitioner had the sole right to receive the $350,000 payment in

1995 until, as part of the divorce settlement, he agreed to give

his wife approximately one-half of that payment in 1995.     Those


     2
      (...continued)
               (1) for purposes of this subtitle, the
          property shall be treated as acquired by the
          transferee by gift, and

               (2) the basis of the transferee in the
          property shall be the adjusted basis of the
          transferor.
     3
        In In re ACME Music Co., 208 Bankr. 838, 843 (Bankr. W.D.
Pa. 1997), the District Court held that the position of the IRS
had a reasonable basis in law because the position was supported
by two Federal District Court cases.
                               - 8 -

facts, coupled with the holding in Smith, provide a basis in fact

and law for respondent’s position.

C.   Conclusion

     We conclude that respondent’s position in the underlying

proceeding had a reasonable basis in both law and fact.     Thus,

respondent’s position was substantially justified, and petitioner

is not entitled to an award of litigation costs under section

7430.   Petitioner’s motion for litigation costs will be denied.

     Accordingly,

                                           An appropriate order

                                       and decision will be entered.
