                       T.C. Memo. 2000-243



                     UNITED STATES TAX COURT



          ROBERT L. AND JOANNE TAMMARO, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22972-97.                    Filed August 7, 2000.



     Robert L. Tammaro, pro se.

     Michael D. Baker, for respondent.


                       MEMORANDUM OPINION


     ARMEN, Special Trial Judge:   This matter is before the Court

on the motion filed by petitioner Robert L. Tammaro (petitioner)1




     1
        Although the petition in this case was filed by both
Robert L. and Joanne Tammaro, only Robert L. Tammaro requests an
award of administrative and litigation costs.
                                - 2 -

for an award of administrative and litigation costs under section

7430 and Rules 230 through 233.2

       After concessions by respondent,3 the issues for decision

are as follows:

       (1) Whether respondent's position in the administrative and

court proceedings was substantially justified.    We hold that it

was.

       (2) Whether petitioner unreasonably protracted the court

proceeding.    In light of our holding as to the first issue, we

need not address this second issue.

       (3) Whether the administrative and litigation costs claimed

by petitioner are reasonable.    In light of our holding as to the

first issue, we need not address this third issue.

       Neither party requested an evidentiary hearing, and the

Court concludes that such a hearing is not necessary for the

proper disposition of petitioner’s motion.    See Rule 232(a)(2).

We therefore decide the matter before us based on the record that

has been developed to date.


       2
        Unless otherwise indicated, all sec. references are to
the Internal Revenue Code in effect for the taxable years in
issue. However, all references to section 7430 are to such sec.
in effect at the time that the petition was filed. All Rule
references are to the Tax Court Rules of Practice and Procedure.
       3
        Respondent concedes: (1) Petitioner exhausted his
administrative remedies, see sec. 7430(b)(1); (2) petitioner
substantially prevailed, see sec. 7430(c)(4)(A)(i); and (3)
petitioner satisfied the applicable net worth requirement, see
sec. 7430(c)(4)(A)(ii).
                              - 3 -

Background

     Petitioner resided in Cranbury, New Jersey, at the time that

the petition was filed with the Court.

     Petitioner is a certified public accountant who operated an

accounting firm during the relevant period of 1990 through 1994.

Also during that period, petitioner was involved in breeding and

showing horses (the horse activity).    Petitioner operated the

horse activity as an S corporation under the name Equine

Investment Properties, Inc. (EIP) during 1990 through 1993 and as

a sole proprietorship during 1994.4    Petitioner claimed net

operating losses from the horse activity for 1990 through 1994 in

the amounts of $45,839, $44,222, $36,162, $31,928, and $26,782.

By comparison, petitioner reported gross receipts from the horse

activity for 1990 through 1994 in the amounts of $4,100, $3,881,

$4,635, $67, and $2,702.



     4
        In addition to EIP, petitioner operated a horse activity
by the name of Bob Tammaro QuarterHorses (BTQH). The record
provides little about this activity. However, respondent’s
revenue agent determined the following about BTQH:

          BTQH has operated for most part as a Schedule F
     horse breeding and show activity since 1979. However,
     for years 1990-1993 taxpayer revised the original
     individual returns and changed BTQH from a Schedule F
     to a Schedule E-Farm and Horse Leasing activity in
     conjunction with EIP.

     The revenue agent also found that BTQH had sustained losses
in all years of operation.
                                 - 4 -

     Respondent initiated an audit of petitioner’s income tax

returns for 1990 through 1992.    The audit was thereafter expanded

to include petitioner’s returns for 1993 and 1994.

     By notice of deficiency dated August 29, 1997, respondent

made the following determinations for the taxable years 1993 and

1994:

     For 1993, respondent did not determine any deficiency in

income tax, but he did determine an addition to tax under section

6651(a)(1) in the amount of $303 and an accuracy-related penalty

under section 6662(a) in the amount of $756.

     For 1994, respondent determined a deficiency in income tax

in the amount of $3,784, an addition to tax under section

6651(a)(1) in the amount of $440, and an accuracy-related penalty

under section 6662(a) in the amount of $785.

     Respondent's deficiency determination was based on the

disallowance of losses claimed from the horse activity.    Although

respondent disallowed such losses for both 1993 and 1994, no

deficiency in income tax for 1993 resulted therefrom because

respondent allowed a carry forward of the unused portion of a net

operating loss (NOL) from 1990 that was attributable to

petitioner's accounting practice.    In contrast, respondent did

not allow a carry forward to either 1993 or 1994 of losses from

the horse activity claimed for 1990, 1991, and 1992.    Again,

although respondent disallowed such losses for 1990, 1991, and
                              - 5 -

1992, no deficiency in income tax resulted for any of those years

because of the aforementioned NOL in 1990 attributable to

petitioner's accounting practice.

     Respondent disallowed the losses claimed by petitioner from

the horse activity on the ground that such activity was not

pursued with the requisite profit objective.   See secs. 162(a),

212, 183; see also Dreicer v. Commissioner, 78 T.C. 642, 645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983).

     In determining that petitioner’s horse activity was not

conducted with the requisite profit objective, respondent relied

on findings in the revenue agent’s report (RAR), including, in

particular, the following: (a) That petitioner did not maintain a

formal business plan or prepare projections on profitability or

consider stop-loss points, that petitioner estimated losses, and

that petitioner did not maintain accurate books and records of

the activity, see sec. 1.183-2(b)(1), Income Tax Regs.; (b) that

petitioner did not invest a significant amount of time and effort

in the horse activity, relying in part on the fact that

petitioner also owned and operated an accounting firm and owned

and managed two rental properties, see sec. 1.183-2(b)(3), Income

Tax Regs.; (c) that EIP did not own any assets with the potential

to appreciate in value sufficient to overcome the losses

sustained in the activity, see sec. 1.183-2(b)(4), Income Tax
                               - 6 -

Regs.;5 (d) that petitioner did not report any profits with

respect to his horse activity in any year of operation and that

such losses extended for a period beyond a reasonable startup

period, see sec. 1.183-2(b)(6) and (7), Income Tax Regs.; (e)

that petitioner offset most of his net income from his C.P.A.

practice, net rental income from outside parties, and other

dividend and interest income with the horse activity losses, and

that petitioner created net operating losses to be used to reduce

future potential capital gains from the sale of petitioner’s real

estate properties; and (f) that petitioner realized significant

personal and social benefit from the horse activity, see sec.

1.183-2(b)(9), Income Tax Regs.

     Respondent’s revenue agent also concluded that petitioner’s

activity was not engaged in for profit pursuant to the

presumption under section 183(d) because the gross income derived

from the horse activity did not exceed the deductions

attributable to that activity for 2 or more of the most recent 7

consecutive taxable years.   Specifically, the agent concluded



     5
        In particular, the revenue agent determined that the real
estate property used in the horse activity, which had appreciated
in value since its purchase in the late sixties or the early
seventies, was not owned by EIP, but rather owned personally by
the taxpayer.

     Further, the revenue agent determined that as of the end of
1995, petitioner’s horses were worth just over $30,000 (compared
to his losses for the activity to date that were well in excess
of $175,000).
                               - 7 -

that EIP and BTQH were organizationally and economically

interrelated and that for the purpose of section 183(d) they

constituted one activity.

     On November 26, 1997, petitioner filed a timely petition

with the Court disputing the deficiency in tax for 1994, as well

as the additions to tax and accuracy-related penalties for 1993

and 1994, as determined in the notice of deficiency.    Respondent

filed an answer on January 9, 1998.

     On January 5, 1998, respondent’s counsel mailed petitioner a

letter requesting him to attend a conference and to produce

relevant documents relating to the case on January 28, 1998.

Petitioner did not appear for the January 28th conference.

Rather, petitioner informed respondent’s counsel that he was busy

with the tax filing season and requested a conference at a later

date.   In March 1998 another conference was scheduled for June

1998.

     On the day of the scheduled June conference, petitioner

canceled the conference for the expressed reasons that it would

be too burdensome for him to transport his records to

respondent’s office in Philadelphia and because he did not want

to incur travel expenses for his representative, Theresa Thery

(Ms. Thery).   Ms. Thery is an employee at petitioner’s accounting

firm.
                               - 8 -

     By notice dated August 12, 1998, the Court calendered

petitioner’s case for trial on November 2, 1998.    Early in

October 1998, petitioner and respondent entered into settlement

negotiations.   At the November 2, 1998, calendar, counsel for

respondent advised the Court that a basis for settlement had been

reached by the parties and requested 90 additional days to submit

the decision document.   On December 24, 1998, respondent filed a

motion to restore the case to the general trial calendar,

reporting that a disagreement had arisen between the parties

regarding the tax computations for the income tax and net

operating losses.

     Petitioner’s case was restored to the general calendar.     By

Notice dated June 15, 1999, this case was calendared for trial at

the Court's trial session on September 7, 1999.    The parties

resumed settlement negotiations.   Counsel for respondent

determined that the hazards of litigation, as well as the cost of

trying the case, warranted a concession by respondent of a small

percentage of the losses attributable to the horse activity that

had been disallowed in the notice of deficiency for 1993 and 1994

and that had been disallowed for 1991 and 1992.    Respondent also

determined that the hazards of litigation did not warrant any

concession by respondent of the loss attributable to the horse

activity that had been disallowed for 1990.   Respondent’s

concession with respect to the small portion of the losses
                               - 9 -

claimed for 1991 through 1994, together with the carry forward of

the 1990 NOL attributable to petitioner's accounting practice,

eliminated the deficiency in income tax for 1994.   Respondent’s

concession also resulted in no additions to tax and no accuracy-

related penalties for 1993 and 1994.

     Based on the belief that the parties had reached a new basis

for settlement, respondent prepared a revised computation of

petitioner’s net operating losses for 1991 through 1994.

Petitioner rejected the revised computation and refused to sign

the decision document insisting that respondent allow him to

claim the same percentage of the 1990 net operating loss that had

been allowed for 1991 through 1994.

     On September 2, 1999, respondent filed a Motion for Entry of

Decision.   In the motion, respondent requested the Court to enter

a decision reflecting that there were no deficiencies in income

taxes due from, nor overpayments due to, petitioner for 1993 and

1994 and that there were no additions to tax and no accuracy-

related penalties due from petitioner for such years.

Respondent's motion relied heavily on LTV Corp. v. Commissioner,

64 T.C. 589 (1975).

     Petitioner opposed respondent's motion.   In petitioner’s

view, respondent's concessions did not address what petitioner

considered to be the real issue in this case, namely, the amount

of the NOL attributable to the horse activity that would be
                              - 10 -

available as a carryover to post-docketed years; i.e., to 1995

and subsequent years.   In opposing respondent's motion,

petitioner relied heavily on McGowan v. Commissioner, 67 T.C. 599

(1976).

     The Court entered an Order and Decision on September 29,

1999, granting respondent’s motion for entry of decision and

holding that it was in the interests of justice to accept

respondent’s unilateral concessions.

     Petitioner thereafter filed his motion for administrative

and litigation costs.   In accordance with section 7430 and Rule

232, the decision entered on September 29, 1999, was vacated and

set aside.

Discussion

     We apply section 7430 as most recently amended by Congress

in the IRS Restructuring and Reform Act of 1998 (RRA 1998), Pub.

L. 105-206, sec. 3101, 112 Stat. 685, 727-730.   However, certain

of the amendments made by RRA 1998 to section 7430 (regarding the

reasonableness of costs, the type of recoverable costs, and other

provisions that are not at issue herein) apply only to costs

incurred after January 18, 1999.   To the extent of the portion of

the claimed costs incurred on or before January 18, 1999, we

apply section 7430 as amended by the Taxpayer Relief Act of 1997

(TRA), Pub. L. 105-34, secs. 1285, 1453, 111 Stat. 1038-1039,

1055.
                               - 11 -

       A. Requirements for a Judgment Under Section 7430

       Under section 7430(a), a judgment for litigation costs

incurred in connection with a court proceeding may be awarded

only if a taxpayer: (1) Is the "prevailing party"; (2) has

exhausted his or her administrative remedies within the IRS; and

(3) did not unreasonably protract the court proceeding.    See sec.

7430(a) and (b)(1), (3).    Similarly, a judgment for

administrative costs incurred in connection with an

administrative proceeding may be awarded under section 7430(a)

only if a taxpayer: (1) Is the "prevailing party"; and (2) did

not unreasonably protract the administrative proceeding.    See

sec. 7430(a) and (b)(3).

       A taxpayer must satisfy each of the respective requirements

in order to be entitled to an award of litigation or

administrative costs under section 7430.    See Rule 232(e).    Upon

satisfaction of these requirements, a taxpayer may be entitled to

reasonable costs incurred in connection with the administrative

or court proceeding.    See sec. 7430(a)(1) and (2), (c)(1) and

(2).

       To be a 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 and satisfy the

applicable net worth requirement.    See sec. 7430(c)(4)(A).

       Respondent concedes that petitioner has satisfied the
                                - 12 -

requirements of section 7430(c)(4)(A).     Petitioner will

nevertheless fail to qualify as the prevailing party if

respondent can establish that respondent’s position in the court

and administrative proceedings was substantially justified.      See

sec. 7430(c)(4)(B).

     B.   Substantial Justification

     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.   See Pierce v. Underwood, 487 U.S. 552 (1988); Sher

v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th

Cir. 1988).   In other words, to be substantially justified, the

Commissioner's position must have a reasonable basis in both law

and fact.   See 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).     A position is

substantially justified if the position is "justified to a degree

that could satisfy a reasonable person".      Pierce v. Underwood,

supra at 565 (construing similar language in the Equal Access to

Justice Act).   Thus, the Commissioner's position may be incorrect

but nevertheless be substantially justified "’if a reasonable

person could think it correct’".      Maggie Management Co. v.

Commissioner, 108 T.C. 430, 443 (1997) (quoting Pierce v.

Underwood, supra at 566 n.2).
                                - 13 -

     The relevant inquiry is "whether * * * [the Commissioner]

knew or should have known that * * * [his] position was invalid

at onset".    Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.

1995), affg. T.C. Memo. 1994-182.    We look to whether the

Commissioner's position was reasonable given the available facts

and circumstances at the time that the Commissioner took his

position.     See Maggie Management Co. v. Commissioner, supra at

443; DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

     The fact that the Commissioner eventually concedes, or even

loses, a case does not establish that his position was

unreasonable.    See Estate of Perry v. Commissioner, 931 F.2d

1044, 1046 (5th Cir. 1991); Sokol v. Commissioner, 92 T.C. 760,

767 (1989).    However, the Commissioner's concession does remain a

factor to be considered.    See Powers v. Commissioner, 100 T.C.

457, 471 (1993), affd. in part, revd. in part and remanded on

another issue 43 F.3d 172 (5th Cir. 1995).

     As relevant herein, the position of the United States that

must be examined against the substantial justification standard

with respect to the recovery of administrative costs is the

position taken by the Commissioner as of the date of the notice

of deficiency.    See sec. 7430(c)(7)(B).   The position of the

United States that must be examined against the substantial

justification standard with respect to the recovery of litigation

costs is the position taken by the Commissioner in the answer to
                              - 14 -

the petition.   See Bertolino v. Commissioner, 930 F.2d 759, 761

(9th Cir. 1991), affg. an unpublished decision of this Court;

Sher v. Commissioner, supra at 134-135.   Ordinarily, we consider

the reasonableness of each of these positions separately.   See

Huffman v. Commissioner, 978 F.2d 1139, 1144-1147 (9th Cir.

1992), affg. in part, revg. in part and remanding on other issues

T.C. Memo. 1991-144.   In the present case, however, we need not

consider two separate positions because there is no indication

that respondent's position changed or that respondent became

aware of any additional facts that rendered his position any more

or less justified between the issuance of the notice of

deficiency (on August 29, 1997) and the filing of the answer to

the petition (on January 9, 1998).

     In order to decide whether respondent's position was

substantially justified we must review the substantive merits of

this case.

     Respondent determined that petitioner’s horse activity was

not engaged in with a profit objective.   Thus, we inquire whether

respondent had a reasonable basis in fact and law for determining

that petitioner did not engage in his horse activity with an

actual and honest objective of earning a profit.   See Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983).
                               - 15 -

     The existence of the requisite profit objective is a

question of fact that must be determined on the basis of the

entire record.   See Benz v. Commissioner, 63 T.C. 375, 382

(1974).    In resolving this factual question, greater weight is

accorded objective facts than a taxpayer's statement of intent.

See sec. 1.183-2(a), Income Tax Regs.    For purposes of

determining whether a taxpayer had the requisite profit

objective, profit means economic profit, independent of tax

savings.    See Surloff v. Commissioner, 81 T.C. 210, 233 (1983).

     The regulations set forth a nonexhaustive list of factors

that may be considered in deciding whether a profit objective

exists.    These factors are: (1) The manner in which the taxpayer

carries on the activity; (2) the expertise of the taxpayer or the

taxpayer's advisers; (3) the time and effort expended by the

taxpayer in carrying on the activity; (4) the expectation that

the assets used in the activity may appreciate in value; (5) the

success of the taxpayer in carrying on other similar or

dissimilar activities; (6) the taxpayer's history of income or

losses with respect to the activity; (7) the amount of occasional

profits, if any, that are earned; (8) the financial status of the

taxpayer; and (9) any elements indicating personal pleasure or

recreation.   See sec. 1.183-2(b), Income Tax Regs.

     No single factor, nor even the existence of a majority of

factors, favoring or disfavoring the existence of a profit
                                - 16 -

objective is controlling.   See id.      Rather, the relevant facts

and circumstances of the case are determinative.      See Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).      Thus, we must decide

whether it was reasonable for respondent to determine that

applying the section 183 factors, on balance, petitioner’s horse

activity was not conducted with the requisite profit objective.

     We think that respondent's position was sufficiently

supported by the facts and circumstances in petitioner’s case and

the existing legal precedent.    See Pierce v. Underwood, 487 U.S.

552 (1988).   We note in particular the large amount of claimed

losses compared to minimal gross receipts, the minimal amount of

time devoted to the activity, and the number of years for which

losses were claimed.   Given the facts, respondent reasonably

relied upon existing legal precedent to conclude that

petitioner’s horse activity was not a for-profit activity.

     Petitioner requests that we apply the rationale in Han v.

Commissioner, T.C. Memo. 1993-386, to his case.      However, Han is

distinguishable on several grounds.      In Han respondent had

assigned the examination of a complex return to an inexperienced

revenue agent who made highly complex tax adjustments without

adequately developing the facts of the case or properly applying

the law.   Subsequently, respondent fully conceded all major

adjustments contained in the agent’s RAR, including the agent’s
                               - 17 -

determination of fraud.    In addition, it took 26 months following

the petition to file a stipulation of settled issues, and we held

that nothing in the record explained the Commissioner’s failure

to settle the case on a timely and fair basis.

     In this case, the record establishes that respondent’s agent

conducted a thorough examination of petitioner’s horse activity

including, contrary to petitioner’s assertion, the 1993 and 1994

tax years.    The revenue agent’s RAR also establishes that he

appropriately developed the applicable law.    Further, although it

took about 2 years for respondent to concede the case, the record

indicates that such delay was not entirely attributable to

respondent.    In part, petitioner contributed to the delay by

failing to attend scheduled meetings with respondent.    Further,

respondent conceded the case after two attempts at settling the

case had failed.    We do not think it was unreasonable for

respondent to attempt to reach a more favorable settlement prior

to conceding the deficiency.

     Therefore, we hold that respondent has established that his

position in the administrative and litigation proceedings was

substantially justified because he acted reasonably given the

legal precedent and the circumstances surrounding petitioner’s

case.   Accordingly, petitioner is not entitled to recover

administrative or litigation costs.
                             - 18 -

     Based on the foregoing, we need not decide whether

petitioner unreasonably protracted the court proceeding or

whether petitioner’s claimed costs are reasonable in amount.

     To reflect the foregoing,



                                        An appropriate order and

                                   decision will be entered.
