                        T.C. Memo. 1995-534



                      UNITED STATES TAX COURT



             BOCA CONSTRUCTION, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18570-92.      Filed November 13, 1995.



     Richard S. Lynch and John Kennedy Lynch, for petitioners.

     Mario J. Fazio and J. Scott Broome, for respondent.



                        MEMORANDUM OPINION

     COLVIN, Judge:   This matter is before the Court on

petitioner's motion for award of administrative and litigation

costs under section 7430 and Rule 231.

     To prevail, petitioner must show that respondent's position

in the underlying administrative and judicial proceeding was not
                                 - 2 -


substantially justified.   We conclude that petitioner has not

made this showing.   Thus, petitioner's motion will be denied.

     The parties have submitted affidavits and memoranda

supporting their positions.    We decide the motion based on the

memoranda, affidavits, and exhibits attached to the affidavits.1

The parties do not dispute the facts in the affidavits or the

authenticity of the exhibits attached to the affidavits.      There

are no significant conflicts of fact presented by the affidavits.

Neither party requested a hearing.       We conclude that a hearing is

not necessary to decide this motion.       Rule 232(a)(3).

     Section references are to the Internal Revenue Code in

effect for the years in issue.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                              Background

1.   Petitioner and the Underlying Tax Case


     1
       By motion, petitioner asked us not to consider affidavits
and exhibits attached to respondent's memorandum. The affidavits
and exhibits generally addressed whether respondent's position
had the requisite basis in fact. We denied petitioner's motion
because our Rules allow parties to submit affidavits in
connection with a motion for an award of administrative and
litigation costs. Rules 231, 232; see Rule 34(b) (taxpayer may
not claim litigation costs in petition); Rule 70(a)(2) (no
discovery relevant to litigation costs without leave of Court
before hearing set on motion for litigation costs). However, as
we stated in denying petitioner's motion, neither party requested
a hearing or suggested that there is any factual dispute relating
to the affidavits or exhibits submitted by the parties. We also
stated that we would consider the affidavits and exhibits only to
decide petitioner's motion for administrative and litigation
costs.
                               - 3 -


     Petitioner is a closely held corporation, the principal

place of business of which was in Ohio when it filed its

petition.

     The primary issue in the underlying case, Boca Constr., Inc.

v. Commissioner, T.C. Memo. 1995-5, filed January 9, 1995, was

whether petitioner may deduct as reasonable compensation amounts

it paid to its officers in the years in issue.    Petitioner

deducted as compensation for its officers $689,600 for 1989 and

$817,500 for 1990.   Respondent's revenue agent examined

petitioner's return and investigated this case.    Respondent

determined that the amount of compensation petitioner paid to

its officers in the years in issue was unreasonable.    Respondent

relied on facts obtained by the revenue agent and reports from

Robert Morris Associates (RMA) and the Occupational Outlook

Handbook to determine reasonable compensation.

     In the notice of deficiency, the answer, at trial, and on

brief, respondent's position was that reasonable compensation for

petitioner's officers was $274,000 in 1989 and $282,000 in 1990.

Respondent did not call any witnesses at trial.    We held that the

compensation petitioner paid to its officers was reasonable.
                                 - 4 -


                              Discussion

1.     Motion for Administrative and Litigation Costs:
       Introduction

       Generally, a taxpayer who has substantially prevailed in

a Tax Court proceeding may be awarded reasonable administrative

and litigation costs.     Sec. 7430(a), (c).    To be entitled to an

award, the taxpayer must:

       a.   Exhaust administrative remedies.    Sec. 7430(b)(1).

Respondent concedes that petitioner meets this requirement.

       b.    Substantially prevail with respect to the amount in

controversy.     Sec. 7430(c)(4)(A)(ii)(I).    Respondent concedes

that petitioner meets this requirement.

       c.   Be an individual whose net worth did not exceed

$2,000,000, or an owner of an unincorporated business, or any

partnership, corporation, etc., the net worth of which did not

exceed $7,000,000, when the petition was filed.       Sec.

7430(c)(4)(A)(iii); 28 U.S.C. sec. 2412(d)(2)(B) (1988).

Respondent concedes that petitioner meets this requirement.

       d.    Show that the position of the United States in the

action was not substantially justified.       Sec. 7430(c)(4)(A)(i).

Respondent contends and we hold that petitioner does not meet

this requirement.

       e.    Establish that the amount of costs and attorney's fees

claimed by petitioner is reasonable.       Sec. 7430(a), (c)(1) and

(2).    Respondent contends that petitioner does not meet this
                                - 5 -


requirement.   We need not decide this issue because we conclude

that respondent's position was substantially justified.

     A taxpayer has the burden of proving that it meets each

requirement before the Court may order an award of administrative

and litigation costs under section 7430.   Rule 232(e); Estate of

Johnson v. Commissioner, 985 F.2d 1315, 1318 (5th Cir. 1993);

Gantner v. Commissioner, 92 T.C. 192, 197 (1989), affd. 905 F.2d

241 (8th Cir. 1990).

     A taxpayer must establish that the position of the United

States in the litigation was not substantially justified to be

entitled to an award for administrative or litigation costs.

Sec. 7430(c)(4)(A)(i).   The position of the United States is the

position taken by respondent:   (a) In the judicial proceeding,

and (b) in the administrative proceeding as of the earlier of,

(i) the date the taxpayer receives the notice of the decision

of the Internal Revenue Service Office of Appeals, or (ii) the

date of the notice of deficiency.   Sec. 7430(c)(7).   Here,

respondent's position in the notice of deficiency, the answer,

throughout trial, and posttrial briefs, was that petitioner paid

unreasonable compensation to its officers.    Thus, respondent's

position in both the judicial and the administrative proceeding

was that taken in the notice of deficiency.

2.   Whether Respondent's Position That Petitioner Paid
     Unreasonable Compensation to its Officers Was Substantially
     Justified
                                - 6 -


     a.   Background

     The Equal Access to Justice Act's substantially justified

standard requires that the Government's position be justified

to a degree that would satisfy a reasonable person.    Pierce v.

Underwood, 487 U.S. 552, 565 (1988).    That standard applies to

motions for litigation costs under section 7430.    Comer Family

Equity Pure Trust v. Commissioner, 958 F.2d 136, 139-140 (6th

Cir. 1992), affg. T.C. Memo. 1990-316; Powers v. Commissioner,

100 T.C. 457, 471 (1993), affd. on this issue and revd. in part

and remanded on other issues 43 F.3d 172 (5th Cir. 1995),

remanded 51 F.3d 34 (5th Cir. 1995).    To be substantially

justified, the Commissioner's position must have a reasonable

basis in both law and fact.    Pierce v. Underwood, supra; Hanover

Bldg. Matls., Inc. v. Guiffrida, 748 F.2d 1011, 1015 (5th Cir.

1984); Powers v. Commissioner, supra at 473.    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 fact that the Commissioner eventually loses or concedes

the case does not in itself establish that a position is

unreasonable.    Wilfong v. United States, 991 F.2d 359, 364 (7th

Cir. 1993); Hanson v. Commissioner, 975 F.2d 1150, 1153 (5th Cir.

1992), revg. an unpublished Order of this Court.    However, it is

a factor to be considered.    Heasley v. Commissioner, 967 F.2d
                              - 7 -


116, 120 (5th Cir. 1992), affg. in part and revg. in part T.C.

Memo. 1991-189; Estate of Perry v. Commissioner, 931 F.2d 1044,

1046 (5th Cir. 1991); Powers v. Commissioner, supra at 471.

The taxpayer need not show bad faith to establish that the

Commissioner's position was not substantially justified for

purposes of a motion for litigation costs under section 7430.

Estate of Perry v. Commissioner, supra; Powers v. Commissioner,

supra.

     b.   Respondent's Basis in Fact

     Respondent's position in Boca Constr., Inc. v. Commissioner,

supra, was that the compensation petitioner paid to its officers

of $689,600 for 1989 and $817,500 for 1990 was unreasonable and

that compensation of not more than $274,000 for 1989 and $282,000

for 1990 would have been reasonable.    Whether compensation is

reasonable is a question of fact.     Botany Worsted Mills v. United

States, 278 U.S. 282, 289-290 (1929); Trinity Quarries, Inc. v.

United States, 679 F.2d 205, 210 (11th Cir. 1982); Estate of

Wallace v. Commissioner, 95 T.C. 525, 553 (1990), affd. 965 F.2d

1038 (11th Cir. 1992).

     Petitioner points out that in Boca Constr., Inc. v.

Commissioner, T.C. Memo. 1995-5, we considered 12 factors in

deciding whether compensation was reasonable.    We concluded that

eight favored petitioner and four were neutral.    However, we

believe that respondent's position had a basis in fact because
                               - 8 -


respondent knew that Michael Bockrath (Bockrath) and Joseph

Caizzo (Caizzo) were petitioner's sole shareholders who, as

employees, did not deal at arm's length with petitioner to set

their compensation; petitioner paid compensation to the

shareholders in proportion to their stockholding; and petitioner

did not have records adopting the compensation formula upon which

petitioner relied.   Respondent knew that Bockrath and Caizzo

spent time helping another company called CABO, Inc.; that

petitioner had fewer than 30 employees; and that petitioner's

business was limited to resurfacing roads.   Respondent also knew

that petitioner paid Bockrath and Caizzo $689,600 in 1989 and

$817,500 in 1990, and that petitioner did not claim that it made

catchup payments for service in prior years.   Respondent also

considered data from RMA that was admitted into evidence.

Although we found petitioner's evidence in the underlying

case to be more convincing than respondent's, we believe that

respondent's position had a reasonable basis in fact.

     In the notice of deficiency, respondent determined that the

amounts petitioner deducted as compensation for its officers in

the years in issue were unreasonable.   Petitioner points out

that respondent did not explain at trial how respondent

calculated the amount of reasonable compensation stated in the

notice of deficiency.   Petitioner's argument misses the mark.

The point is not whether respondent gave the basis for the
                                - 9 -


determination in the notice of deficiency; it is whether

respondent had a basis in fact for that position.    We may

consider evidence not offered at trial in deciding a motion

for litigation costs.    Rules 231, 232; see Rule 34(b) (taxpayer

may not claim litigation costs in petition); Rule 70(a)(2) (no

discovery relevant to litigation costs without leave of Court

before hearing set on motion for litigation costs).

     Respondent relied on RMA and Occupational Outlook Handbook

data to determine petitioner's reasonable compensation for

officers.    This case is different from Powers v. Commissioner,

supra at 472, in which the Commissioner determined a deficiency

without considering any information about the case.

     Respondent did not call any expert witnesses.    However,

even without an expert at trial, we believe respondent's position

had a basis in fact.

     c.     Respondent's Basis in Law

     The parties generally agreed about the factors courts have

used to decide whether compensation is reasonable, but disagreed

on how the factors applied to this case.   Petitioner does not

contend that respondent did not have a reasonable basis in law.

We conclude respondent had a reasonable basis in law.
                               - 10 -


3.   Conclusion

     We conclude that respondent's position in the underlying

administrative and judicial proceedings had a reasonable basis

in both law and fact.    We hold that respondent's position was

substantially justified and that petitioner is not entitled to

an award for administrative or litigation costs under section

7430.   In light of this conclusion, we need not decide whether

the amount of costs petitioner claims is reasonable.

Petitioner's motion for litigation costs will be denied.      To

reflect the foregoing,


                                           An appropriate order

                                     will be issued denying

                                     petitioner's motion for

                                     an award of administrative

                                     and litigation costs.
