                        T.C. Memo. 2003-313



                      UNITED STATES TAX COURT



                  HUNG N. NGUYEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13563-01.           Filed November 12, 2003.


     Bruce E. Gardner, for petitioner.

     Roger W. Bracken, for respondent.



                        MEMORANDUM OPINION


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

on petitioner’s motion for an award of administrative and

litigation costs, filed pursuant to section 7430 and Rules 230

through 233.1   Petitioner seeks an award of $13,511 in respect of


     1
        All section references are to the Internal Revenue Code,
as amended; however, references to section 7430 are to such
                                                   (continued...)
                                - 2 -

respondent’s deficiency determination of $4,328.2

     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.

     (2) Whether petitioner unreasonably protracted the

administrative and court proceedings.

     (3) Whether the administrative and litigation costs claimed

by petitioner are reasonable.

     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.

Background

     Petitioner resided in Hyattsville, Maryland, at the time

that his petition was filed with the Court.

     Petitioner timely filed a Federal income tax return for the


     1
      (...continued)
section in effect at the time that the petition was filed.
Unless otherwise indicated, all Rule references are to the Tax
Court Rules of Practice and Procedure.
     2
         All amounts have been rounded.
     3
        Respondent concedes: (1) Petitioner substantially
prevailed, see sec. 7430(c)(4)(A)(i); and (2) petitioner
satisfies the applicable net worth requirement, see sec.
7430(c)(4)(A)(ii).
                               - 3 -

taxable year 2000.   On his return, petitioner listed his filing

status as head of household, and he claimed dependency exemptions

for two children (Lilly Phan and Anna Phan), the earned income

credit, and the child tax credit.   Petitioner also claimed a

refund of tax in the amount of $4,098.

     Petitioner’s 2000 return was selected for examination.     By

letter dated April 6, 2001 (the examination letter), respondent

proposed to:   (1) Change petitioner’s filing status from head of

household to single (and allow only the standard deduction for

the latter filing status); and (2) disallow the two dependency

exemptions, the earned income credit, and the child tax credit.

Concurrently, respondent requested specific information and

documentation from petitioner to substantiate the filing status,

dependency exemptions, earned income credit, and child tax credit

as claimed on his return.

     On April 22, 2001, petitioner responded to the examination

letter by mailing various documents to respondent.   This material

included a birth registration notice (not a birth certificate)

for Lilly Phan, a birth certificate for Anna Phan, a Social

Security card for each child, a purported lease, and a letter

from Lamont Elementary School regarding Lilly Phan’s enrollment.

Neither of the birth records for the two children identified

petitioner as their father.   After reviewing this material,

respondent concluded that the information submitted was
                              - 4 -

insufficient to verify the items under examination.

     In response to the documents provided by petitioner on April

22, 2001, a second letter was sent to petitioner advising him

that additional information would be required.   Respondent

enclosed with the letter a Form 866-A, Explanation of Items, and

requested additional information.   Respondent indicated that

petitioner was considered a foster parent because he was not

identified as the father on the two birth records he provided.4

As such, respondent specifically requested, in part, documents to

verify that the two children lived with petitioner for the entire

2000 taxable year and that they were placed with petitioner by an

authorized agency.

     In response to respondent’s second letter, petitioner

provided respondent with a handwritten document which stated that

petitioner was the “foster father” to the two children who

resided in the same household as their mother and petitioner.

     By a notice of deficiency dated September 18, 2001,

respondent determined a deficiency in petitioner’s Federal income

tax for 2000 in the amount of $4,328.   The deficiency was

attributable to the adjustments proposed in respondent’s April 6,

2001, letter; i.e., change in petitioner’s filing status from

head of household to single (with a concomitant change in the


     4
        During the administrative proceeding, petitioner had also
indicated to respondent that he was in fact the foster father to
the two children.
                               - 5 -

amount of the standard deduction) and disallowance of the two

dependency exemptions, the earned income credit, and the child

tax credit.

     On October 20, 2001, petitioner retained his present

counsel.

     On December 3, 2001, petitioner filed a petition for

redetermination with this Court.   See sec. 6213(a).   Petitioner

placed the entire amount of the deficiency in dispute, assigning

error to each of the adjustments made by respondent in the notice

of deficiency.   Petitioner alleged, among other things, that he

was the natural father of the two claimed dependents.

     On December 15, 2001, petitioner’s counsel sent additional

documentation to respondent.   This included the same information

previously sent by petitioner, as well as a copy of petitioner’s

2000 tax return.   Petitioner also provided an uncertified

Affidavit of Parentage5 for each child which indicated that he

was their natural father.   The uncertified affidavits were signed

by petitioner and dated December 11, 2001.   After reviewing the

documentation provided by petitioner, respondent did not alter

his position.


     5
        The Affidavit of Parentage is a form provided by the
State of Maryland. The Annotated Code of Maryland, Family Law
Article, Sec. 5-1028, Affidavit of Parentage, provides, in part,
that “An executed affidavit of parentage constitutes a legal
finding of paternity, subject to the right of any signatory to
rescind the affidavit in writing within 60 days after execution
of the affidavit”.
                               - 6 -

     On February 4, 2002, respondent filed an answer.   In the

answer, respondent denied all of petitioner’s assignments of

error, including that petitioner was the natural father of the

two claimed dependents.

     On June 24, 2002, petitioner filed a motion for summary

judgment on the ground that petitioner is the natural father of

Lilly Phan and Anna Phan and that he is otherwise properly

entitled to the head of household filing status and the claimed

dependency exemptions, earned income credit, and child tax

credit.

     On August 20, 2002, respondent filed with the Court a notice

of objection to petitioner’s motion for summary judgment,

together with a supporting memorandum.   In the objection,

respondent maintained that petitioner had failed to substantiate

that he was entitled to the head of household filing status and

to the claimed deductions and credits.

     On August 23, 2002, respondent requested a certified copy

from the Registrar of Vital Records for the State of Maryland of

any documents filed by petitioner with respect to the paternity

of Lilly Phan and Anna Phan.

     On August 26, 2002, respondent received certified copies of

the Affidavits of Parentage and birth certificates from the State
                               - 7 -

of Maryland for both Lilly Phan and Anna Phan.6

     A hearing was held on petitioner’s motion for summary

judgment on August 28, 2002.

     Following the hearing with this Court, respondent forwarded

the certified copies of the Affidavits of Parentage and birth

certificates to the assigned Appeals officer.     After receiving

these documents, respondent settled the case within 2 weeks.

     On October 23, 2002, petitioner filed his motion for an

award of costs.   On January 22, 2003, respondent filed an

objection to petitioner’s motion for an award of costs.

Thereafter, on March 14, 2003, petitioner filed a reply, and on

April 21, 2003, respondent filed a response.

Discussion

     We apply section 7430 as amended by Congress in the Internal

Revenue Service Restructuring and Reform Act of 1998 (RRA 1998),

Pub. L. 105-206, sec. 3101, 112 Stat. 727.7




     6
        The certified copies of the Affidavits of Parentage are
signed by the State Registrar of Vital Records with the following
declaration: “I HEREBY CERTIFY THAT THE ATTACHED IS A TRUE COPY
OF A RECORD ON FILE IN THE DIVISION OF VITAL RECORDS”. The
certified copies of the affidavits are stamped “VALID ONLY WITH
IMPRESSED SEAL”.
     7
        Sec. 7430 was amended most recently by Congress in the
Community Renewal Tax Relief Act of 2000 (CRTRA), Pub. L. 106-
554, sec. 319(25), 114 Stat. 2763A-647. The amendment, which is
effective on the date of enactment of CRTRA (Dec. 21, 2000),
affects only sec. 7430(c)(3) and is purely clerical in nature.
                                 - 8 -

       A.   Requirements for a Judgment Under Section 7430

       Under section 7430(a), 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.     Sec. 7430(a) and (b)(3).    Similarly,

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.     Sec. 7430(a) and (b)(1), (3).

       A taxpayer must satisfy each of the respective requirements

in order to be entitled to an award of administrative or

litigation costs under section 7430.     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:     (1)

Substantially prevail with respect to either the amount in

controversy or the most significant issue or set of issues

presented; and (2) satisfy the applicable net worth requirement.

Sec. 7430(c)(4)(A).     Respondent concedes that petitioner has

satisfied the requirements of section 7430(c)(4)(A).       Petitioner
                                - 9 -

will nevertheless fail to qualify as the prevailing party if

respondent can establish that respondent’s position in the

administrative and court proceedings was substantially justified.

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

     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.    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.    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 Mgmt. Co. v. Commissioner, 108

T.C. 430, 443 (1997) (quoting Pierce v. Underwood, supra at 566

n.2).

     The relevant inquiry is “whether * * * [the Commissioner]
                               - 10 -

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

at the 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.   Maggie Mgmt. 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.    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.    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.   Sec. 7430(c)(7)(B)(ii).   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

the petition.    Bertolino v. Commissioner, 930 F.2d 759, 761 (9th
                              - 11 -

Cir. 1991), affg. an unpublished decision of this Court; Sher v.

Commissioner, supra at 134-135; see sec. 7430(c)(7)(A).

Ordinarily, we consider the reasonableness of each of these

positions separately in order to allow the Commissioner to change

his position.   Maggie Mgmt. Co. v. Commissioner, supra at 442

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

Cir. 1992), affg. in part and revg. in part on another ground

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

follow this approach because respondent’s position was

essentially the same in the administrative and court proceedings.

See Maggie Mgmt. Co. v. Commissioner, supra at 442.   More

specifically, respondent’s position was that petitioner had

failed to substantiate his entitlement to head of household

filing status (and the standard deduction for that filing status)

and dependency exemption deductions, earned income credit, and

child tax credit in respect of his children.

     Deductions and credits are matters of legislative grace.

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934);

Segel v. Commissioner, 89 T.C. 816, 842 (1987).   The same may be

said of a tax-favored filing status such as head of household.

See D’Anjou v. Commissioner, T.C. Memo. 1992-138.   Taxpayers are

required to substantiate the deductions and credits that they

claim by maintaining records necessary to establish both the

taxpayers’ entitlement to such items and the proper amount
                              - 12 -

thereof.   Sec. 6001; Meneguzzo v. Commissioner, 43 T.C. 824, 831-

832 (1965); sec. 1.6001-1(a), Income Tax Regs.; see Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.

Helvering, 290 U.S. 111, 115 (1933); Segel v. Commissioner,

supra; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976); Goertler v. Commissioner,

T.C. Memo. 2003-136 (Commissioner’s position was substantially

justified as taxpayers had failed to substantiate deductions for

personal exemptions); see also sec. 7491(a)(2)(A) and (B).    A

taxpayer’s self-serving declaration is no ironclad substitute for

the records that the law requires.     See Weiss v. Commissioner,

T.C. Memo. 1999-17; see also Seaboard Commercial Corp. v.

Commissioner, 28 T.C. 1034, 1051 (1957) (a taxpayer's income tax

return is a self-serving declaration that may not be accepted as

proof for the deduction or exclusion claimed by the taxpayer);

Halle v. Commissioner, 7 T.C. 245, 247 (1946) (a taxpayer’s

return is not self-proving as to the truth of its contents),

affd. 175 F.2d 500 (2d Cir. 1949).

     Factual determinations are required in order to decide

whether a taxpayer is entitled to:     (1) Head of household filing

status, see sec. 2(b); (2) a dependency exemption deduction, see

secs. 151 and 152; (3) an earned income credit, see sec. 32; or

(4) a child tax credit, see sec. 24.    We have held that whenever

the resolution of adjustments requires factual determinations,
                               - 13 -

the Commissioner is not obliged to concede those adjustments

until the Commissioner has received, and has had a reasonable

period of time to verify, adequate substantiation for the matters

in question.   See Huynh v. Commissioner, T.C. Memo. 2002-110;

Gealer v. Commissioner, T.C. Memo. 2001-180 (and cases cited

therein); O’Bryon v. Commissioner, T.C. Memo. 2000-379 (and cases

cited therein); Cooper v. Commissioner, T.C. Memo. 1999-6.

     Based on the facts available to respondent at the time the

notice of deficiency was issued and the answer was filed, as well

as long-standing legal precedent regarding the availability of

tax deductions and credits, respondent’s position had a

reasonable basis in both law and fact and therefore was

substantially justified.    See Maggie Mgmt. Co. v. Commissioner,

108 T.C. at 443.   When respondent filed his answer, he had not

received documentation sufficient to substantiate petitioner’s

head of household filing status, dependency deductions, and

credits.

     Petitioner contends that it was unreasonable for respondent

to require adequate substantiation for the adjustments in issue

because (so petitioner alleges) sufficient substantiation had

been previously provided.   However, none of the information

provided by petitioner prior to the issuance of the notice of

deficiency identified petitioner as the natural father of the two

children.   For instance, the birth records petitioner provided
                              - 14 -

did not indicate the father of the two children.    The Social

Security cards, lease, and elementary school letter likewise

failed to offer any indication that petitioner was the children’s

natural father.   Additionally, the Affidavits of Parentage

provided by petitioner after filing his petition and prior to

respondent’s answer were uncertified and offered no indication

that they had been filed by petitioner with the State of

Maryland.   Thus, at the time that respondent filed his answer,

the uncertified affidavits provided by petitioner were nothing

more than self-serving assertions.     Petitioner’s 1999 return was

also merely a self-serving declaration.    Therefore, the documents

provided by petitioner, while helpful, did not overcome

respondent’s position.8

     We note further that when respondent finally received

certified affidavits and birth certificates that identified



     8
        See, e.g., sec. 2(b)(1)(A) (an unmarried taxpayer will
qualify for head of household status if, among other
requirements, he maintains as his home a household that is the
principal place of abode of a daughter for more than one-half of
the taxable year); sec. 24(c)(1) (a qualifying child for the
purpose of the child tax credit includes an individual who is,
among other requirements, the taxpayer’s daughter or an eligible
foster child); sec. 32(c)(3)(B) (a qualifying child for purposes
of the earned income credit includes an individual who is, among
other requirements, the taxpayer’s daughter or an eligible foster
child); sec. 152(a)(1), (a)(9), (b)(2) (a dependent for purposes
of claiming a dependency exemption deduction includes an
individual who is, among other requirements, the taxpayer’s
daughter, an individual who has as his principal place of abode
the taxpayer’s home and is a member of the taxpayer’s household,
or the taxpayer’s foster child).
                              - 15 -

petitioner as the natural father of Lilly Phan and Anna Phan, the

documentation was considered by respondent’s Appeals Office and a

basis of settlement was reached within 2 weeks thereafter.

     In view of the foregoing, we hold that respondent’s position

in the administrative and court proceedings was substantially

justified.   In so holding, we have considered other arguments

made by petitioner for a contrary result and found those

arguments to be without merit.

     C.   Remaining Requirements of Section 7430

     Because respondent’s position in the administrative and

court proceedings was substantially justified, we need not decide

whether petitioner exhausted his administrative remedies, whether

petitioner unreasonably protracted the proceedings, or whether

the administrative and litigation costs claimed by petitioner are

reasonable in amount.

     D.   Conclusion

     In conclusion, we hold that petitioner is not entitled to an

award of administrative and litigation costs.

     In order to reflect the foregoing,



                                          An appropriate order and

                                    decision will be entered.
