                        T.C. Memo. 2010-205



                      UNITED STATES TAX COURT



                RI UNLIMITED, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13601-07.            Filed September 22, 2010.



     Dennis N. Brager, Howard C. Rosenblatt, John O. Kent, and

Roger C. Glienke, for petitioner.

     Nathan C. Johnston, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   This case is before the Court on

petitioner’s motion for recovery of reasonable litigation costs

filed pursuant to section 7430 and Rule 231.1   Petitioner’s


     1
      Unless otherwise indicated, all section references are to
                                                   (continued...)
                                - 2 -

principal place of business was in Minnesota when its petition

was filed.

      On July 15, 2009, we filed the parties’ stipulation of

settled issues and petitioner’s motion for reasonable litigation

costs.    On September 14, 2009, we filed respondent’s opposition

to petitioner’s motion.    On October 14, 2009, we filed

petitioner’s reply to respondent’s opposition.    The parties have

not requested a hearing, and we conclude that a hearing is not

necessary to decide this motion.    See Rule 232(a)(2).

      After concessions,2 the issues for decision are:     (1)

Whether respondent’s position in the court proceeding was

substantially justified, (2) whether petitioner unreasonably

protracted the court proceeding, and (3) whether the litigation

costs petitioner claims are reasonable.

                             Background

      The following facts are based on the entire record, which

includes the declarations and exhibits submitted by the parties



      1
        (...continued)
the   Internal Revenue Code in effect at the time petitioner filed
its   petition or incurred its litigation costs, as appropriate,
and   all Rule references are to the Tax Court Rules of Practice
and   Procedure.
      2
      Respondent concedes that petitioner meets the net worth
requirements of 28 U.S.C. sec. 2412(d)(2)(B) (2006), that
petitioner exhausted all administrative remedies available within
the Internal Revenue Service (IRS), and that petitioner
substantially prevailed with respect to the amount in
controversy.
                                 - 3 -

with respect to the motion for reasonable litigation costs, the

parties’ pleadings, the stipulation of settled issues, various

other motions, and supporting documents.

Petitioner’s Business

     Petitioner, which was incorporated in 1998,3 provides

medical transcription services to medical service providers.      To

carry out its business, petitioner hires home-based medical

transcriptionists to type medical documents from medical

dictation files.

        The medical transcriptionists decide when and how often to

work, pay all expenses incurred in the business (e.g., the costs

of maintaining a home office, a personal computer, medical

reference texts, and Internet service), and are paid per line of

completed transcription.     Petitioner’s medical transcriptionists

are required to complete each assignment within 10 hours.

Transcripts received after the 10-hour deadline are paid at only

one-half of the medical transcriptionist’s agreed-upon rate;

transcripts that contain spelling errors are considered

incomplete and are not paid at all.      Petitioner treated the

medical transcriptionists as independent contractors for Federal

employment tax purposes for every taxable period during the

calendar years 2000 through 2003.



     3
        Petitioner elected S corporation status as of Dec. 31,
1998.
                               - 4 -

Petitioner’s Employment Tax Examination

     In 2004 respondent began an employment tax examination of

petitioner for all four quarters of calendar years 2000 through

2003.   One of the issues in the examination was whether

petitioner’s medical transcriptionists were properly

characterized as independent contractors or as employees.

Petitioner cooperated with the examination, and petitioner’s then

counsel, Michael P. Kennedy (Mr. Kennedy), provided documents and

information to respondent’s auditor, Mike Boeckmann (Mr.

Boeckmann).   Among the documents Mr. Kennedy provided were

petitioner’s completed Form SS-8, Determination of Worker Status

for Purposes of Federal Employment Taxes and Income Tax

Withholding, copies of petitioner’s Independent Contractor

Agreement (ICA), and copies of the confidentiality agreement

petitioner required its medical transcriptionists to sign.    Mr.

Boeckmann also conducted interviews in connection with the

examination, but it is not clear whom he interviewed.

     After reviewing the materials petitioner provided, Mr.

Boeckmann determined that petitioner’s medical transcriptionists

were employees for purposes of the Federal Insurance

Contributions Act (FICA), sections 3101-3128 as in effect for the

years in issue.   Specifically, Mr. Boeckmann concluded the

medical transcriptionists were not employees under the common law

rules but should be treated as statutory home workers pursuant to
                               - 5 -

section 3121(d)(3)(C).   Mr. Boeckmann explained his conclusions

in Form 4666, Summary of Employment Tax Examination, Form 4668,

Employment Tax Examination Changes Report, and Form 886-A,

Explanation of Items, which he provided to petitioner.   None of

the forms addressed whether petitioner was entitled to relief

under the Revenue Act of 1978, Pub. L. 95-600, sec. 530, 92 Stat.

2885, as amended (act section 530),4 and there is no indication

in the record that Mr. Boeckmann considered whether petitioner

was entitled to act section 530 relief.

     On June 7, 2005, Mr. Kennedy sent a letter to Mr. Boeckmann

disputing Mr. Boeckmann’s conclusion that petitioner’s medical

transcriptionists were employees and asserting that petitioner

was entitled to act section 530 relief.   They were unable to

resolve their differences, and on August 12, 2005, Mr. Kennedy

rejected a settlement offer and requested that Mr. Boeckmann

transfer the matter to the IRS Office of Appeals.




     4
      Act sec. 530, which is discussed in detail infra sec. III.
B.1., generally provides that notwithstanding the actual
relationship between a taxpayer and an individual providing
services for such taxpayer, the taxpayer may treat the individual
as an independent contractor for FICA tax purposes if: (1) The
taxpayer has never treated the individual as an employee for
Federal employment tax purposes; (2) the taxpayer has filed all
required tax returns consistent with such treatment; and (3) the
taxpayer had a reasonable basis for treating the individual as an
independent contractor.
                               - 6 -

Petitioner’s Administrative Appeal

     After petitioner’s request, its case was transferred to the

IRS Office of Appeals and assigned to Appeals Officer Orville

Holland (Mr. Holland).   On September 25, 2006, Mr. Kennedy signed

Form SS-10, Consent to Extend the Time to Assess Employment

Taxes.   On October 11, 2006, Mr. Holland mailed to petitioner a

Summary of Issues, which concluded, inter alia, that petitioner’s

medical transcriptionists were statutory home workers pursuant to

section 3121(d)(3)(C) and that petitioner was not entitled to act

section 530 relief because it had not established that it

reasonably relied on one of the act section 530 safe harbors or

had any other reasonable basis for treating its medical

transcriptionists as independent contractors.

     Petitioner’s case was subsequently transferred to Appeals

Officer Catherine Folkerth (Ms. Folkerth), and on February 16,

2007, Ms. Folkerth proposed to settle the case pursuant to

respondent’s Classification Settlement Program.   Ms. Folkerth

offered to concede all of the tax proposed for 2000, 2001, and

2002 and 75 percent of the tax proposed for 2003.   In exchange,

Ms. Folkerth proposed that petitioner begin treating its medical

transcriptionists as employees beginning on July 1, 2007.

Petitioner rejected the settlement offer, and on March 12, 2007,

Ms. Folkerth issued a Notice of Determination of Worker

Classification (notice of determination) which determined that
                               - 7 -

(1) petitioner’s medical transcriptionists were employees for

Federal employment tax purposes, (2) petitioner was not entitled

to act section 530 relief, and (3) petitioner owed employment tax

of $477,617.74.

The Tax Court Proceeding

     On June 14, 2007, we received and filed petitioner’s

Petition for Redetermination of Employment Status Under Code

Section 7436.   The petition asserted, in relevant part, that

respondent erred in his determinations that (1) petitioner’s

medical transcriptionists were employees, (2) petitioner was not

entitled to act section 530 relief; and (3) petitioner owed

additional employment taxes for all four quarters of calendar

years 2000 through 2003.   On July 17, 2007, we received and filed

respondent’s Answer to Petition for Redetermination of Employment

Status Under Code Section 7436.   The answer stated, in relevant

part, that (1) petitioner’s medical transcriptionists were

properly classified as employees pursuant to section

3121(d)(3)(C), (2) petitioner was not entitled to relief under

act section 530, and (3) the amount of employment tax liability

determined in the notice of determination was correct.

     On July 20, 2007, respondent mailed a letter to petitioner’s

counsel scheduling a pretrial conference for August 21, 2007, and

requesting documents and information relating to petitioner’s

business, petitioner’s relationship with the medical
                               - 8 -

transcriptionists, and petitioner’s tax filings.   Respondent

specifically requested “Any evidence of the safe harbor

provisions of section 530 that petitioner intends to rely upon.”

On or about July 25, 2007, petitioner’s counsel responded that he

would be unable to attend a pretrial conference on August 21,

2007, because, among other reasons, he needed more time to obtain

the documents respondent had requested.   Respondent rescheduled

the conference for September 11, 2007, but petitioner’s counsel

ultimately canceled that conference, as well as a later pretrial

conference.   The parties never held a pretrial conference, and

respondent was unable to obtain the information he sought through

informal measures.

     Respondent served on petitioner interrogatories, a request

for admissions, and a request for production of documents.   On

August 4, 2008, petitioner’s counsel served on respondent

responses to respondent’s interrogatories, request for

admissions, and request for production of documents.   In a letter

accompanying the responses to discovery, petitioner asserted that

even if its medical transcriptionists were employees for FICA tax

purposes, it was entitled to act section 530 relief.   Petitioner

enclosed the declarations of three individuals--Ellen Drake, Jay

Vance, and Toni Ranieri--each of whom had many years of

experience in the medical transcription services industry, and a

fourth individual--Gary David--who had completed an academic
                                - 9 -

study of the industry.   Each of the declarants stated that

substantially more than 25 percent of the firms in the medical

transcription services industry treated their medical

transcriptionists as independent contractors for FICA tax

purposes.

     On October 1, 2008, petitioner provided additional

documents--including the declarations of Quentin Irey (Mr. Irey),

an officer and shareholder of petitioner, and Mr. Kennedy--in

support of its contention that it qualified for act section 530

relief.   After reviewing the declarations, respondent sought

permission to interview Mr. Irey to determine whether he had

relied on Mr. Kennedy’s advice in treating the medical

transcriptionists as independent contractors and to gauge his

credibility as a witness.   Petitioner agreed to the request, and

the interview was held on December 12, 2008.

     On January 28, 2009, respondent informed petitioner that he

would fully concede the case on the basis of act section 530, on

the ground that petitioner reasonably relied on the advice of an

attorney in deciding to treat its medical transcriptionists as

independent contractors.    On July 15, 2009, we filed the parties’

stipulation of settled issues, which stated that petitioner had

no Federal employment tax liability for the tax periods at issue

and disposed of all issues in the case except petitioner’s motion
                                  - 10 -

for litigation costs, which petitioner filed concurrently

therewith.

                              Discussion

I.   Section 7430

     A.      General Provisions

     Section 7430(a) authorizes the award of reasonable

litigation costs to the prevailing party in a court proceeding

brought by or against the United States in connection with the

determination of any tax.     See Corson v. Commissioner, 123 T.C.

202, 205 (2004).     In addition to being the prevailing party, to

receive an award of reasonable litigation costs a taxpayer must

have exhausted all administrative remedies available within the

IRS and must not have unreasonably protracted the court

proceeding.     Sec. 7430(b)(1), (3); Corson v. Commissioner, supra

at 205.    We do not award costs unless a taxpayer satisfies all of

the section 7430 requirements.      Corson v. Commissioner, supra at

205-206 (citing Minahan v. Commissioner, 88 T.C. 492, 497

(1987)).

     A taxpayer is the prevailing party if (1) the taxpayer

substantially prevailed with respect to the amount in controversy

or the most significant issue or set of issues, (2) the taxpayer

meets the net worth requirements of 28 U.S.C. sec. 2412(d)(2)(B)

(2006), and (3) the Commissioner’s position in the court

proceeding was not substantially justified.     Sec. 7430(c)(4)(A)
                               - 11 -

and (B)(i); see also sec. 301.7430-5(a), Proced. & Admin. Regs.

As noted above, respondent concedes that petitioner substantially

prevailed with respect to the amount in controversy and meets the

net worth requirements of 28 U.S.C. sec. 2412(d)(2)(B).

Respondent contends, however, that his position in the court

proceeding was substantially justified.    Respondent bears the

burden of proof with respect to this issue.    Sec.

7430(c)(4)(B)(i); Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430,

440-441 (1997).

     B.   Substantial Justification

     For purposes of section 7430, the Commissioner’s position in

the court proceeding generally is the position set forth in the

Commissioner’s answer to the taxpayer’s petition.     Sec.

7430(c)(7)(A); Maggie Mgmt. Co. v. Commissioner, supra at 442.

The Commissioner’s position is substantially justified if it has

a reasonable basis in both fact and law.    Corson v. Commissioner,

supra at 206; Maggie Mgmt. Co. v. Commissioner, supra at 443.

The reasonableness of the Commissioner’s position is determined

on the basis of the available facts that formed the basis for the

position, as well as the controlling law.     Maggie Mgmt. Co. v.

Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C.

927, 930 (1985).   Thus, a position that was reasonable when

established may become unreasonable in the light of changed

circumstances.    See sec. 301.7430-5(c)(2), Proced. & Admin. Regs.
                                - 12 -

The fact that the Commissioner ultimately concedes an issue does

not necessarily establish that the Commissioner’s position with

respect to that issue was not substantially justified, but it is

a factor to be considered.     Maggie Mgmt. Co. v. Commissioner,

supra at 443.   There is a rebuttable presumption that the

Commissioner’s position was not substantially justified if the

IRS did not follow applicable published guidance in the

administrative proceeding.     Sec. 7430(c)(4)(B)(ii).   Applicable

published guidance is defined as regulations, revenue rulings,

revenue procedures, information releases, notices, announcements,

private letter rulings, technical advice memoranda, and

determination letters issued to taxpayers.     Sec.

7430(c)(4)(B)(iv).

II.   The Parties’ Arguments

      Petitioner contends that respondent’s position in the court

proceeding was not substantially justified because petitioner’s

medical transcriptionists could not have been statutory home

workers pursuant to section 3121(d)(3)(C).     Indeed, petitioner

argues that respondent’s position should be presumed to be not

substantially justified because respondent failed to follow

applicable published guidance with respect to the classification

of the medical transcriptionists.     Moreover, petitioner contends

that respondent’s position that petitioner did not qualify for

act section 530 relief lacked a reasonable basis in fact or law.
                               - 13 -

Alternatively, petitioner argues it is entitled to recover its

litigation costs incurred after August 4, 2008--the date

petitioner provided respondent with evidence that it qualified

for one of the act section 530 safe harbors.

     Respondent counters that his position that petitioner’s

medical transcriptionists were statutory home workers was

substantially justified because it had a reasonable basis in fact

and in law.   With respect to act section 530 relief, respondent

asserts that petitioner has never established a prima facie case

that it qualifies for any of the act section 530 safe harbors.

Finally, respondent argues that petitioner unreasonably

protracted the court proceeding and that the costs petitioner

claims are not reasonable.

III. The Dispute:   Employee Versus Independent Contractor

     A.   Section 3121(d)(3)(C)

     Section 3111 imposes on employers a FICA tax that is based

on the wages paid to employees.    For purposes of section 3111

the term “employee” is defined in section 3121(d), which provides

in relevant part:

     SEC. 3121. DEFINITIONS.

          (d) Employee.--For purposes of this chapter,
     the term “employee” means--

                *    *    *    *     *    *    *

               (3) any individual (other than an individual
          who is an employee under paragraph (1) or (2)) who
                             - 14 -

          performs services for remuneration for any
          person--

               *    *    *      *     *   *   *

                    (C) as a home worker performing work,
               according to specifications furnished by the
               person for whom the services are performed,
               on materials or goods furnished by such
               person which are required to be returned to
               such person or a person designated by him; or

               *    *    *      *     *   *   *

          if the contract of service contemplates that
          substantially all of such services are to be
          performed personally by such individual; except
          that an individual shall not be included in the
          term “employee” under the provisions of this
          paragraph if such individual has a substantial
          investment in facilities used in connection with
          the performance of such services (other than in
          facilities for transportation), or if the services
          are in the nature of a single transaction not part
          of a continuing relationship with the person for
          whom the services are performed * * *

     The regulations provide additional guidance with respect to

the requirements listed in the flush language of section 3121(d).

Specifically, section 31.3121(d)-1(d)(4)(i), Employment Tax

Regs., provides:

     The fact that an individual falls within one of the
     enumerated occupational groups, however, does not make
     such individual an employee under this paragraph unless
     (a) the contract of service contemplates that
     substantially all the services to which the contract
     relates * * * are to be performed personally by such
     individual, (b) such individual has no substantial
     investment in the facilities used in connection with
     the performance of such services * * * and (c) such
     services are part of a continuing relationship with the
     person for whom the services are performed and are not
     in the nature of a single transaction.
                             - 15 -

     Section 31.3121(d)-1(d)(4)(ii), Employment Tax Regs.,

provides that the requirement in section 3121(d) that

substantially all services be performed personally means that “it

is not contemplated that any material part of the services to

which the contract relates * * * will be delegated to any other

person by the individual who undertakes under the contract to

perform such services.”

     Petitioner argues that its medical transcriptionists could

not have been statutory home workers because (1) the medical

transcriptionists had the right to delegate (and in some cases

did delegate) work to subcontractors, (2) the medical

transcriptionists had a substantial investment in the facilities

used in connection with the work (e.g., personal computers,

medical reference materials, and Internet service), and (3) some

of the medical transcriptionists did not have a continuing

relationship with petitioner.5   Respondent counters that his

position in the court proceeding was substantially justified

because it had a reasonable basis in fact and in law.   Because


     5
      Petitioner argues that respondent’s position should be
presumed to be not substantially justified under sec.
7430(c)(4)(B)(ii) because respondent failed to follow sec.
3121(d)(3)(C) and sec. 31.3121(d)-1(d)(4)(ii), Employment Tax
Regs. We disagree. Contrary to petitioner’s assertion, the
record does not demonstrate that respondent failed to follow sec.
3121(d)(3)(C) or sec. 31.3121(d)-1(d)(4)(ii), Employment Tax
Regs. We note, however, that respondent bears the burden of
establishing that his position with respect to the classification
of petitioner’s medical transcriptionists as statutory home
workers was substantially justified. See sec. 7430(c)(4)(B)(i).
                              - 16 -

respondent’s answer does not contain any significant analysis, we

rely on the facts developed at the administrative level as the

reasoning behind respondent’s position.   See Images in Motion of

El Paso, Inc. v. Commissioner, T.C. Memo. 2006-19.

     On the basis of his review of petitioner’s Form SS-8, ICA,

and confidentiality agreement, Mr. Boeckmann determined that

petitioner contemplated that the medical transcriptionists would

perform their work personally and that the work would be done as

part of a continuing relationship between petitioner and the

medical transcriptionists.   Moreover, Mr. Boeckmann determined

that petitioner’s relationship with the medical transcriptionists

was analogous to the relationships described in Rev. Rul. 70-340,

1970-1 C.B. 202, and Rev. Rul. 64-280, 1964-2 C.B. 384.6   Mr.

Holland reached the same conclusion on the basis of a similar

analysis of the facts and the law applicable to petitioner.      In

addition Mr. Holland specifically concluded that the medical

transcriptionists’ investment in personal computers, specialized



     6
      In Rev. Rul. 70-340, 1970-1 C.B. 202, the Commissioner
determined that transcribers who worked from home, who set their
own hours, and who paid all expenses incurred in the work were
statutory home workers under sec. 3121(d)(3)(C). Similarly, in
Rev. Rul. 64-280, 1964-2 C.B. 384, the Commissioner determined
that a typist who worked from home, who set her own hours, and
who furnished her own typewriter and office supplies was a
statutory home worker under sec. 3121(d)(3)(C). The Commissioner
further determined in Rev. Rul. 64-280, supra, that the typist’s
furnishing of a typewriter, office supplies, and office space in
her home was not a substantial investment for purposes of sec.
3121(d)(3).
                              - 17 -

software, and medical reference materials was not a substantial

investment for purposes of section 3121(d)(3).   Respondent has

never conceded that petitioner’s medical transcriptionists are

independent contractors but instead conceded the case on the

basis of act section 530 relief.

     Whether respondent properly classified petitioner’s medical

transcriptionists as statutory home workers is a close question,

but we need not answer it.   It is enough to note that

respondent’s position with respect to the classification of

petitioner’s medical transcriptionists had a reasonable basis in

fact and in law.   Accordingly, respondent has established that

his position was substantially justified with respect to this

issue.

     B.   Act Section 530 Relief

          1.   In General

     In enumerated circumstances, act section 530 provides relief

from employment taxes notwithstanding that the relationship

between the taxpayer and the individual performing services would

otherwise require payment of such taxes.   See, e.g., Charlotte’s

Office Boutique, Inc. v. Commissioner, 121 T.C. 89, 106 (2003),

affd. 425 F.3d 1203 (9th Cir. 2005).   A taxpayer is entitled to

relief under act section 530 if it demonstrates:   (1) It did not

treat an individual as an employee for employment tax purposes

for any period, (2) it filed all required Federal tax returns
                               - 18 -

consistent with its treatment of the individual, and (3) it had a

reasonable basis for not treating the individual as an employee.

Act sec. 530(a)(1) and (2); Images in Motion of El Paso, Inc. v.

Commissioner, supra.    A taxpayer is deemed to have had a

reasonable basis if the taxpayer establishes that its treatment

of the individual was in reasonable reliance on:

          (A) judicial precedent, published rulings,
     technical advice with respect to the taxpayer, or a
     letter ruling to the taxpayer;

          (B) a past Internal Revenue Service audit of the
     taxpayer in which there was no assessment attributable
     to the treatment (for employment tax purposes) of the
     individuals holding positions substantially similar to
     the position held by this individual, or

          (C) long-standing recognized practice of a
     significant segment of the industry in which such
     individual was engaged.

Act sec. 530(a)(2).    With respect to the third enumerated safe

harbor, act section 530(e)(2)(B) provides:    “in no event shall

the significant segment requirement * * * be construed to require

a reasonable showing of the practice of more than 25 percent of

the industry (determined by not taking into account the

taxpayer)”.   Small Business Job Protection Act of 1996, Pub. L.

104-188, sec. 1122, 110 Stat. 1766 (adding subsection (e) of act

section 530).

     In addition to the specific safe harbors of act section

530(a)(2), a taxpayer is entitled to act section 530 relief if it

can demonstrate any other reasonable basis for treating its
                             - 19 -

workers as independent contractors.   Boles Trucking, Inc. v.

United States, 77 F.3d 236, 239 (8th Cir. 1996); Images in Motion

of El Paso, Inc. v. Commissioner, supra; Rev. Proc. 85-18, sec.

3.01(C), 1985-1 C.B. 518, 518.   The reasonable basis inquiry is

to be construed liberally in favor of the taxpayer.     Images in

Motion of El Paso, Inc. v. Commissioner, supra (citing H. Rept.

95-1748, at 5 (1978), 1978-3 C.B. (Vol. 1) 629, 633).

     In his answer respondent asserted that petitioner was not

entitled to act section 530 relief.   In the Appeals Office’s

Summary of Issues, which represents the reasoning behind

respondent’s position, see Images in Motion of El Paso, Inc. v.

Commissioner, supra, Mr. Holland concluded that petitioner did

not treat any of its medical transcriptionists as employees for

any period and that petitioner filed all tax returns consistent

with such treatment but had not established reasonable reliance

on any of the act section 530 safe harbors nor any other

reasonable basis for act section 530 relief.

     Petitioner argues that respondent’s position was not

substantially justified because on the date he took a position in

the court proceeding, i.e., on July 17, 2007, the date

respondent’s answer was filed, respondent already had enough

information to conclude that petitioner was entitled to act
                              - 20 -

section 530 relief.7   In the alternative, petitioner argues that

respondent’s position was not substantially justified after

August 4, 2008, the date when petitioner responded to

respondent’s formal discovery requests.

     If the taxpayer establishes a prima facie case that it is

entitled to act section 530 relief and has complied with all

reasonable requests from the Commissioner, act section 530(e)(4)

shifts the burden of proof to the Commissioner to demonstrate

that the taxpayer is not entitled to act section 530 relief.    On

the date respondent first took a position in the court proceeding

with respect to act section 530 relief, petitioner had not

established a prima facie case that it was entitled to such

relief.   Indeed, there is no credible evidence in the record as

of July 17, 2007, that petitioner qualified for any of the act

section 530 safe harbors or had any other reasonable basis for



     7
      Petitioner argues that under sec. 7430(c)(4)(B)(ii),
respondent’s position in the court proceeding should be presumed
to be not substantially justified because respondent failed to
follow applicable published guidance in the administrative
proceeding. Specifically, petitioner asserts that respondent
failed to notify it in writing of the provisions of act sec. 530
at the beginning of the audit, as required by act sec. 530(e)(1).
See Small Business Job Protection Act of 1996, Pub. L. 104-188,
sec. 1122, 110 Stat. 1766 (adding subsec. (e) of act sec. 530).
Regardless of the presumption, however, petitioner bears the
ultimate burden of demonstrating its entitlement to act sec. 530
relief, except as provided in act sec. 530(e)(4). Thus,
petitioner may not recover litigation costs incurred with respect
to respondent’s position that petitioner was not entitled to act
sec. 530 relief before the date when petitioner demonstrated a
prima facie case that it was in fact entitled to such relief.
                                  - 21 -

act section 530 relief.       Accordingly, when respondent first took

a position regarding petitioner’s entitlement to act section 530

relief, the position was justified.

     However, a position that was reasonable when first taken may

become unreasonable in the light of changed facts and

circumstances.    See sec. 301.7430-5(c)(2), Proced. & Admin. Regs.

Respondent’s position that petitioner was not entitled to act

section 530 relief became unreasonable on August 4, 2008, when

petitioner responded to respondent’s requests for formal

discovery.    Petitioner’s responses--specifically, the

declarations of four individuals stating that substantially more

than 25 percent of the firms in the medical transcription

services industry treated their medical transcriptionists as

independent contractors for FICA tax purposes--established a

prima facie case that petitioner was entitled to act section 530

relief, see act sec. 530(a)(2)(C), thus shifting the burden of

proof to respondent to demonstrate that petitioner was not

entitled to relief.

     Respondent argues that petitioner never established a prima

facie case because the declarations submitted on August 4, 2008,

merely reflect the personal experiences of the individual

declarants.    We disagree.    While it is true that a taxpayer’s

personal experience, standing alone, is not evidence of the

longstanding recognized practice of a significant segment of the
                               - 22 -

industry, Day v. Commissioner, T.C. Memo. 2000-375, the

declarations of three individuals with decades of experience in

the medical transcription industry,8 plus a fourth individual who

has studied the industry’s practices, are evidence of a

longstanding recognized practice of a significant segment of the

industry.   To hold otherwise would place an unreasonably high

burden on taxpayers claiming relief under act section

530(a)(2)(C).

     Respondent also argues that the declarations do not

establish a prima facie case for act section 530 relief because

petitioner did not actually rely on the individual declarants in

deciding to treat its medical transcriptionists as independent

contractors.    Respondent’s argument misreads the statute.   Act

section 530(a)(2)(C) does not require reliance on a particular

individual; the safe harbor merely requires reliance on a “long-

standing recognized practice of a significant segment of the

industry in which the individual was engaged.”

     Finally, soon after reviewing the declarations and other

materials petitioner submitted on August 4, 2008, respondent

agreed to fully concede the case, albeit on the basis that

petitioner relied on professional advice rather than on the basis



     8
      On Aug. 4, 2008, declarant Ellen Drake had worked in the
medical transcription industry for 39 years, Tony Ranieri had
worked in the industry for 22 years, and Jay Vance had worked in
the industry for 9 years.
                              - 23 -

of the act section 530(a)(2)(C) safe harbor.   Although

respondent’s concession does not establish that his position was

not substantially justified, it is a factor to be considered.

See Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443.

     To summarize, petitioner had the burden of establishing its

entitlement to act section 530 relief.   Petitioner had not met

the burden on July 17, 2007, the date respondent first took his

position with respect to act section 530 relief in the court

proceeding.   However, petitioner demonstrated a prima facie case

for relief on August 4, 2008, thus shifting the burden of proof

to respondent to establish that petitioner was not entitled to

act section 530 relief.   See act sec. 530(e)(4).   Respondent

failed to rebut the presumption.   Indeed, respondent failed to

put forward any credible evidence that petitioner was not

entitled to act section 530 relief on the basis of the documents

and information petitioner provided on August 4, 2008.    As a

result, respondent’s position that petitioner was not entitled to

act section 530 relief became substantially unjustified after

August 4, 2008, insofar as it lacked a reasonable basis in fact

or law, and petitioner is entitled to recover reasonable

litigation costs incurred after that date.9


     9
      Respondent did not offer any credible evidence to justify
the time he took to concede that petitioner was entitled to act
sec. 530 relief. See Corkrey v. Commissioner, 115 T.C. 366, 375-
376 (2000). In a status report dated Oct. 6, 2008, respondent
                                                   (continued...)
                               - 24 -

IV.   Whether Petitioner Unreasonably Protracted the Court
      Proceedings

      Section 7430(b)(3) provides that no award for reasonable

litigation costs may be made with respect to any portion of the

court proceeding during which the prevailing party unreasonably

protracted such proceeding.   The taxpayer bears the burden of

proving that he or she did not unreasonably protract the court

proceeding.   See Swanson v. Commissioner, 106 T.C. 76, 85 (1996);

see also Rule 232(e).

      Respondent contends that petitioner unreasonably protracted

the court proceeding by repeatedly canceling pretrial conferences

and failing to cooperate with respondent’s informal requests for

documents and information.    Because respondent’s argument relates

to the period before August 4, 2008, and we have already

concluded that petitioner is not entitled to recover litigation

costs incurred during that period, we conclude that respondent’s

argument is moot.

V.    Whether the Costs Petitioner Claims Are Reasonable

      The final issue we must resolve is whether the litigation

costs petitioner claims are reasonable.   For purposes of section

7430 reasonable litigation costs include reasonable court costs;



      9
      (...continued)
asserted that petitioner did not meet the act sec. 530
requirements, and in a status report dated Dec. 2, 2009,
respondent still did not concede that petitioner was entitled to
act sec. 530 relief.
                                - 25 -

the reasonable expenses of expert witnesses in connection with

the court proceeding; the reasonable cost of any study, analysis,

engineering report, test, or project which is found by the court

to be necessary to the party’s case; and reasonable fees paid or

incurred for the service of attorneys in connection with the

court proceeding.    Sec. 7430(c)(1).    The statute provides that

generally an award for attorney’s fees shall not be in excess of

$125 per hour, sec. 7430(c)(1)(B)(iii), but is adjusted annually

for inflation.     For 2008 and 2009, the limitations on attorney’s

fees awards are $170 and $180 per hour, respectively.      Rev. Proc.

2007-66, sec. 3.39, 2007-2 C.B. 970, 976; Rev. Proc. 2008-66,

sec. 3.38, 2008-45 I.R.B. 1107, 1114.      Petitioner must establish

the amount of its reasonable litigation costs.      Sec. 7430(c);

Cozean v. Commissioner, 109 T.C. 227, 230 (1997).      The parties

agree that petitioner incurred $22,547 in litigation costs after

August 4, 2008.10

VI.   Conclusion

      To summarize, we award petitioner reasonable litigation

costs incurred during the period after August 4, 2008, of

$22,547.   We have considered the remaining arguments of both


      10
      Respondent argues that the costs associated with
petitioner’s responses to respondent’s formal discovery requests
are unreasonable in that they would have been unnecessary had
petitioner responded to respondent’s informal discovery requests.
Because all costs associated with responding to formal discovery
were incurred on or before Aug. 4, 2008, respondent’s argument is
moot.
                             - 26 -

parties for results contrary to those expressed herein, and to

the extent not discussed above, we conclude such arguments are

irrelevant, moot, or without merit.

     To reflect the foregoing,


                                           An appropriate order and

                                      decision will be entered.
