                        T.C. Memo. 1999-120



                      UNITED STATES TAX COURT



             JUNG SIK AND BOK S. LIM, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17433-97.                       Filed April 6, 1999.



     Matthew J. McCann, for petitioners.

     Wendy L. Wojewodzki, for respondent.



                        MEMORANDUM OPINION

     GERBER, Judge:   This matter is before the Court on

petitioners’ motion for award of litigation costs pursuant to

section 74301 and Rule 231.

     1
       References to sec. 7430 in this opinion are to that
section as amended by the Taxpayer Bill of Rights 2, Pub. L. 104-
168, sec. 701, 110 Stat. 1452, 1463-1464 (1996), effective with
                                                   (continued...)
                                 - 2 -


         All section references are to the Internal Revenue Code in

effect for the taxable year at issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.

     Petitioners requested an evidentiary hearing; however, after

considering the record and the parties’ memoranda we concluded

that a hearing is not necessary to reach our decision.     See Rule

232(a)(1).     The relevant facts are taken from the record and the

parties’ memoranda.     At the time the petition was filed,

petitioners resided in Temple Hills, Maryland.

     After concessions,2 the issues for our consideration are:

(1) Whether respondent’s position in the litigation proceedings

was substantially justified; and (2) whether petitioners

unreasonably protracted the proceedings.


     1
      (...continued)
respect to proceedings commenced after July 30, 1996. The
amendments to that section shift to the Commissioner the burden
of proving that the position of the United States was
substantially justified, sec. 7430(c)(4)(B).
     A judicial proceeding is commenced in this Court with the
filing of a petition. See Rule 20(a). Petitioners filed their
petition on Aug. 20, 1997. Accordingly, the 1996 amendments to
sec. 7430 are applicable here. See Maggie Management Co. v.
Commissioner, 108 T.C. 430 (1997).
     2
       Respondent has conceded that petitioners substantially
prevailed, exhausted their administrative remedies, and met the
net worth requirements. In addition, respondent conceded that
his position after the calendar call of May 18, 1998, was not
substantially justified. Both parties agree that the hourly rate
at which attorney’s fees should be awarded is limited to $120 per
hour.
                                - 3 -


                              Discussion

A.   General Background

      Respondent determined a deficiency in petitioners’ 1993

Federal income tax of $8,909.    Respondent conceded all

adjustments determined in the notice of deficiency, and the

remaining issue for trial concerned whether petitioners were

entitled to an overpayment.    To answer that question we had to

decide whether the interest paid by petitioners was deductible as

business interest.   If deductible as business interest,

petitioners would have been entitled to certain deductions that

they had not claimed on their returns, and an overpayment.      The

matter was decided in petitioners’ favor.    See Lim v.

Commissioner, T.C. Memo. 1998-432, filed December 10, 1998.

      Section 7430 provides for the award of reasonable

administrative and litigation costs to a taxpayer in an

administrative or court proceeding brought against the United

States involving the determination of any tax, interest, or

penalty pursuant to the Internal Revenue Code.    An award of

administrative or litigation costs may be made where the

taxpayer:   (1) Is the prevailing party, (2) exhausted available

administrative remedies,3 and (3) did not unreasonably protract




      3
       This requirement does not apply to an award for reasonable
administrative costs. See sec. 7430(b)(1).
                                 - 4 -


the administrative or judicial proceeding.    Sec. 7430(a), (b)(1),

(3).

       To be a “prevailing party”, a 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) meet the net worth requirements of 28 U.S.C.

section 2412(d)(2)(B).    See sec. 7430(c)(4)(A)(i) and (ii).    A

taxpayer will not be treated as a prevailing party, however, if

the United States established that its position was substantially

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

B.   Substantial Justification

       As we stated earlier, respondent concedes that petitioner

substantially prevailed and met the net worth requirements.

Moreover, respondent concedes that his position after the

calendar call on May 18, 1998, was not substantially justified.

The parties primarily dispute at what point in the litigation

proceedings respondent’s position was no longer substantially

justified.

       Petitioners contend that respondents’ position was not

substantially justified from the time of the issuance of the

notice of deficiency.    Accordingly, petitioners claim legal

expenses for the period beginning with the preparation and filing

of their petition.    Respondent asserts that his position was
                                   - 5 -


substantially justified until the case was called for trial at

the May 18, 1998, calendar.

        The notice of deficiency was sent to petitioners on May 23,

1997.       Respondent’s Appeals officer requested a meeting with

petitioners’ representative in a letter dated February 2, 1998.

Petitioners’ counsel replied that a meeting was inconvenient at

that time but that documents could be provided by mail.       The

Appeals officer agreed and provided counsel with a list of needed

information.       The requested information was not provided until

April 14, 1998.

        After a timely review of the requested information,

respondent’s Appeals officer concluded on May 1, 1998, that

petitioners were entitled to a refund and forwarded a proposed

settlement computation to petitioners’ counsel.       Petitioners’

counsel indicated his agreement by return facsimile that same

day.4       On May 11, 1998, however, petitioners’ counsel was advised

by the Appeals officer that his supervisor refused to approve the

proposed settlement.       The case was forwarded to the Internal

Revenue Service (IRS) District Counsel on May 11, 1998, 1 week

before calendar call.

        Shortly after being informed that there would be no

settlement with the IRS Appeals Office, petitioners’ counsel

        4
       Although the settlement proposal required petitioners to
concede deductions to which they were arguably entitled, the
settlement was accepted to avoid the further expense of trial.
                                 - 6 -


advised that litigation costs would be requested if the case

could not be resolved quickly.    At a May 15, 1998, trial

preparation conference, the parties discussed a settlement under

which respondent would allow the requested overpayment, and

petitioners would agree not to assert a claim for attorney’s

fees.   Petitioners decided not to accept the settlement and to

proceed to trial.

     The Commissioner’s position is substantially justified if

that position could satisfy a reasonable person and if it has a

reasonable basis in both fact and law.      See Pierce v. Underwood,

487 U.S. 552, 565 (1988).   We examine the facts known to the

Commissioner at the time the position was taken.      See Maggie

Management Co. v. Commissioner, 108 T.C. 430, 443 (1997).

Respondent must prove that his position was substantially

justified.   See sec. 7430(c)(4)(B).     The fact that the

Commissioner eventually loses or concedes a case does not

establish an unreasonable position.      See Wasie v. Commissioner,

86 T.C. 962, 968-969 (1986).   However, the Commissioner’s

concession does remain a factor to be considered.      See Dugan v.

Commissioner, T.C. Memo. 1997-458.

     Contrary to petitioners’ position, respondent contends that

he was substantially justified in his position from the issuance

of the statutory notice of deficiency on May 23, 1997, until the

calendar call on May 18, 1998.    Petitioners did not provide
                                   - 7 -


respondent with all relevant requested information until April

14, 1998.       Therefore, no settlement could have been reached prior

to April 14, 1998.       See Salopek v. Commissioner, T.C. Memo. 1998-

385.       When respondent ultimately received the information, the

Appeals officer concluded that petitioners were entitled to a

refund and forwarded a proposed settlement to petitioners.

Respondent did not spend an unreasonable amount of time reviewing

the information and proposing a settlement to petitioner.5

Although the proposed settlement was ultimately rejected by the

associate chief of the IRS Appeals Office and the case was

forwarded to District Counsel, the time respondent spent

reviewing the proposed settlement was not unreasonable.6

Respondent should not have to bear the litigation costs for a

reasonable period of time it may take to review documentation

and/or modify his position.       See Harrison v. Commissioner, 854

F.2d 263, 266 (7th Cir. 1988), affg. T.C. Memo. 1987-52.

       Respondent concedes that his position was not substantially

justified after the calendar call on May 18, 1998, but has not

explained what additional facts rendered the position any more or


       5
       Respondent received the requested information from
petitioners on Apr. 14, 1998, and proposed a settlement on May 1,
1998.
       6
       Petitioners’ counsel agreed to the proposed settlement on
May 1, 1998, and was informed that the proposed settlement had
been rejected by the associate chief of the Internal Revenue
Service (IRS) Appeals Office on May 11, 1998.
                               - 8 -


less justified between May 11, 1998, the date the proposed

settlement was rejected, and May 18, 1998.    Respondent has failed

to establish that his position was substantially justified beyond

May 11, 1998, the date when the proposed settlement was rejected.

Accordingly, petitioners are entitled to attorney’s fees incurred

after May 11, 1998, when the case was forwarded from the IRS

Appeals Office to the District Counsel.

C.   Unreasonable Protraction of Proceeding

      Respondent contends that petitioners unreasonably protracted

the litigation proceedings, but respondent failed to provide any

examples of how petitioners acted unreasonably.   Section

7430(b)(3) provides that no award of litigation costs may be made

for any portion of the proceeding that the prevailing party

unreasonably protracted.   After petitioners provided respondent

with the requested information, petitioners did nothing to

protract the proceeding.   Moreover, petitioners’ counsel agreed

to respondent’s proposed settlement agreement on the same day

that it was received.

D.   Amount of Attorney’s Fees and Expenses To Be Awarded

      Having determined when in the court proceeding respondent’s

position was no longer substantially justified, we must determine

the appropriate amount of attorney’s fees and expenses to be

awarded.   Petitioners submitted a bill showing $1,023.66 of
                                 - 9 -


miscellaneous costs and expenses.    Of that total, $697 in

expenses was incurred prior to the time the case was forwarded to

the District Counsel.   Therefore, petitioners are entitled to

$954.66 in costs and expenses.

     Petitioners’ attorney billed a total of 109.4 hours on this

case.    Of that total, 80.3 hours were billed after the case was

forwarded to the District Counsel.       An award relating to

attorney’s fees incurred in 1998 is limited to $120 per hour.

See sec. 7430(c); Rev. Proc. 98-61, 1998-52 I.R.B. 18.

Accordingly, we award petitioners attorney’s fees in the amount

of $9,636, plus attorney’s fees and costs incurred pursuing this

motion.

     To reflect the foregoing,

                                         An appropriate order and

                                 decision will be entered.




     7
       That amount includes the $60 fee to file petitioners’
petition with the Tax Court and $9 in postage costs.
