                        T.C. Memo. 2002-271



                      UNITED STATES TAX COURT



                  JOHN J. PETITO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3277-00.             Filed October 28, 2002.



     John J. Petito, pro se.

     Theresa G. McQueeney and Lewis J. Abrahams, for respondent.



                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Chief Special

Trial Judge Peter J. Panuthos pursuant to section 7443A(b)(5) and

Rules 180, 181, and 183.1   The Court agrees with and adopts the


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended; references to sec. 7430
are to that section in effect at the time that the petition was
                                                   (continued...)
                                - 2 -

opinion of the Special Trial Judge, which is set forth below.

                  OPINION OF THE SPECIAL TRIAL JUDGE

     PANUTHOS, Chief 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.    Petitioner seeks an award of $86,500 in

administrative and litigation costs and $9 million in punitive

damages.

     After concessions by respondent,2 the issues for decision

are as follows:

     (1) Whether petitioner may claim in this case administrative

and litigation costs associated with separate criminal

proceedings;

     (2) whether respondent’s position in this matter was

substantially justified;

     (3) whether petitioner unreasonably protracted the

proceedings;

     (4) whether the administrative and litigation costs claimed

by petitioner are reasonable;


     1
      (...continued)
filed (Mar. 21, 2000). All Rule references are to the Tax Court
Rules of Practice and Procedure.
     2
        Respondent concedes: (1) Petitioner substantially
prevailed, see sec. 7430(c)(4); (2) petitioner exhausted
administrative remedies, see sec. 301.7430-1(e)(2), Proced. &
Admin. Regs.; and (3) petitioner satisfied the applicable net
worth requirement, see sec. 7430(c)(4)(A)(ii).
                               - 3 -

     (5) whether petitioner is entitled to punitive damages.

     Although petitioner requested an evidentiary hearing, 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 on the basis of the

record that has been developed to date.

     Petitioner resided in North Woodmere, New York, at the time

that his petition was filed with the Court.

                            Background

     Petitioner is an accountant and the sole shareholder of John

J. Petito CPA, P.C. (Petito Corp.).    Petitioner prepared and

submitted to the Internal Revenue Service (IRS) a Form 1120S,

U.S. Income Tax Return for an S Corporation, for Petito Corp. for

the taxable year 1992.   On the Form 1120S, Petito Corp. reported

gross receipts or sales of $158,350, cost of goods sold of

$75,903, and deductions of $84,191, leaving a net loss of $1,744.

Petito Corp. issued a Schedule K-1, Shareholder’s Share of

Income, Credits, Deductions, etc., to petitioner for 1992

allocating to him an ordinary loss of $1,744.

     Petitioner prepared and filed with the IRS a Form 1040, U.S.

Individual Income Tax Return, for himself for the taxable year

1992.   On the Form 1040, petitioner listed his filing status as

married filing separately, and he reported adjusted gross income

of $5,282, comprising wages, salaries, and tips of zero, taxable
                                - 4 -

interest of $8,327, dividends of $199, a capital loss of $1,500,

and an S corporation loss reported on Schedule E of $1,744.

     In 1995, respondent instituted a criminal investigation

regarding petitioner’s tax liability for 1992.   Petitioner

executed Forms 872, Consent to Extend the Time to Assess Tax,

extending the time for the assessment of taxes for 1992 until

December 31, 1999.

     By letter dated April 9, 1997, petitioner’s then counsel,

Lawrence V. Carra (Mr. Carra), wrote a letter to Iris Rothman, an

attorney assigned to respondent’s Office of District Counsel in

Westbury, New York, referring to petitioner’s tax liabilities for

1992 through 1995 and informing her that petitioner “wishes to

enter into a plea agreement.”

     On September 10, 1997, Special Agents Philip D. Hill and

Randall L. Sprance met with Mr. Carra and a certified public

accountant, Timothy Mulcahy (Mr. Mulcahy), with regard to

petitioner’s tax liability for 1992.    During the meeting, Messrs.

Carra and Mulcahy provided the special agents with a schedule

titled “PETITO CPA STATEMENT OF INCOME AND EXPENSES” indicating

that Petito Corp. had overstated its deductible expenses for

1992.   In particular, rather than incurring a net loss of $1,744,

the schedule indicated that Petito Corp. earned net income of

$44,456 during 1992.   It appears that the parties believed that

such income would be included in petitioner’s gross income as a
                                - 5 -

pass-through item from Petito Corp.

     On December 29, 1999, respondent issued to petitioner a

notice of deficiency.   In the notice, respondent determined a

deficiency of $30,490 in petitioner’s income tax for 1992, an

addition to tax under section 6654 of $1,330, and an accuracy-

related penalty for fraud under section 6663 of $22,868.   The

deficiency was attributable in part to respondent’s determination

that petitioner failed to report his share of income from Petito

Corp.

     Petitioner filed a timely petition contesting the notice of

deficiency described above.    After respondent filed an answer to

the petition, petitioner filed a motion to dismiss the case on a

variety of grounds, including allegations that the notice of

deficiency was frivolous and respondent’s agents conducted the

audit in a negligent manner.   Petitioner’s motion to dismiss was

denied.

     Petitioner subsequently filed a motion for reconsideration

alleging that the notice of deficiency was invalid on the ground

that Petito Corp. was a subchapter S corporation, and, therefore,

respondent was obliged under sections 6241-6245 of the unified

subchapter S corporation audit and litigation procedures to issue

a final notice of S corporation administrative adjustment (FSAA)

to Petito Corp. before issuing a notice of deficiency to

petitioner.   Petitioner asserted that Petito Corp. made a valid
                               - 6 -

election on its 1986 Form 1120S to invoke the unified audit and

litigation procedures.   See sec. 301.6241-1T(c)(2)(v)(B),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 3001 (Jan. 30,

1987).

     Respondent opposed petitioner’s motion to dismiss on the

grounds that:   (1) Petitioner failed to produce a copy of the

Form 1120S that Petito Corp. purportedly filed for 1986, and (2)

the Form 1120S that Petito Corp. submitted for 1992 did not

include an election that the corporation would be subject to the

unified S corporation audit and litigation procedures.

     In the meantime, on August 31, 2000, petitioner was indicted

in the U.S. District Court for the Eastern District of New York

and charged with one count of filing a false or fraudulent tax

return.   United States v. Petito, No. CR-00-924.

     Petitioner’s motion to reconsider was called for hearing at

the Court’s motions session in Washington, D.C.     Following the

hearing, the parties filed with the Court a stipulation including

as an exhibit a copy of the Form 1120S that Petito Corp.

purportedly filed for 1986.   On the basis of the record

presented, we denied petitioner’s motion for reconsideration.

See Petito v. Commissioner, T.C. Memo. 2000-363.     In particular,

we concluded that petitioner had failed to prove that Petito

Corp. made an election to bring itself within the unified

subchapter S corporation audit and litigation procedures.     As a
                                 - 7 -

result, we held that respondent was not obliged to issue an FSAA

to Petito Corp. before issuing a notice of deficiency to

petitioner.

     On January 2, 2001, petitioner moved the Court to reconsider

its opinion in Petito v. Commissioner, supra.    Petitioner averred

that he had obtained information from respondent (in a phone

conversation with an IRS customer service employee) that, despite

Petito Corp.’s submission of Forms 1120S for the years 1990,

1991, and 1992, respondent had always treated Petito Corp. as a

regular or C corporation.   Petitioner asserted that the notice of

deficiency issued to him should be considered invalid inasmuch as

the adjustments therein should have been determined against

Petito Corp. as opposed to him.    Respondent filed an objection to

petitioner’s motion for reconsideration asserting that Petito

Corp.’s status as an S corporation or a C corporation did not

affect the validity of the notice of deficiency issued to

petitioner.

     Petitioner’s motion for reconsideration was called for

hearing in New York, New York.    During the hearing, counsel for

respondent conceded that respondent’s records indicated that,

despite Petito Corp.’s practice of submitting Forms 1120S,

respondent had treated Petito Corp. as a C corporation.    The

Court received the testimony of David Messecca, the revenue agent

that prepared the notice of deficiency in question.   Revenue
                               - 8 -

Agent Messecca testified that he prepared the notice of

deficiency as directed by Special Agent Hill using the schedule

prepared by Mr. Mulcahy and the tax returns filed by petitioner

and Petito Corp. for 1992.   On the record presented, the Court

denied petitioner’s motion for reconsideration on the ground

that, although the notice of deficiency may have been incorrect,

it was not invalid for the purpose of invoking the Court’s

jurisdiction.

     On September 28, 2001, the District Court granted the

Government’s motion to dismiss the indictment filed against

petitioner.

     On November 16, 2001, respondent filed with the Court a

status report stating that respondent would concede the instant

case.   On February 21, 2002, the parties filed a stipulation of

settled issues stating that petitioner is not liable for any

deficiency, addition to tax, or penalty, nor is petitioner

entitled to an overpayment for the taxable year 1992.

                             Discussion

     We apply section 7430 as amended by Congress in the Internal

Revenue Service Restructuring and Reform Act of 1998, Pub. L.

105-206, sec. 3101, 112 Stat. 685, 727.

     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
                                - 9 -

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).    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.      Sec.

7430(a) and (b)(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).    A taxpayer does not qualify as the

prevailing party if the Commissioner can establish that his

position in the court and administrative proceedings was

substantially justified.    Sec. 7430(c)(4)(B)(i).
                                 - 10 -

A.   Substantial Justification

      The Commissioner’s position is substantially justified if,

on the basis of 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]

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
                               - 11 -

and circumstances at the time 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

Cir. 1991); Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir.

1988), affg. 89 T.C. 79 (1987); 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
                               - 12 -

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 litigation

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

More specifically, respondent’s position was that petitioner had

failed to report his allocable share of income from Petito Corp.

     Considering all the facts and circumstances, we conclude

that respondent’s position in this matter was not substantially

justified.   Respondent determined in the notice of deficiency and

maintained in his answer that petitioner failed to report the

flowthrough income from Petito Corp.    The determination in the

notice of deficiency is inconsistent with the treatment by

respondent of Petito Corp. as a C corporation as revealed by

Internal Revenue Service internal documents.    Throughout this

proceeding respondent maintained that petitioner understated

income on his individual return as a result of a failure to

report income that flowed through Petito Corp., an S corporation.

This was the position taken in the notice of deficiency as well

as in this proceeding.   Yet respondent’s own internal records

reflected that respondent treated Petito Corp. as a C corporation

despite the filing of Forms 1120S by the corporation for the
                              - 13 -

years 1990, 1991 and 1992.   It was only after the Court’s opinion

in Petito v. Commissioner, T.C. Memo. 2000-363, on petitioner’s

motion for reconsideration, that petitioner and respondent’s

counsel apparently became aware that in fact the IRS had treated

Petito Corp. as a C corporation in its internal records.    It was

at this point that respondent conceded all adjustments in this

case, recognizing that his determination and position were

inconsistent with his own administrative records.3

      Respondent failed to explain to the Court why he proceeded

as he did in this case and why no one in the IRS discovered at

some earlier time that respondent’s determination in the notice

of deficiency and position taken in this litigation were

inconsistent with respondent’s internal records.     Considering the

ease with which respondent could have determined Petito Corp.’s

correct status, it was unreasonable for respondent to issue the

disputed notice of deficiency to petitioner and to litigate this

case.

B.   Unreasonable Protraction of the Proceedings

      Respondent contends that petitioner should not be awarded



      3
        Respondent indicated that consistent treatment of Petito
Corp. with the internal documents would require respondent to
proceed directly against the corporation. Respondent also
acknowledged that the normal 3-year period of limitations under
sec. 6501(a) for making an assessment against Petito Corp. has
expired.
                                - 14 -

administrative or litigation costs to the extent that petitioner

unreasonably protracted the proceedings in this case.     Respondent

points primarily to the number and length of the motions that

petitioner filed with the Court.

      Although most of petitioner’s submissions to the Court were

verbose, we note that petitioner is not a lawyer and he was

acting pro se in this matter.    Considering all the circumstances,

we reject the assertion that petitioner unreasonably protracted

the proceedings within the meaning of section 7430(b)(3).     See,

e.g., Mearkle v. Commissioner, 90 T.C. 1256 (1988).

C.   Administrative and Litigation Costs Associated With Criminal
     Proceedings

      Respondent contends that petitioner is not entitled to

administrative or litigation costs associated with the criminal

investigation and petitioner’s subsequent indictment.     We agree.

      Section 7430 permits an award of reasonable administrative

costs incurred in connection with an administrative proceeding

within the IRS and reasonable litigation costs incurred in

connection with a court proceeding.      Section 7430(c)(6) defines

the term “court proceeding” to mean any civil action.

Accordingly, petitioner is barred in this action from claiming

litigation costs associated with the criminal proceedings brought

against him.   Similarly, the flush language of section 7430(c)(2)

limits the term “reasonable administrative costs” to costs

incurred on or after the earlier of the taxpayer’s receipt of a
                                - 15 -

notice of decision from the Commissioner’s Appeals Office, the

date of a notice of deficiency, or the date the first letter of a

proposed deficiency is sent.    Inasmuch as respondent did not

issue to petitioner either an Appeals Office notice of decision

or a letter of proposed deficiency, petitioner’s claim for

administrative costs is limited to costs incurred after December

29, 1999–-the date of the notice of deficiency.

D.   Reasonable Administrative and Litigation Costs

      We now decide whether the amounts claimed by petitioner for

administrative and litigation costs are reasonable, and if not,

what portion of the amounts claimed should be awarded under

section 7430.    Petitioner is requesting $10,500 in attorney’s

fees and $4,200 in accountant’s fees paid to Mr. Carra and Mr.

Mulcahy, respectively; $20,000 and $2,500 in attorney’s fees paid

to Fred Schwartz (Mr. Schwartz) and Richard Fish (Mr. Fish),

respectively; pro se/lost business opportunities of $40,800;

travel expenses of $3,000; telephone, copying, office supplies,

and equipment expenses of $5,500; and punitive damages of $9

million.    Respondent objects to the reasonableness and amounts of

the alleged fees and expenses.

      1.   Attorney’s and Accountant’s Fees

            a.   Mr. Carra/Mr. Mulcahy

      The record shows that Mr. Carra provided legal services and

Mr. Mulcahy provided accounting services to petitioner with
                                - 16 -

regard to the criminal investigation and related proceedings.

Consistent with our discussion of this point above, we conclude

that petitioner is not entitled to an award under section 7430

for such attorney’s or accountant’s fees.

            b.   Mr. Schwartz/Mr. Fish

       The record shows that Mr. Schwartz and Mr. Fish provided

legal services to petitioner with regard to both the criminal

proceedings and petitioner’s Tax Court case.    Although the record

is not a model of clarity, we conclude that Mr. Schwartz and Mr.

Fish spent a total of 24 hours and 2 hours, respectively,

providing legal services to petitioner with regard to his Tax

Court case.

       Section 7430(c)(1)(B)(iii) and the flush language therein

provide that reasonable attorney’s fees shall not exceed a fixed

hourly rate (subject to an annual cost of living adjustment)

unless the Court determines that a special factor justifies a

higher rate.     During the period in question, the adjusted hourly

rate for attorney’s fees under section 7430(c)(1)(B)(iii) was

fixed at $140 per hour.    See Rev. Proc. 2001-13, 2001-1 C.B. 337,

341.

       Petitioner has not identified, to the Court’s satisfaction,

any special factor justifying an hourly rate greater than $140

for the services provided by Messrs. Schwartz and Fish.
                              - 17 -

Consequently, petitioner is entitled to an award in this matter

of $3,640 for reasonable attorney’s fees (26 hours x $140 per

hour).

     2.   Pro Se Expenses/Opportunity Costs

     Petitioner is not entitled to recover costs for the value of

his pro se services.   We have held that a pro se attorney may not

recover fees for the value of his own services because lost

opportunity costs are not fees paid or incurred for the services

of an attorney within the meaning of section 7430.     Frisch v.

Commissioner, 87 T.C. 838, 844-846 (1986).    Thus, the $40,800

that petitioner claims for the value of the time that he spent

representing himself in this matter constitutes “opportunity

costs” which are not costs which may be awarded under section

7430.

     3.   Travel Expenses

     Mileage and parking fees incurred while traveling to and

from the various hearings in this matter are not expenses which

fall within the purview of section 7430.    See Mason v.

Commissioner, T.C. Memo. 1998-400.     Accordingly, petitioner is

not entitled to an award for travel expenses.

     4.   Miscellaneous Expenses

     Although telephone, copying, and office supply expenses may

be reimbursable administrative or litigation costs under section

7430, see Schaefer v. Commissioner, T.C. Memo. 1991-426,
                                - 18 -

petitioner failed to submit any detailed records to support his

claim that he incurred costs of $5,500 for such items.

Nevertheless, because it is obvious that petitioner incurred some

miscellaneous expenses, we will allow a recovery of $500 for

these items, bearing heavily upon petitioner for his failure to

itemize and substantiate his costs.      See O'Bryon v. Commissioner,

T.C. Memo. 2000-379 (applying the doctrine of Cohan v.

Commissioner, 39 F.2d 540, 544 (2d Cir. 1930), to an award of

costs under section 7430); see also Malamed v. Commissioner, T.C.

Memo. 1993-1.

     5.   Punitive Damages

     Petitioner claims that he is entitled to an award of $9

million in punitive damages attributable to the reckless conduct

of respondent’s employees in this case.     Petitioner cites the

“Taxpayer Bill of Rights” as authority for an award of up to $1

million for each instance in which an IRS employee intentionally

disregards a provision of the Internal Revenue Code.

     Section 7433 provides for civil damages for certain

unauthorized collection actions.    Section 7433(a) provides that a

taxpayer may bring a civil action for damages against the United

States in a U.S. District Court.    The Tax Court is not vested

with jurisdiction to consider petitioner’s claim for punitive

damages under this provision.    Accordingly, petitioner’s claim

for punitive damages is denied.
                        - 19 -

To reflect the foregoing,

                                 An appropriate order and

                            decision will be entered.
