                       T.C. Memo. 2005-106



                     UNITED STATES TAX COURT



                   SUSANNE SHAW, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 15888-03.            Filed May 11, 2005.



     Jeffrey D. Stoermer, for petitioner.

     Donald E. Edwards, for respondent.



                       MEMORANDUM OPINION


     GERBER, Chief Judge:   This matter is before us on

petitioner’s motion pursuant to Rule 231 for an award of

reasonable administrative and litigation costs under section
                               - 2 -

7430.1   In accordance with Rule 232, the parties have filed

affidavits and memoranda in support of their respective

positions.   The primary issues to be addressed are:   (1) Whether

petitioner exhausted the administrative remedies available to her

within the Internal Revenue Service as required by section

7430(b)(1) and is eligible for an award of litigation costs; (2)

whether the position of the United States in the administrative

proceeding was substantially justified so as to preclude an award

of administrative costs to petitioner under section

7430(c)(4)(B); (3) whether the position of the United States in

this Tax Court proceeding was substantially justified so as to

preclude an award of litigation costs to petitioner under section

7430(c)(4)(B); and (4) in the event that petitioner is determined

to be entitled to recover administrative and/or litigation costs,

whether she is entitled to recover, as part of her litigation

costs, any additional expense she incurs in pursuing this motion.

Background

     At the time that she filed her petition, petitioner resided

in Tulsa, Oklahoma.   On the Federal income tax return that she

filed for 2002, petitioner claimed that she was entitled to head

of household filing status and a $4,522 refund.   Among other

things on her 2002 return, petitioner claimed (1) dependency


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

exemptions for her two children, Brent Shaw (Brent) and Ronald

Shaw (Ronald), (2) an earned income tax credit of $3,075, and (3)

a child tax credit of $821.

       On April 4, 2003, respondent’s Compliance Center in Austin,

Texas, mailed a 30-day letter to petitioner proposing to disallow

her:    (1) Head of household filing status and instead to treat

her as a single filer; (2) dependency exemptions for her two

children, Brent and Ronald; (3) earned income tax credit; and (4)

child care tax credit.    The 30-day letter included an address and

telephone number to contact by May 4, 2003, if petitioner did not

agree with the proposed changes to her 2002 return.

       Shortly after she received the April 4, 2003, 30-day letter,

petitioner retained Jeffrey D. Stoermer (petitioner’s counsel) to

represent her in the above matter concerning her claimed 2002 tax

refund.    Petitioner did not respond to the 30-day letter.

       On June 13, 2003, respondent issued to petitioner a notice

of deficiency for 2002 in which respondent determined an income

tax deficiency of $5,227.    Among other things, respondent

determined that petitioner should use a filing status of single

and disallowed her earned income credit, child care credit, and

claimed exemptions for her two children.
                                 - 4 -

     On September 11, 2003, petitioner filed her Tax Court

petition2 in this case seeking review of the notice of deficiency

that was issued to her for 2002.    At no time during the period

from her receipt of the April 4, 2003, 30-day letter through

September 11, 2003, when she filed her petition, did petitioner

request an Appeals Office conference.

     On October 15, 2003, respondent filed his answer asserting

that his determinations in the notice of deficiency should be

sustained.

     From July 2, 2003, through September 29, 2004, petitioner

provided substantial information and documentation to the

Internal Revenue Service supporting her entitlement to head of

household filing status and to her claimed exemptions and earned

income and child care credits.

     Petitioner and her representatives advised respondent that

petitioner was married, but they maintained that in 2002

petitioner and her husband lived apart.    Initially, petitioner’s

counsel communicated only with the Taxpayer Advocate’s Office and

an examiner in respondent’s Examination Division.    Later, on

October 14, 2003, after petitioner filed her petition and

respondent prepared his answer, respondent’s counsel forwarded

the administrative file to the Appeals Office in Oklahoma City.

     2
       Though the Court filed the petition on Sept. 16, 2003, the
Sept. 11, 2003, date of the postmark on the cover in which the
petition was mailed is deemed to be the date of delivery. See
sec. 7502(a)(1).
                                 - 5 -

On October 16, 2003, an Appeals officer sent petitioner’s counsel

a letter offering petitioner an Appeals conference.    Thereafter,

petitioner’s counsel and the Appeals officer corresponded and

held telephone conferences concerning the issues and evidence in

the case.   On August 6, 2004, petitioner’s counsel sent the

Appeals officer a fax indicating he needed to gather more

information and had to interview two potential witnesses before

discussing the possibility of settlement with the Appeals

officer.

     On August 9, 2004, this Court issued its notice setting this

case for trial at the trial session in Oklahoma City, Oklahoma,

beginning on January 10, 2005.    On September 7, 2004, the Appeals

officer, having received no further documentation from

petitioner’s counsel, forwarded her Appeals Transmittal and Case

Memorandum to respondent’s associate area counsel, thereby

releasing the case from the Appeals Office.     The Appeals officer

still questioned whether petitioner lived apart from her husband

for the requisite amount of time during the 2002 taxable year to

qualify for head of household filing status.3



     3
       See secs. 2(b)(1), (c), 7703(b). If petitioner and her
husband had filed jointly for 2002, their combined incomes would
have exceeded the threshold for qualifying for the earned income
credit by a married couple filing jointly with more than one
child. If petitioner’s correct filing status were married filing
separately rather than head of household, she also would not
qualify for the earned income credit for that year. See sec.
32(d).
                               - 6 -

     On September 28, 2004, respondent’s associate area counsel

reviewed the administrative file and determined that

consideration should be given to conceding all issues in the

case.   On September 29, 2004, respondent’s Appeals officer spoke

with petitioner’s counsel and learned that petitioner would be

obtaining from her husband an affidavit stating that her husband

did not live with her during the last 6 months of 2002.    On

October 4, 2004, respondent’s associate area counsel approved a

settlement memorandum recommending respondent’s full concession

of the case.   In a letter to petitioner’s counsel dated October

13, 2004, respondent notified petitioner of respondent’s decision

to concede the case.

     On December 2, 2004, after the filing of the parties’

supplemental stipulation of settlement, petitioner filed her

instant motion seeking an award of administrative and litigation

costs under section 7430.   In her motion, petitioner seeks to

recover certain fees and costs that she incurred from April 10,

2003, through November 24, 2004, plus any additional expenses

that she might incur in pursuing that motion.   From April 10,

2003, through November 24, 2004, petitioner incurred the

following fees and costs:
                                - 7 -

          Type of Fees and Costs            Total

             Attorney’s fees              $4,770.00
             Paralegal’s fees              1,770.00
             Miscellaneous costs:
               Fax                             7.80
               Photocopies                    27.20
               Postage and express mail       34.07
               Long distance                  30.00
               Filing fee                     60.00
                                             159.07
                Total                      6,699.07

Of the $4,770 in attorney’s fees and $1,770 in paralegal’s fees,

$1,623 covered work done from April 10 through September 11,

2003, when petitioner filed her Tax Court petition.   Of the

$1,623, $546 may have related to the preparation and filing of

the petition.

Discussion

     Petitioner seeks to recover under section 7430

administrative and litigation costs that she incurred after

respondent’s April 4, 2003, 30-day letter was mailed to her.

     Respondent acknowledges:   (1) Petitioner substantially

prevailed both with respect to the amounts in controversy and

with respect to the most significant issues presented; (2)

petitioner meets the net worth requirements provided by law; (3)

petitioner has not unreasonably protracted the administrative and

Court proceedings; and (4) the specified costs that petitioner

claims are reasonable in amount within section 7430(a).
                               - 8 -

      In opposing petitioner’s recovery of administrative and

litigation costs, respondent primarily contends, however:   (1)

Because petitioner did not request and participate in an Appeals

Office conference before filing her Tax Court petition, she

failed to exhaust her administrative remedies and is precluded

from recovering litigation costs under section 7430(b)(1); (2)

the position of the United States in the administrative

proceeding was substantially justified so that petitioner was not

a prevailing party in that proceeding and is not entitled to

recover administrative costs under section 7430(a)(1) and

(c)(4)(B); and (3) the position of the United States in this

judicial proceeding was substantially justified so that

petitioner was not a prevailing party in this proceeding and is

not entitled to recover litigation costs under section 7430(a)(2)

and (c)(4)(B).

      Except as provided in section 7430(c)(4)(B), petitioner must

show that she meets each of the requirements of section 7430.

See Rule 232(e).

I.   Exhaustion of Administrative Remedies

      Section 7430(b)(1) requires that a taxpayer take advantage

of all “available” administrative remedies to be eligible for an

award of litigation costs.   Haas & Associates Accountancy Corp.

v. Commissioner, 117 T.C. 48, 57 (2001), affd. 55 Fed. Appx. 476

(9th Cir. 2003); see H. Rept. 97-404, at 13 (1982) (explaining
                              - 9 -

that this statutory requirement is intended to preserve the role

that the administrative appeals process plays in the resolution

of tax disputes by requiring taxpayers to pursue such remedies

before litigation).

     A taxpayer generally is not regarded as having exhausted

available administrative remedies unless (1) before filing a Tax

Court petition, the taxpayer participates in an Appeals Office

conference, or (2) if no Appeals Office conference is granted,

the taxpayer, before the issuance of a notice of deficiency in

the case of a Tax Court petition, (a) requests an Appeals Office

conference and (b) files a written protest if a written protest

is required to obtain an Appeals Office conference.   Sec.

301.7430-1(a) and (b)(1), Proced. & Admin. Regs.; see Rogers v.

Commissioner, T.C. Memo. 1987-374 (noting that before the

issuance of a notice of deficiency, the Internal Revenue Service

is seeking facts to decide whether it should determine a tax

deficiency and thereby force a taxpayer to incur litigation costs

or pay the determined tax; noting further that the regulations

are designed to require a taxpayer to either disclose information

needed by the Internal Revenue Service to make its decision or

forgo recovery of the taxpayer’s litigation costs).   Though not

applicable here, certain limited exceptions apply to relieve

taxpayers of the requirement that they either participate in or

request an Appeals Office conference in order to be treated as
                                - 10 -

having exhausted available administrative remedies.    Sec.

301.7430-1(f) and (g), Examples (4) and (5), Proced. & Admin.

Regs.; see also Kaufman v. Egger, 758 F.2d 1, 3 (1st Cir. 1985);

Burke v. Commissioner, T.C. Memo. 1997-127.

     Petitioner failed to request an Appeals Office conference

before respondent’s issuance of the notice of deficiency, even

though the April 4, 2003, 30-day letter advised petitioner of her

right to file an administrative appeal.    Indeed, petitioner did

not commence dealing with the Appeals Office until well after she

filed her Tax Court petition.    Accordingly, we hold that

petitioner failed to exhaust her available administrative

remedies as required by section 7430(b)(1) and is ineligible for

an award of reasonable litigation costs under section

7430(a)(2).4   See Haas & Associates Accountancy Corp. v.

Commissioner, supra at 57-59; Roginiel v. Commissioner, T.C.

Memo. 2002-270; Swanagan v. Commissioner, T.C. Memo. 2000-294.

In light of this holding, for the purposes of deciding whether to

award petitioner reasonable litigation costs, we need not decide

whether the position of the United States in this proceeding was

substantially justified so that petitioner would not be treated

as the prevailing party.



     4
       Petitioner’s litigation costs are those incurred (1) in
connection with the preparation and filing of her Tax Court
petition and (2) after the filing of the petition. See sec.
301.7430-4(c)(3) and (4), Example (2), Proced. & Admin. Regs.
                                - 11 -

II.   Reasonableness of the Position of the United States in the
      Administrative Proceeding With Respect to Administrative
      Costs

      As previously discussed, respondent contends that petitioner

does not qualify for an award of reasonable administrative costs

because the position of the United States in the administrative

proceeding was substantially justified.     A taxpayer is not

treated as a prevailing party if the Commissioner can establish

that the Commissioner’s position in the administrative proceeding

was substantially justified.    Sec. 7430(c)(4)(B); Rule 232(e).

      We must identify the point at which the United States is

first considered to have taken a position in the administrative

proceeding, and then decide whether that position from that point

forward was substantially justified.     For purposes of the

administrative proceeding in this case, respondent’s position is

that which was articulated in the notice of deficiency issued to

petitioner on June 13, 2003, as the Appeals Office never

considered petitioner’s entitlement to her claimed 2002 refund

before the issuance of the notice of deficiency.     See sec.

7430(c)(7)(B); Fla. Country Clubs, Inc. v. Commissioner, 122 T.C.

73, 85-87 (2004), affd.        F.3d      (11th Cir., Mar. 31, 2005);

Maggie Management Co. v. Commissioner, 108 T.C. 430, 442 (1997);

sec. 301.7430-5(b), Proced. & Admin. Regs.
                              - 12 -

     A position in the notice of deficiency is substantially

justified if it is “justified to a degree that could satisfy a

reasonable person” and has a “reasonable basis in both law and

fact.”   Pierce v. Underwood, 487 U.S. 552, 565 (1988)

(interpreting similar language in the Equal Access to Justice

Act, 28 U.S.C. sec. 2412 (1988)); Swanson v. Commissioner, 106

T.C. 76, 86 (1996).   A reasonable basis exists if legal precedent

substantially supports the Commissioner’s position given the

facts available to the Commissioner.     Coastal Petroleum Refiners,

Inc. v. Commissioner, 94 T.C. 685, 688 (1990).    In deciding

whether the Commissioner acted reasonably, this Court must

“consider the basis for * * * [the Commissioner’s] legal position

and the manner in which the position was maintained.”     Wasie v.

Commissioner, 86 T.C. 962, 969 (1986).

     The fact that the Commissioner eventually loses or concedes

the case is not conclusive as to whether the taxpayer is entitled

to an award of administrative costs.     Coastal Petroleum Refiners,

Inc. v. Commissioner, supra at 689; Wasie v. Commissioner, supra

at 968-969.   It remains, however, a relevant factor to consider

in deciding the degree of the Commissioner’s justification.

Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir.

1991) (award of litigation costs in the Court of Appeals), affg.

T.C. Memo. 1990-123; Swanson v. Commissioner, supra at 94.
                              - 13 -

     As of June 13, 2003, when respondent issued the notice of

deficiency, petitioner had not responded to the April 4, 2003,

30-day letter or communicated in any way with the examiner,

except perhaps to make one telephone call to the Taxpayer

Advocate’s Office.   Although petitioner eventually provided

substantial documentation and information (much of which earlier

had been requested in the 30-day letter) supporting her claimed

filing status, personal exemptions for her two children, earned

income credit, and child care credit, virtually all of this

documentation and information was provided to the Internal

Revenue Service well after the notice of deficiency was issued on

June 13, 2003.   It was not until July 2, 2003, that petitioner

first began providing documents to the examiner.   As of September

11, 2003, when petitioner filed her petition, she had still

failed to establish her entitlement to head of household filing

status and the earned income credit.   Indeed, not until much

later, on September 29, 2004, did petitioner inform respondent

that she would be obtaining an affidavit from her husband that he

did not live with her during the last 6 months of 2002.   See

supra p. 6.   We find that the position respondent took in the

notice of deficiency and maintained through September 11, 2003,
                                - 14 -

was substantially justified.5    Coastal Petroleum Refiners, Inc.

v. Commissioner, supra at 688-689; see also Corkrey v.

Commissioner, 115 T.C. 366, 375 n.5 (2000) (citing McDaniel v.

Commissioner, T.C. Memo. 1993-148, for the propositions that (1)

whenever there is a factual determination, the Commissioner is

not obliged to concede a case until the Commissioner receives the

necessary documentation to prove the taxpayer’s contentions, and

(2) the Commissioner must be given reasonable time to analyze the

documents and make adjustments after receiving the documents).

     From June 13, 2003 (the date of the notice of deficiency),

through September 11, 2003 (the date upon which petitioner filed

her petition), respondent’s position with respect to all issues

in the administrative proceeding was substantially justified.

See sec. 7430(c)(4)(B); sec. 301.7430-5(c)(1), Proced. & Admin.

Regs.    As a result, we hold that petitioner is not eligible to

receive an award of reasonable administrative costs under section

7430(a)(1).




     5
       Costs petitioner incurred (1) in connection with the
preparation and filing of her Tax Court petition and (2) after
the Sept. 11, 2003, filing of the petition would be litigation
costs rather than administrative costs. Sec. 301.7430-4(c)(3)
and (4), Example (2), Proced. & Admin. Regs. As we have
previously held, petitioner is ineligible for an award of
reasonable litigation costs because of her failure to exhaust
administrative remedies as required by sec. 7430(b)(1).
                               - 15 -

III.   Additional Expenses in Pursuing This Motion

       In light of our above holdings that petitioner is not

eligible to recover reasonable administrative and litigation

costs under section 7430, we hold that petitioner is not entitled

to recover, as part of her litigation costs, additional expenses

(if any) she incurred in pursuing this motion.

       To reflect the foregoing,


                                        An appropriate order and

                                   decision will be entered.
