                        T.C. Memo. 2008-90



                      UNITED STATES TAX COURT



                CHARLES B. COVERT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12751-05.               Filed April 8, 2008.



     George W. Connelly, Jr., for petitioner.

     Susan K. Greene, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This case is before the Court on

petitioner’s motion for litigation costs including attorney’s

fees pursuant to section 74301 and Rule 231.




     1
      All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure, unless otherwise indicated.
                                  -2-

     We are asked to decide whether petitioner is entitled to

recover litigation costs.    We hold that he is not.

                            Background

     Respondent issued petitioner a notice of proposed deficiency

(30-day letter) proposing deficiencies in his income tax for

2001, 2002, and 2003 regarding whether petitioner, a

psychiatrist, operated his ranch for a profit under section 183.

The notice of proposed deficiency also advised petitioner of his

opportunity for review by the Appeals Office and informed

petitioner that his rights in court, including, for example, the

right to litigation costs, depended on his full participation in

the administrative consideration of his case, including Appeals

Office review.

     Petitioner met with his counsel, David Allie (Mr. Allie),

before the 30-day period expired, and the two decided to forego a

hearing with the Appeals Office and await the deficiency notice

to petition the Tax Court.    Petitioner and Mr. Allie believed

this course would avoid a protracted battle with respondent and

reasoned that a hearing would only delay a resolution of the

case.   Accordingly, petitioner did not request an Appeals Office

conference.   Neither petitioner nor his counsel met with an

Appeals officer for an Appeals Office conference before the

petition was filed.
                                 -3-

     Respondent sent petitioner a deficiency notice in which he

determined a $184,551 deficiency for 2001, a $163,532 deficiency

for 2002, and a $150,638 deficiency for 2003.    Petitioner filed a

petition with this Court.    The sole issue for each year was

whether petitioner engaged in his ranching activity for profit as

defined by section 183.

     Mr. Allie met with the Appeals officer assigned to

petitioner’s case several months after the petition was filed.

Mr. Allie believed that the Appeals officer was not interested in

settling the case under terms acceptable to petitioner.

     Petitioner retained new counsel, George Connelly, before the

trial.   After trial, respondent conceded all issues in the

deficiency notice, and the parties filed a Stipulation of Settled

Issues resulting in no deficiencies due from petitioner for any

of the years at issue.    Petitioner now seeks to recover

$223,457.68 in litigation costs from respondent, including his

attorney’s fees.

                             Discussion

     We now address whether petitioner may recover any of the

$223,457.68 in litigation costs.    The prevailing party may be

awarded reasonable litigation costs in any court proceeding by or

against the United States.    Sec. 7430(a)(2).   If the Government

establishes that its position was substantially justified, the

moving party will not be treated as having prevailed.    Sec.
                                 -4-

7430(c)(4)(B).   A prevailing party must establish, in order to

obtain such an award, that (1) the party has exhausted the

administrative remedies available; (2) the party has

substantially prevailed in the controversy; (3) the party

satisfies certain net worth requirements; (4) the party has not

unreasonably protracted the proceedings; and (5) the amount of

costs is reasonable.   Sec. 7430(b) and (c).    We may grant

petitioner’s motion if he meets all of the statutory requirements

for an award of litigation costs.      See sec. 7430(b) and (c); see

also Rule 232(e); Swanagan v. Commissioner, T.C. Memo. 2000-294.

     A threshold requirement exists for the recovery of

litigations costs.   The taxpayer must have exhausted the

available administrative remedies before filing a petition.     Sec.

7430(b)(1); Burke v. Commissioner, T.C. Memo. 1997-127; sec.

301.7430-1(a), Proced. & Admin. Regs.      A taxpayer exhausts his or

her administrative remedies where an Appeals Office conference is

available only if the taxpayer participated in such a conference

before filing a petition.    Burke v. Commissioner, supra; sec.

301.7430-1(b)(1), (g), Example (11), Proced. & Admin. Regs.      None

of the limited exceptions applies here to relieve petitioner of

the requirement that he participate in an Appeals Office

conference to be treated as having exhausted available

administrative remedies.    See Shaw v. Commissioner, T.C. Memo.

2005-106.
                                -5-
     “The Appeals Mission is to resolve tax controversies,

without litigation.”   4 Administration, Internal Revenue Manual

(CCH), pt. 8.1.1.1(1), at 27,003 (Oct. 23, 2007).   The Internal

Revenue Service is seeking facts during the Appeals phase to

decide whether it should determine a deficiency and thereby force

a taxpayer to incur litigation costs or pay the determined tax.

See, e.g., Shaw v. Commissioner, supra.   This Court has

previously warned taxpayers and their counsel about waiving the

opportunity for an Appeals Office conference where a taxpayer

hopes to comply with the exhaustion-of-administrative-remedies

requirement to preserve a right to recover litigation costs.

Haas & Associates Accountancy Corp. v. Commissioner, 117 T.C. 48,

62 (2001), affd. 55 Fed. Appx. 476 (9th Cir. 2003).   This Court

seeks to preserve the role that the administrative appeal process

plays in resolving tax disputes by requiring taxpayers to

participate in an Appeals Office conference before litigation.

See Burke v. Commissioner, supra (citing H. Rept. 97-404, at 13

(1981) and Technical Explanation of Committee Amendment, 127

Cong. Rec. 15594 (daily ed. Dec. 16, 1981)).

     Respondent issued petitioner the 30-day letter, providing

him with an opportunity for an Appeals Office conference.

Petitioner’s affidavit explains that because he believed a

meeting with the Appeals officer would delay resolution of his

case, he did not pursue a conference before filing a petition in
                                 -6-
this Court.   Petitioner’s counsel argues that a conference would

have been futile.   Mr. Allie’s affidavit states that when he met

with the Appeals officer after filing the petition, he understood

that the Appeals Office was determined to take the case to trial

and settlement was not a possibility.     As a result, petitioner

claims that his decision to forego an Appeals Office conference

should not bar reimbursement of litigation costs.     We disagree.

     Petitioner was advised of his right to challenge

respondent’s determination in an Appeals Office conference.     He

chose not to participate in such a conference.     He was warned

that, in many instances, this meant he would have no opportunity

to recover litigation costs.

     We hold that petitioner did not exhaust his administrative

remedies by participating in an Appeals Office conference, and,

therefore, petitioner is not entitled to an award of reasonable

litigation costs.   Accordingly, we need not, nor do we, address

whether any remaining requirements of section 7430 have been

satisfied.

     To reflect the foregoing,

                                            An order will be issued

                                       denying petitioner’s motion

                                       for litigation costs, as sup-

                                       plemented, and decision will

                                       be entered for petitioner.
