                        T.C. Memo. 1997-127



                      UNITED STATES TAX COURT



         JOHN J. BURKE AND VIVIAN BURKE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18772-93.                     Filed March 11, 1997.



     Vincent R. Barrella, for petitioner Vivian Burke.

     Catherine R. Chastanet and Mark A. Ericson, for respondent.



                        MEMORANDUM OPINION


     RUWE, Judge:   In Burke v. Commissioner, T.C. Memo. 1995-608,

we sustained respondent's determination of Federal income tax

deficiencies and additions to tax for fraud, delinquent filing,

and substantial understatement against petitioner John J. Burke

for the taxable years 1985, 1986, and 1987.     We also found that
                              - 2 -

petitioner Vivian Burke did not tacitly consent to the filing of

joint Federal income tax returns and, therefore, was not jointly

and severally liable for the taxes in issue.     We now consider

petitioner1 Vivian Burke's Motion for an Award of Litigation

Costs pursuant to section 74302 and Rule 231.


                           Background3


     In May 1987, the Suffolk County District Attorney's Office

indicted John Burke on two counts of grand larceny for embezzling

more than $1.2 million in insurance premiums from U.S. Life

Insurance Co. between 1985 and 1987.     Pursuant to a plea

agreement, Mr. Burke pled guilty to Grand Larceny 4, a felony,

for his failure to remit sales taxes, which were owing from a

restaurant owned by Mr. Burke, to the New York State Department

of Taxation and Finance.




     1
      Hereinafter, all references to petitioner are to petitioner
Vivian Burke.
     2
      The petition in this case was filed on Aug. 30, 1993;
therefore, the motion has been considered under sec. 7430 as
amended by sec. 6239(a) of the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3743-3744,
effective for all civil tax proceedings commenced after Nov. 10,
1988. All Rule references are to the Tax Court Rules of Practice
and Procedure.
     3
      Neither party has requested   an evidentiary hearing
regarding the Motion for an Award   of Litigation Costs. The
relevant facts are taken from the   parties' memoranda and our
opinion in Burke v. Commissioner,   T.C. Memo. 1995-608.
                               - 3 -

      On March 29, 1991, Mr. Burke filed untimely Federal income

tax returns for 1985, 1986, and 1987.    The returns reported tax

liabilities of $34,262, $4,359, and $4,557, respectively.    The

returns also purported to be joint returns, and a signature

purporting to be that of petitioner appeared on each return.

Petitioner, individually, was not required to file a return of

her own for any of the years in issue.   At the time Mr. Burke

filed the returns, petitioner was aware of the financial and

legal problems Mr. Burke had encountered during the taxable years

in issue.   The returns in question were filed long after their

due dates, at which time petitioners were experiencing severe

marital difficulties.

     On June 21, 1991, respondent sent a Letter 904(DO) to

petitioners at their home address in Setauket, New York.    The

letter informed petitioners that their 1986 and 1987 Federal

income tax returns were under investigation and requested

information regarding a claimed theft loss and a small business

corporation (S corporation) loss, as well as copies of

petitioners' 1985 and 1988 Federal income tax returns.

     In a letter dated June 28, 1991, Kenneth S. Silver, the

accountant for two insurance agencies owned by Mr. Burke (the

Burke Insurance Agencies), provided respondent with a Form 2848

(Power of Attorney and Declaration of Representative) and

confirmed a meeting with respondent for July 31, 1991.   The power
                                   - 4 -

of attorney authorized Mr. Silver to represent both Mr. Burke and

petitioner in respondent's audit.

     Mr. Silver and respondent's examining agents met on July 31,

1991, and February 11, 1992, and had several telephone

conversations prior to May 1, 1992.        There is no evidence of any

discussion regarding the purported joint filing status of the

returns.

     During the audit process, respondent served summonses upon

various banks where petitioners had their business and personal

accounts.    Pursuant to section 7609(a)(2), respondent sent a

certified letter to the account holder(s) within 3 business days

of the issuance of the summonses to notify the account holder(s)

of the existence of the summonses.

     On May 15, 1992, respondent issued to petitioners a Letter

950 (30-day letter),4 which proposed the following adjustments:


                                           Addition to Tax
           Year       Deficiency           Sec. 6651(a)(1)

           1985        $14,752                $4,523
           1986        142,690                35,781
           1987            476                   233


Respondent disallowed deductions for losses allegedly incurred by

Ard Rhei, Inc., an S corporation owned by Mr. Burke, and

deductions for losses resulting from the alleged embezzlement of


     4
      Respondent also sent a copy of the 30-day letter to Mr.
Silver.
                                  - 5 -

funds from the Burke Insurance Agencies by several of Mr. Burke's

employees.    Respondent also determined an addition to tax for

delinquent filing of the returns in issue.

     The 30-day letter also stated as follows:


          IF YOU DO NOT AGREE and wish a conference with the
     Office of the Regional Director of Appeals, you MUST
     LET US KNOW within 30 days.

                      *   *   *    *      *   *   *

          An appeals officer, who has not examined your
     return previously, will review your case. The appeals
     office is independent of the district director and
     resolves most disputes informally and promptly.

          By going to the appeals office, you may avoid
     court costs, resolve the matter sooner, and prevent
     interest from compounding. * * *


     On May 20, 1992, respondent received another Form 2848 Power

of Attorney from Mr. Silver, which appointed Mr. Silver and

Robert Nicolai, C.P.A., as petitioners' representatives for the

taxable years 1985 through 1989.       Both petitioners had signed

this form on May 11, 1992.

     On June 16, 1992, Mr. Silver informed respondent that

petitioners would not be filing a protest.        Neither petitioners

nor Mr. Silver ever requested an Appeals Office conference with

respondent.
                                          - 6 -

       On June 11, 1993, respondent issued a notice of deficiency,

which determined deficiencies in petitioners' Federal income

taxes and additions to tax as follows:5


                                         Additions to Tax
       Year   Deficiency    Sec. 6653(b)(1) Sec. 6653(b)(2)          Sec. 6661

       1985    $38,140          $36,201           50 percent of      $5,847
                                                  the interest due
                                                  on $23,388


                                      Additions to Tax
Year   Deficiency Sec. 6651(a)(1) Sec. 6653(b)(1)(A) Sec. 6653(b)(1)(B) Sec. 6661

1986       $256,295      $34,692           $88,473         50 percent of the     $28,401
                                                           interest due on
                                                           $113,605

1987        12,973         --               12,791         50 percent of the      3,124
                                                           interest due on
                                                           $12,497


In addition to the adjustments contained in the 30-day letter,

respondent determined that Mr. Burke had failed to report

$330,615 in premium funds which he had embezzled from U.S. Life.

Respondent also determined additions to tax for delinquent

filing, fraud, and substantial understatement.                   Respondent did

not issue a second 30-day letter prior to issuance of the notice

of deficiency.

       On August 30, 1993, Attorney Michael N. Balsamo filed the

original petition in this case on behalf of both petitioners.

The petition stated in several places that the returns were

jointly filed:

       5
      In her answer, respondent asserted an increased deficiency
and additions to tax for 1986.
                                     - 7 -


          5. The facts upon which petitioners rely are as
     follows:

          (a) Petitioners filed their tax returns for the
     1985, 1986, and 1987 [taxable years] on or about March
     28, 1991.

                    *      *    *     *      *   *   *

          (d) The deficiencies herein have been asserted
     against Petitioner, Vivian Burke, for the sole reason
     that she executed joint tax returns with Petitioner,
     John J. Burke.

                    *      *    *     *      *   *   *

          (i) Petitioner, Vivian Burke, is not responsible
     for any of the tax, interest, or penalties asserted by
     the Commissioner, since she is an innocent spouse as
     defined in Section 6013(e). In support thereof,
     Petitioner Vivian Burke states as follows:

           1) A joint return was filed by Vivian Burke and
     John J. Burke for each of the years at issue herein,
     * * *

                    *      *     *    *      *   *   *

          3) At the time Petitioner, Vivian Burke, signed
     the returns at issue herein, she did not know, and had
     no reason to know that there was such alleged
     substantial understatement, * * * [Emphasis added.]


     On April 18, 1994, the parties were served with notice that

petitioners' case was scheduled for trial at the Court's

September 19, 1994, session in New York City.            On May 23, 1994,

Attorney Vincent R. Barrella entered an appearance on behalf of

petitioner Vivian Burke.       On June 29, 1994, following her initial

examination of the returns in issue, petitioner informed Mr.

Barrella that she had not signed the returns.            On July 11, 1994,
                               - 8 -

Mr. Barrella informed respondent who requested handwriting

exemplars from petitioner.   On July 26 or 27, 1994, respondent

received the report of the Internal Revenue Service Criminal

Investigation National Forensic Laboratory, which concluded that

petitioner had not signed the returns.

     On July 26, 1994, petitioner filed an amended petition,

which asserted that the signatures on the returns, purporting to

be hers, were not those of Vivian Burke.   On or about September

8, 1994, respondent conceded the addition to tax for fraud

against petitioner.

     A trial was conducted on September 27, 28, and 29, 1994.     In

Burke v. Commissioner, T.C. Memo. 1995-608, we upheld the income

tax deficiencies and additions to tax determined against Mr.

Burke in the notice of deficiency, as well as the increased

deficiencies and additions to tax asserted by respondent in her

answer.   We also concluded that petitioner Vivian Burke did not

tacitly consent to the filing of joint Federal income tax returns

and, therefore, was not jointly and severally liable for the

taxes in issue.

     On February 12, 1996, petitioner filed her Motion for An

Award of Litigation Costs.


                             Discussion


     Section 7430(a)(2) provides that a party that has prevailed

in any court proceeding against the United States may recover
                               - 9 -

reasonable litigation costs.   To obtain such an award, the

prevailing party must establish that:   (1) She has exhausted the

administrative remedies available; (2) she has "substantially

prevailed" in the controversy; (3) she satisfies certain net

worth requirements; (4) the position of the United States in the

proceeding was not substantially justified; (5) she has not

unreasonably protracted the proceedings; and (6) the amount of

the costs sought is reasonable.   Sec. 7430(b) and (c).

Petitioner bears the burden of proving that she satisfies each of

these requirements.   Rule 232(e).6

     Respondent concedes that petitioner has substantially

prevailed and that she satisfies the net worth requirements.


Exhaustion of Administrative Remedies


     The threshold requirement imposed on a taxpayer asserting a

claim pursuant to section 7430 is the exhaustion of

administrative remedies before suit is filed.   Section 301.7430-

1(b)(1), Proced. & Admin. Regs., provides that where an Appeals

Office conference is available, administrative remedies are

exhausted only if the taxpayer (1) participated7 in such a

     6
      In the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec.
701(b), 110 Stat. 1452, 1463 (1996), sec. 7430(c)(4) was amended
to require the Government to establish that its position was
substantially justified. This amendment is effective for
proceedings commenced after July 30, 1996.
     7
      A taxpayer or her representative "participates" in an
Appeals conference "if the party or qualified representative
                                                   (continued...)
                             - 10 -

conference prior to filing a petition, or (2) requested an

Appeals Office conference and the request was denied.    Cole v.

Commissioner, T.C. Memo. 1996-375.    This requirement aims "to

preserve the role that the administrative appeals process plays

in the resolution of tax disputes by requiring taxpayers to

pursue such remedies prior to litigation."   H. Rept. 97-404, at

13 (1981); see also Technical Explanation of Committee Amendment,

127 Cong. Rec. sec. 15594 (daily ed. Dec. 16, 1981).8

     In the instant case, the following facts are not in dispute:

On May 15, 1992, respondent issued to petitioners (and their

representative, Mr. Silver) a 30-day letter, which afforded

petitioners an opportunity for an Appeals conference with

respondent's Office of the Regional Director of Appeals.

However, neither petitioners nor their representative requested



     7
      (...continued)
discloses to the Appeals office all relevant information
regarding the party's tax matter to the extent such information
and its relevance were known or should have been known to the
party or qualified representative at the time of such
conference." Sec. 301.7430-1(b)(2), Proced. & Admin. Regs.
     8
      The House report also stated:

     A taxpayer who actively participates in and discloses
     all relevant information during the administrative
     stages of the case will be considered to have exhausted
     the available administrative remedies. Failure to so
     participate and disclose information may be sufficient
     grounds for determining that the taxpayer has not
     exhausted administrative remedies and, therefore, is
     ineligible for an award of litigation costs. [H. Rept.
     97-404, at 13 (1981).]

See also Minahan v. Commissioner, 88 T.C. 492, 508 (1987).
                               - 11 -

an Appeals Office conference with respondent.     Petitioner now

posits several arguments in an attempt to circumvent her failure

to proceed to Appeals.    We shall address each one in turn.

     First, petitioner argues that she did not have the

opportunity to exhaust her administrative remedies, because

respondent's determination in the 30-day letter, which afforded

petitioners the opportunity for an Appeals conference, was

"entirely different" than that contained in the notice of

deficiency.   In the notice of deficiency, respondent determined

deficiencies in petitioners' Federal income taxes that were

$149,490 greater than the deficiencies determined in the 30-day

letter.   In the notice of deficiency, respondent determined

additions to tax for delinquent filing,9 fraud,10 and substantial

understatement as well.

     Despite these additional determinations in the notice of

deficiency, the fact remains that the 30-day letter asserted

substantial Federal income tax deficiencies and additions to tax

for the years in issue against both petitioners.      These

deficiencies totaled $157,918, and the additions to tax for

delinquent filing totaled $40,537.      Petitioner was not required



     9
      In the 30-day letter, respondent determined an addition to
tax for delinquent filing for each of the years in issue. In the
notice of deficiency, respondent determined this addition to tax
for 1986 only, and this amount was less than the total amount
asserted for delinquent filing in the 30-day letter.
     10
      As an alternative to the additions to tax for fraud,
respondent determined additions to tax for negligence.
                               - 12 -

to file a Federal income tax return of her own for any year in

issue.    Any tax deficiencies attributable to her could only be

due to a determination by respondent that she had elected to file

joint returns.    Thus, when the 30-day letter was sent, the

central issues for petitioner Vivian Burke were whether she

signed the purported joint returns, and, if not, whether she

tacitly consented to their filing.11

     Second, petitioner maintains that even if she had availed

herself of the available administrative remedies, it would have

been of no consequence.    In discussing the importance of the

exhaustion of administrative remedies requirement, the report of

the House Ways and Means Committee stated that


          The committee recognizes that the exhaustion of
     remedies requirement may be inappropriate in some
     cases. For example, if a notice of deficiency is
     issued to a taxpayer in connection with an issue which
     the Internal Revenue Service has identified as one
     which it will litigate in all cases, then it would be
     inappropriate to require an administrative appeal.

     11
      These were the central and, ultimately, decisive issues,
notwithstanding that neither petitioner nor her representatives
alleged that she had not filed joint returns until Mr. Barrella
entered his appearance on petitioner's behalf after the case was
set for trial. Prior to that time, petitioner had affirmatively
alleged that she filed joint returns with Mr. Burke. Indeed,
joint return filing was a requirement for petitioner to prevail
on her claim that she was an innocent spouse. See sec.
6013(e)(1)(A). Petitioner has consistently maintained, even when
she alleged that the returns were jointly filed, that she had no
knowledge of her husband's income-producing activities. She
maintained this position even after amending her petition. The
amount of tax in question was never the focus of petitioner's
individual position. At trial, petitioner's counsel indicated
that petitioner was not interested in issues other than joint
return and innocent spouse status.
                               - 13 -

     Therefore, taxpayers are required to exhaust available
     administrative remedies unless the court determines
     that, under the circumstances of the case, such
     requirement is unnecessary. [H. Rept. 97-404, supra at
     13.]


In this case, petitioner contends that respondent's position was

"set in stone", and petitioners could have agreed to respondent's

proposed adjustments or else proceeded to trial.   We disagree.

Nothing in the record suggests that respondent would not have

considered petitioner's claims had she proceeded to Appeals in

1992 and submitted relevant information regarding the joint

return issue.12   The fact that respondent refused to concede the

joint return issue after learning 2 years later that petitioner

had not signed the returns does not persuade us to the contrary.

By then, petitioner had affirmatively alleged in her petition

that she had jointly filed the returns in question.   In light of

this, it was respondent's position that petitioner had consented

to her husband's filing of joint returns.

     Petitioner also seeks to excuse her failure to pursue

administrative remedies on the grounds that she did not learn

that respondent was seeking to hold her liable for deficiencies

until after the issuance of the notice of deficiency.   However,

petitioners received notification from respondent that she would

be conducting an examination of their Federal income tax returns.

     12
      Respondent conceded the addition to tax for fraud against
petitioner shortly after receipt of her forensic report, which
concluded that the signatures on the returns were not
petitioner's.
                               - 14 -

Petitioner signed two powers of attorney granting Mr. Silver's

accounting firm the authority to represent her for purposes of

respondent's audit.   Moreover, through her original attorney,

petitioner maintained in the petition, and until shortly before

trial in this case, that the returns were jointly filed.13     See

supra pp. 6-7.

     Petitioner's reliance on our opinion in Lomanno v.

Commissioner, T.C. Memo. 1994-426, granting the taxpayer's motion

for an award of attorney's fees and litigation costs, is

misplaced.   In Lomanno, we determined that the taxpayer had

exhausted her administrative remedies, despite the fact that no

Appeals conference was held.   However, in contrast to the instant

case, the taxpayer in Lomanno never received a 30-day letter.        As

a result, we concluded that section 301.7430-1(e), Proced. &

Admin. Regs., "would allow * * * [her] to be excepted from having

to participate in a prepetition appeals office conference."

Lomanno v. Commissioner, supra.14   In addition, we found that

     13
      Respondent is not required to question and investigate the
authenticity of every return signature. Sec. 6064 provides that
"The fact that an individual's name is signed to a return,
statement, or other document shall be prima facie evidence for
all purposes that the return, statement, or other document was
actually signed by him."
     14
      Pursuant to sec. 301.7430-1(e)(2), Proced. & Admin. Regs.,
in the case of a petition in the Tax Court, a party's
administrative remedies shall be deemed to be exhausted if:


        (i) The party did not receive a notice of proposed
     deficiency (30-day letter) prior to the issuance of the
                                                   (continued...)
                               - 15 -

prior to the filing of the petition, the taxpayer's counsel had

not turned his back on any opportunity that was afforded him to

present evidence to support the taxpayer's position.   Counsel

made both written and oral requests to meet with the

Commissioner's agents, although these were to no avail.    On these

facts, we held that the taxpayer had exhausted her available

administrative remedies.

     The instant case is also distinguishable from Phillips v.

Commissioner, 88 T.C. 529 (1987), revd. 851 F.2d 1492 (D.C. Cir.

1988).    In Phillips, the taxpayer failed to request consideration

of his case by Appeals, despite the Commissioner's issuance of a

preliminary notice informing him that he was entitled to

administrative review.   Nevertheless, we concluded that the

taxpayer had exhausted his administrative remedies, because the

issue in question did not arise until after the Commissioner had

mailed the notice of deficiency.15   Thus, there was no possible

opportunity for an administrative Appeals conference regarding

that issue.   Id. at 532.   Subsequent to the docketing of the

     14
      (...continued)
     statutory notice and the failure to receive such notice
     was not due to actions of the party * * *; and

        (ii) The party does not refuse to participate in an
     Appeals office conference while the case is in docketed
     status.
     15
       The issue concerned the validity of a joint filing status
election made on a return filed after the notice of deficiency
for the same year had been mailed. See Phillips v. Commissioner,
86 T.C. 433, 434-435 (1986), affd. 851 F.2d 1492 (D.C. Cir.
1988).
                              - 16 -

case, the taxpayer's accountant had communicated regularly with

the Commissioner's Appeals Office, and his attorney had

communicated with the Commissioner's counsel on all matters.

     In Phillips, we also found that the Commissioner's

insistence on pursuing the matter through litigation and her

refusal to consider the impact of two prior revenue rulings on

her litigating position demonstrated that any discussion of the

relevant issue that the taxpayer attempted was futile.    In

support of our conclusion, we relied upon the report of the House

Ways and Means Committee, which recognized that under

circumstances indicating an unwillingness on the part of the

Commissioner to compromise, the standard of exhaustion of

administrative remedies should be applied less strictly.       Id. at

533; see also H. Rept. 97-404, supra at 13.

     In contrast, the dispositive issue in petitioner's case has

always been the same:   whether petitioner signed the returns in

issue or tacitly consented to their filing.   In addition, we do

not find evidence of intransigence by respondent as we did in

Phillips.   In the instant case, petitioner failed to allege that

she had not filed joint returns until shortly before trial.

After concluding that petitioner had not signed the returns in

issue, respondent was confronted with the fact that petitioner

had filed joint returns with Mr. Burke for years prior and

subsequent to the years in issue and had alleged in her pleadings

that the returns for the years in issue were joint returns.      Had
                              - 17 -

petitioner and her representatives originally come forward at the

administrative Appeals conference, offered in May 1992, with the

relevant facts to demonstrate that she had not filed joint

returns for the years in issue, we have every reason to believe

that her case could have been resolved without the need for this

litigation.16

     We hold that petitioner did not exhaust her administrative

remedies, since she failed to request an Appeals office

conference which was offered by respondent in the 30-day letter.

Kenlin Indus., Inc. v. United States, 927 F.2d 782, 788 (4th Cir.

1991); see also Minahan v. Commissioner, 88 T.C. 492, 508 (1987).

Therefore, petitioner is not entitled to an award of reasonable

litigation costs.   As a result of our disposition, we express no

opinion as to whether any of the remaining requirements of

section 7430 have been satisfied.


                                         An appropriate order

                                    will be issued.




     16
      Even an Appeals conference regarding petitioner's initial
position that she was an innocent spouse would have had to
explore the issues of whether the 1985, 1986, and 1987 returns
were joint returns, petitioner's involvement in their
preparation, and her involvement in and knowledge of the
underlying transactions.
