                        T.C. Memo. 1996-44



                      UNITED STATES TAX COURT



     DANNY K. ELDRIDGE AND ELMA J. ELDRIDGE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28087-92.            Filed February 8, 1996.



     Richard H. Tye, for petitioners.

     Gerald L. Brantley, for respondent.



                        MEMORANDUM OPINION


     PARR, Judge:   This matter is before the Court on

petitioners' motion filed September 18, 1995, and supplemental

motion filed November 6, 1995, for litigation costs pursuant to

Rules 230 through 2321 and section 7430.2    In our opinion of

1
     All Rule references are to the Tax Court Rules of Practice
                                                   (continued...)
                               - 2 -

August 14, 1995, we decided that petitioners engaged in their

cattle-raising activity for profit and that certain depreciation

deductions claimed by petitioners were allowable for tax years

1987, 1988, and 1989.   In addition, we found that petitioners

were liable for negligence and substantial understatement

additions to tax to the extent provided in our opinion.    Finally,

we held that petitioners were not liable for the increased rate

of interest due on a substantial understatement attributable to a

tax-motivated transaction under section 6621(c).     Eldridge v.

Commissioner, T.C. Memo. 1995-384.     Our findings of fact and

opinion in the underlying case are incorporated by this

reference.

     Section 7430 provides, inter alia, that, in any

administrative or court proceeding brought by or against the

United States in connection with the determination, collection,

or refund of any tax, interest, or penalty, the prevailing party

may be awarded reasonable administrative costs and litigation


1
 (...continued)
and Procedure, and all section references are to the Internal
Revenue Code unless otherwise indicated.
2
     Although petitioners moved the Court for an award of both
litigation and administrative costs, the statement of costs
claimed by petitioners, which was attached to the motion as
required by Rule 231(b)(8), indicates that the costs were
incurred in connection with the filing of the petition and
thereafter. Accordingly, we treat petitioners' motion as a
motion solely for litigation costs. See Huffman v. Commissioner,
T.C. Memo. 1991-144, affd. in part, revd. in part, and remanded
978 F.2d 1139 (9th Cir. 1992).
                                - 3 -

costs incurred in connection with the administrative and court

proceeding.   Sec. 7430(a); Huffman v. Commissioner, 978 F.2d 1139

(9th Cir. 1992), affg. in part, revg. in part, and remanding T.C.

Memo. 1991-144; Gustafson v. Commissioner, 97 T.C. 85, 87-88

(1991).   In order to be entitled to an award of reasonable

administrative or litigation costs, the moving party must

establish the following: (1) That the party is a "prevailing

party" within the meaning of section 7430(c)(4)(A); (2) that the

party did not unreasonably protract either the administrative or

court proceeding; and (3) that the administrative or litigation

costs claimed by the party are reasonable within the meaning of

section 7430(c)(1) and (2).    Powers v. Commissioner, 100 T.C.

457, 469 (1993), affd. in part, revd. in part, and remanded 43

F.3d 172 (5th Cir. 1995).   With respect to claims for litigation

costs, taxpayers also are required to show that administrative

remedies were exhausted.    Id. at 469.

     A taxpayer is a "prevailing party" in a court proceeding

only if it is established that: (1) The position of the United

States in the proceeding was not substantially justified; (2) the

taxpayer substantially prevailed with respect to the amount in

controversy or with respect to the most significant issue

presented; and (3) the taxpayer met the net worth requirements of

28 U.S.C. section 2412(d)(2)(B)(1988).    Sec. 7430(c)(4)(A); Comer

Family Equity Pure Trust v. Commissioner, 958 F.2d 136, 139 (6th

Cir. 1992), affg. per curiam T.C. Memo. 1990-316; Powers v.
                                - 4 -

Commissioner, supra.    The term "position of the United States" in

this context, see supra note 2, means the position taken by the

United States in a judicial proceeding.     Sec. 7430(c)(7)(A).

     Respondent concedes that petitioners substantially prevailed

with respect to the amount in controversy and that petitioners

meet the net worth requirement.    Respondent also concedes that

petitioners exhausted their administrative remedies and that they

have not unreasonably protracted this proceeding.     However,

respondent argues that her position was substantially justified.

If that question is resolved in favor of petitioners, there is a

further question as to the amount of the litigation costs.

Whether Respondent's Position Was Substantially Justified

     A position is "substantially justified" when it is

"justified to a degree that could satisfy a reasonable person."

Pierce v. Underwood, 487 U.S. 552, 565 (1988).     It is not enough

that a position simply has enough merit to avoid sanctions for

frivolousness; it must have a "reasonable basis both in law and

fact".   Id. at 564.   The burden of proving no substantial

justification is on the taxpayers.      Rule 232(e); Estate of

Johnson v. Commissioner, 985 F.2d 1315, 1318 (5th Cir. 1993);

Baker v. Commissioner, 83 T.C. 822, 827 (1984), vacated and

remanded on other grounds 787 F.2d 637 (D.C. Cir. 1986).

     Whether the position of the United States in this proceeding

was substantially justified depends on whether respondent's

positions and actions were reasonable in light of the facts of
                                 - 5 -

the case and the applicable legal precedents.       Sher v.

Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir.

1988).   The Commissioner's position can be justified even if

ultimately rejected by the court.        Wilfong v. United States, 991

F.2d 359, 364 (7th Cir. 1993).    The fact that respondent did not

prevail in the underlying litigation does not require a

determination that the position of the Internal Revenue Service

was unreasonable, Broad Ave. Laundry & Tailoring v. United

States, 693 F.2d 1387, 1391-1392 (Fed. Cir. 1982); however, it

remains a factor to be considered.       Heasley v. Commissioner, 967

F.2d 116, 120 (5th Cir. 1992), affg. in part, revg. in part, and

remanding T.C. Memo. 1991-189; Estate of Perry v. Commissioner,

931 F.2d 1044, 1046 (5th Cir. 1991).

     Respondent's position in Eldridge v. Commissioner, T.C.

Memo. 1995-384, was that petitioners did not engage in their

cattle-raising activities for profit under section 183.         In the

analysis of a case under section 183, the determination of

whether the requisite profit objective exists depends upon all

the surrounding facts and circumstances of the case.          Keanini v.

Commissioner, 94 T.C. 41, 46 (1990); Engdahl v. Commissioner, 72

T.C. 659, 666 (1979); sec. 1.183-2(b), Income Tax Regs.         Section

1.183-2(b), Income Tax Regs., provides a nonexclusive list of

factors to be considered in determining whether an activity is

engaged in for profit.   These factors include: (1) The manner in

which the taxpayers carried on the activity; (2) the expertise of
                                - 6 -

the taxpayers or their advisers; (3) the time and effort expended

by the taxpayers in carrying on the activity; (4) the expectation

that the assets used in the activity may appreciate in value; (5)

the success of the taxpayers in carrying on other similar or

dissimilar activities; (6) the taxpayer's history of income or

losses with respect to the activity; (7) the amount of occasional

profits, if any, which are earned; (8) the financial status of

the taxpayers; and (9) any elements indicating personal pleasure

or recreation.   Although these factors are helpful in

ascertaining a taxpayer's objective in engaging in the activity,

no single factor, nor the existence of even a majority of the

factors, is controlling; rather, the facts and circumstances of

the case remain the primary test.       Keanini v. Commissioner, supra

at 47.

     As pointed out in our underlying opinion, petitioners did

not show a profit for any of the years at issue and sustained

losses from their cattle-raising activity over a 14-year period.

Also, petitioner husband had substantial income from his job in

the natural gas industry.    Under the foregoing legal principles,

those and other facts of record were indicative of an activity

not engaged in for profit.   Petitioners presented other,

persuasive evidence at trial that indicated that the activity was

engaged in for profit.   After analyzing all of the facts and

circumstances of the case, we concluded that petitioners did have

the requisite profit objective.
                               - 7 -

     The presence of the factors discussed above leads us to the

conclusion that respondent's position had a reasonable basis in

both law and fact.   Pierce v. Underwood, 487 U.S. 552, 565

(1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861

F.2d 131 (5th Cir. 1988).   Accordingly, we hold that respondent's

position was substantially justified and that petitioners are not

entitled to litigation costs under section 7430.     Based on this

holding, we need not consider respondent's alternative position

that the amount of costs claimed is not reasonable.     Petitioners'

motion will therefore be denied.

                                       An appropriate order will be

                               issued.
