                           T.C. Memo. 1999-55



                       UNITED STATES TAX COURT



           DARL N. AND BONNIE S. MILLER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 4420-97.                        Filed February 26, 1999.


     David P. Leeper, for petitioners.

     Gerald L. Brantley, for respondent.



                           MEMORANDUM OPINION


     DINAN, Special Trial Judge:    This case is before the Court on

petitioners' motion for award of reasonable litigation costs

pursuant to section 7430 and Rules 230, 231, and 232,1 filed

October 1, 1997.   Petitioners did not request a hearing.     In his

notice of objection to petitioners' motion for costs, filed by


     1
           Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year 1993. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                             - 2 -

respondent on January 5, 1998, respondent requested a hearing in

this matter.   We conclude that a hearing is not necessary.    We

decide petitioners' motion based on the record.   The record

consists of petitioners' motion for costs with attached affidavits,

respondent's notice of objection to petitioners' motion for costs,

and the uncontroverted statements by the parties as contained in

the aforementioned documents.

     On their 1993 joint Federal income tax return,

petitioners claimed, inter alia, itemized deductions of

$36,594, an advertising deduction on Schedule C2 of $43,362

and other Schedule C expenses in the amount of $100,362.   The

$100,362 claimed expenses consist of:

     1.   Credit Reports #6064             $28,610
     2.   Business Development #6073        20,932
     3.   Loan Costs #6067                  24,706
     4.   Contract Labor #6068              13,228
     5.   Costs of Funds #6079              12,886
                                           100,362

     Upon audit of petitioners' 1993 return, respondent

determined the following adjustments as stated in the

statutory notice of deficiency:

     Because petitioners' adjusted gross income for 1993

exceeded $100,000 respondent reduced petitioners' itemized

deductions in the amount of $624.

     The amount claimed by petitioners as advertising expense

on Schedule C2 of their return in the amount of $43,362 was

reduced in the amount of $2,925 because it was determined that

the $2,925 was either a personal expense and/or was not an

ordinary and necessary business expense.
                              - 3 -

     The amount claimed by petitioners as a credits report

deduction on Schedule C2 of their return in the amount of

$28,610 was reduced to the amount of $25,283 because the

amounts disallowed were determined to be nondeductible and/or

personal in nature.

     The amount claimed by petitioners for business

development on Schedule C2 of their return in the amount of

$20,932 was disallowed because that amount was determined to

be a personal expenditure.

     The amount claimed by petitioners as cost of loans on

Schedule C2 of their return, in the amount of $24,706 was

reduced to $8,579.    The amount disallowed ($16,127) was

determined to be nondeductible and/or personal in nature.

     The amount claimed by petitioners for contract labor on

Schedule C2 of their return, in the amount of $13,228 was

reduced to $11,920 because the amount disallowed ($1,308) was

determined to be personal in nature.

     The amount claimed by petitioners for costs of funds on

Schedule C2 of their return in the amount of $12,886 was

disallowed because the amount claimed was determined to be

loan payments and/or other nondeductible items.

     In a report dated October 25, 1996, respondent's

examining agent noted that petitioners' accountant had

prepared a general ledger for 1993 from information provided

by petitioners.   Upon examining the various accounts contained

in the ledger, the examining agent opined that a number of
                              - 4 -

items in the ledger appeared to be nondeductible and/or

personal in nature.    Petitioner was reluctant to provide any

information beyond what was contained in the ledger on the

ground that, since the items appeared in a ledger, they were

necessarily correct and further verification should be

unnecessary.   Petitioners would not sign a Form 872 to extend

the statute of limitations, and the case was forwarded for the

issuance of a statutory notice of deficiency.

     The notice of deficiency was mailed to petitioners on

December 12, 1996.    The petition, consisting of seventy-seven

(77) paragraphs, most of which alleged "evidentiary facts",

was filed on March 7, 1997.    Respondent's answer was filed on

March 31, 1997.

     By letter dated June 20, 1997, to petitioners' attorney,

David P. Leeper, respondent's appeals officer informed Mr.

Leeper as follows:

     Dear Mr. Leeper:

          I have reviewed the examiner's workpapers that
     were prepared in connection with the examination of
     the Millers' tax returns for 1993. Based on these
     workpapers, many of the expenses disallowed were for
     lack of substantiation by the taxpayer.

          The following information is need [sic] to help
     resolve these issues at our scheduled appeals
     conference:

          1. A list of the recipients of the
          various statuettes deducted as advertising
          expense. This list should include the
          location and approximate dates the items
          were placed.
                            - 5 -

          2. Copies of invoices for credit reports
          from SARMA and any other reporting
          services that total $25,283 for 1993.

          3. Invoices to substantiate Business
          Development expense of $20,932 less the
          $5,000 loan payment that the taxpayer
          included in this account. The examiner
          has allowed 60% based on an estimate
          because the taxpayer did not provide
          substantiation during the examination.
          Since this is not acceptable to the
          taxpayer, the full amount needs to be
          verified.

          4. Invoices for $1,417.84 from American
          Express and $1,000 from Centurion deducted
          as a cost of loans.

          5. Invoices from The Platinum Card for
          $760.47 and $348.00 that was deducted as
          labor costs.

          6. Invoices or other substantiation for
          the $7,296.29 deducted as cost of funds.

     Thanks for your cooperation.

     By letter dated July 9, 1997, Mr. Leeper responded to the

appeals officer's letter of June 20, 1997, and provided to

respondent the requested documentation, including those

invoices showing payments to "Sarma".

     On July 22, 1997, within 2 weeks from having received the

substantiation from Mr. Leeper that was requested by

respondent, the appeals officer forwarded to Mr. Leeper a

proposed stipulation and decision document.   On October 1,

1997, the parties filed a stipulation of settlement in this

case.
                             - 6 -

                           Discussion

     A taxpayer who substantially prevails in an

administrative or court proceeding may be awarded reasonable

costs incurred in those proceedings.    Sec. 7430(a).   In order

to determine that the taxpayer was a "prevailing party", it

must be shown that:   (1) The position of the United States in

the proceeding was not substantially justified,2 (2) the

taxpayer substantially prevailed with respect to either the

amount in controversy or the most significant issue or issues

presented, and (3) the taxpayer met the net worth requirements

of 28 U.S.C. sec. 2412(d)(2)(B) (1994), on the date the

petition was filed.   Sec. 7430(c)(4)(A).   The taxpayer must

also show that all administrative remedies have been exhausted

(to obtain a judgment for litigation costs), section

7430(b)(1), that the taxpayer has not unreasonably protracted

the administrative or judicial proceedings, section

7430(b)(4), redesignated as (b)(3) by the 1996 Act, and that

the costs claimed are reasonable in amount, section 7430(c)(1)

and (2).   These requirements are in the conjunctive and each

must be met in order for the Court to determine that

administrative or litigation costs should be awarded pursuant




     2
          Because the petition was filed after July 30, 1996, the
burden is on respondent to show that the Government's position
was substantially justified. Taxpayer Bill of Rights 2, Pub. L.
104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996). See
Maggie Management Co. v. Commissioner, 108 T.C. 430 (1997). Our
holding, however, does not depend on which party has the burden.
                             - 7 -

to section 7430.   Minahan v. Commissioner, 88 T.C. 492 (1987);

Renner v. Commissioner, T.C. Memo. 1994-372.

     Petitioners contend that they have substantially

prevailed with respect to the amounts in controversy and on

the most significant issue in these cases.   They further

contend that they have met the net worth requirements of 28

U.S.C., sec. 2412(d)(2)(B), that they have exhausted the

administrative proceedings available to them within the

Internal Revenue Service, and that they have not unreasonably

protracted the administrative or court proceedings.    They also

argue that the costs claimed are reasonable.

     Respondent denies that petitioners have substantially

prevailed with respect to the amounts in controversy and on

the most significant issue in this case.   Respondent admits

that petitioner, Darl N. Miller, meets the net worth

requirements but denies that petitioner Bonnie S. Miller has

shown that she meets the net worth requirements.   Respondent

alleges that because petitioners failed to provide relevant

information to the examining agent so that a 30-day letter

could be issued, petitioners failed to exhaust their

administrative remedies.   Respondent further alleges that by

failing to submit relevant information requested by the

examining agent at the administrative level, before the

issuance of the statutory notice of deficiency, petitioners

unreasonably protracted the proceedings in this case.
                              - 8 -

Finally, respondent does not agree that the claimed costs are

reasonable.

     We first consider whether respondent's position in this

case was substantially justified.     For the reasons stated,

infra, we find that it was.

     Whether respondent's position was substantially justified

depends on whether respondent's position and actions were

reasonable in light of the facts of the case and applicable

precedents.   Bragg v. Commissioner, 102 T.C. 715, 716 (1994);

Powers v. Commissioner, 100 T.C. 457, 470-471 (1993), affd. in

part and revd. and remanded in part 43 F.3d 172 (5th Cir.

1995).   The fact that respondent concedes a part of the case

is not necessarily indicative that a position is not

substantially justified.    Price v. Commissioner, 102 T.C. 660,

662-665 (1994), affd. without published opinion sub nom.

TSA/THE Stanford Associates, Inc. v. Commissioner, 77 F.3d 490

(9th Cir. 1996).   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).

     The principal issue in this case is one of

substantiation.    At the administrative level, petitioners were

reluctant to provide to respondent's examining agent

substantiation of their claimed expenses other than the ledger

prepared by their accountant based upon unsubstantiated

information they had provided to him.
                               - 9 -

     The petition was filed in this case on March 7, 1997; the

answer was filed on March 31, 1997.     By letter dated June 20,

1997, respondent's appeals officer requested of petitioners'

counsel, Mr. Leeper, various documents to substantiate various

claimed deductions that had not previously been provided to

respondent.

     Mr. Leeper provided the requested substantiating

documentation to respondent's appeals officer on July 9, 1997.

     On July 22, 1997, within 2 weeks from having received

from Mr. Leeper the requested substantiating documentation,

respondent forwarded to Mr. Leeper a proposed settlement of

the case.

     On the basis of the facts contained in the record, we

find and hold that at all relevant times respondent's position

in the administrative and litigation proceedings in this case

was substantially justified.

     Because the provisions of section 7430 are conjunctive,

Minahan v. Commissioner, 88 T.C. at 497, and because we hold

that respondent's position in this case was at all relevant

times substantially justified, we will deny petitioners'

motion.   We, therefore, need not address respondent's other

objections to the motion.

                                       An appropriate order and

                                 decision will be entered.
