                        T.C. Memo. 2005-147



                      UNITED STATES TAX COURT



                  DORENE BULGER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket
       .    No. 3829-03.              Filed June 20, 2005.


     Terri A. Merriam, Wendy S. Pearson, and Jennifer A. Gellner,

for petitioner.

     Robert V. Boeshaar and Julie L. Payne, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   This case is before the Court on

petitioner’s motion for litigation and administrative costs

(motion) filed pursuant to section 7430 and Rule 231.1


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the time petitioner filed
                                                   (continued...)
                                 - 2 -

Petitioner resided in Aurora, Colorado, when her petition in this

case was filed.

     On April 29, 2004, we received the parties’ signed decision

document, which we filed as the parties’ stipulation of

settlement.     On May 7, 2004, we filed petitioner’s motion.   On

August 6, 2004, we filed respondent’s response to petitioner’s

motion.     On September 15, 2004, we filed petitioner’s reply to

respondent’s response and an additional declaration in support of

the reply.     On December 6, 2004, we ordered petitioner to submit

an additional declaration and supporting documentation to support

the reasonableness of the costs claimed.     On January 10, 2005, we

received and filed petitioner’s supplemental declaration, and on

January 27, 2005, we received and filed respondent’s supplemental

response to petitioner’s supplemental declaration.

         Neither party requested a hearing, and, after reviewing the

relevant documents, we conclude that a hearing on this matter is

not necessary.     See Rule 232(a)(2).   In disposing of this motion,

we rely on the parties’ filings and attached exhibits.

                              Background

     In 1984, petitioner and her husband, Bruce Bulger (Mr.

Bulger), invested in a partnership called Shorthorn Genetic

Engineering 1985-2, Ltd. (SGE), which had been organized,


     1
      (...continued)
the petition, and all Rule references are to the Tax Court Rules
of Practice and Procedure.
                               - 3 -

promoted, and operated by Walter J. Hoyt III.2   Petitioner and

Mr. Bulger held partnership interests either jointly or as joint

tenants with rights of survivorship in three separate “series” of

SGE partnership units.   Petitioner wrote and signed numerous

checks payable to SGE or the Hoyt organization from her and Mr.

Bulger’s joint bank account to maintain their investment in SGE.

SGE issued Schedules K-1, Partner’s Share of Income, Credits,

Deductions, etc., for 1985 and 1986 to petitioner and Mr. Bulger,

which reflected that both petitioner and Mr. Bulger were partners

in SGE.   In addition, in 1992, petitioner and Mr. Bulger signed a

Power of Attorney and Debt Assumption Agreement in which they




     2
      Walter J. Hoyt III also organized, promoted, operated, and
served as the general partner of more than 100 livestock breeding
limited partnerships from 1971 through 1998. See, e.g., River
City Ranches #1, Ltd. v. Commissioner, T.C. Memo. 2003-150, affd.
in part, revd. in part and remanded 401 F.3d 1136 (9th Cir.
2005). In general, the Hoyt partnerships purchased livestock
from related Hoyt entities for no money down and a promissory
note. See, e.g., Durham Farms #1, J.V. v. Commissioner, T.C.
Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003);
Shorthorn Genetic Engg. 1982-2, Ltd. v. Commissioner, T.C. Memo.
1996-515. The investors in the Hoyt partnerships assumed
personal liability for the partnerships’ promissory notes, made
payments on the notes to the Hoyt partnerships, see, e.g.,
Shorthorn Genetic Engg. 1982-2, Ltd. v. Commissioner, supra, and,
in return, deducted large partnership losses related to the
purchase, management, and sale of livestock, see River City
Ranches #1, Ltd. v. Commissioner, supra; Mekulsia v.
Commissioner, T.C. Memo. 2003-138, affd. 389 F.3d 601 (6th Cir.
2004); Durham Farms #1, J.V. v. Commissioner, supra; Shorthorn
Genetic Engg. 1982-2, Ltd. v. Commissioner, supra; Bales v.
Commissioner, T.C. Memo. 1989-568.
                                 - 4 -

appointed Mr. Hoyt to act on their behalf with regard to

partnership matters and reaffirmed their prior debt assumption

agreement with the Hoyt partnership.

        Petitioner and Mr. Bulger filed joint Federal income tax

returns for 1985 through 1987, on which they claimed substantial

losses and investment credits related to their SGE investment,

and a Form 1045, Application for Tentative Refund, on which they

carried back an investment credit attributable to SGE to 1982,

1983, and 1984.     The SGE deductions and credits the Bulgers

claimed significantly reduced their taxable income and overall

Federal income tax liabilities for 1982 through 1987.     Following

an audit and related litigation,3 respondent adjusted the Hoyt

partnership losses and investment credits claimed on Mr. Bulger’s

1982 and 1983 individual Federal income tax returns and

petitioner and Mr. Bulger’s returns for 1984 through 1987 and

assessed substantial income tax deficiencies for 1984 through

1987.

     On or about July 10, 2000, petitioner submitted Form 8857,

Request for Innocent Spouse Relief (And Separation of Liability

and Equitable Relief), on which she requested relief from joint




        3
      According to respondent, litigation regarding petitioner’s
and Mr. Bulger’s investment in SGE was resolved by this Court’s
order and decision, entered on Nov. 27, 1996, in Shorthorn
Genetic Engg. 1985-1, Ltd. v. Commissioner, docket No. 22069-89.
                               - 5 -

and several liability for 1982 to 1997.4   Petitioner attached a

supporting statement to the request in which she represented that

she was not involved in the SGE investment and did not

financially benefit from it.   Petitioner argued that she met each

requirement of section 6015(b) and, in particular, that she did

not understand the partnership transactions and had no knowledge

or reason to know of the understatements attributable to the Hoyt

partnership items on the joint returns.

     On August 21, 2001, respondent sent petitioner a preliminary

determination letter denying petitioner’s request for relief

under section 6015 for taxable years 1982 through 1987.5

Respondent advised petitioner of her right to administratively

appeal the decision.

     On or about September 17, 2001, petitioner administratively

appealed respondent’s denial of relief from joint and several

liability under section 6015(b) and (f).   Petitioner filed Form

12509, Statement of Disagreement, in which she summarized the

facts and law in support of her request for relief.   Petitioner

maintained that she had no knowledge or reason to know of the



     4
      There are no income tax assessments against petitioner for
1982 and 1983, and no understatements of tax have been assessed
for 1988 through 1997.
     5
      The preliminary determination letter references “enclosed
Form 886-A” as providing an explanation of why respondent denied
relief. Form 886-A, Explanation of Items, was not included in
the exhibits or attachments by either party.
                               - 6 -

true nature of the investment or that the claimed deductions were

erroneous.   Petitioner further stated, in relevant part, as

follows:

     The recent conviction of Jay Hoyt establishes that
     Dorene had no actual knowledge, and thus no reason to
     know, that the claimed deductions were erroneous. The
     Hoyt investors were adjudged to be victims of a fraud,
     which by definition means they were deceived as to the
     nature of their investment and the facts giving rise to
     the disallowance of their investment related tax
     deductions. * * *

The cover letter attached to petitioner’s administrative appeal

stated that “We will provide additional factual information once

we are contacted by the Appeals Officer.”   Petitioner’s case was

assigned to Appeals Officer Leslie Hackmeister.

     On or around April 10, 2002, petitioner’s counsel sent

Appeals Officer Hackmeister a letter intended to supplement the

factual and legal arguments of petitioner’s appeal.   In the

letter, petitioner’s counsel reiterated that Mrs. Bulger was not

involved with the partnership investment, did not understand the

partnership transactions, and that

     She certainly had no substantive knowledge of the
     underlying circumstances that caused the deductions to
     be denied, i.e., that the Hoyt organization did not
     have the 30,000 cattle it claimed it had and the
     misappropriation of capital contributions and IRA
     funds.

Petitioner’s counsel concluded the letter by again offering

additional information and documentation upon request and stating

that everything “in this discussion can be backed up with
                                - 7 -

documentation.    However, the documentation is extensive and we do

not want to overwhelm you.”

     On June 17, 2002, Mr. Bulger died.    Neither petitioner nor

petitioner’s counsel informed Appeals Officer Hackmeister of Mr.

Bulger’s death.

     On December 5, 2002, respondent issued a Notice of

Determination Concerning Your Request for Relief From Joint and

Several Liability Under Section 6015 (notice of determination)

denying petitioner’s request for relief.   Respondent denied

relief because:   (1) Contrary to section 6015(b) requirements,

the erroneous item was attributable to both petitioner and Mr.

Bulger, and petitioner had knowledge of the item that caused the

understatement; (2) petitioner did not meet the marital status

requirements of section 6015(c); and (3) it would not be

inequitable to hold petitioner responsible for the understatement

under section 6015(f).   Appeals Officer Hackmeister’s narrative

explaining the reasons for denying petitioner relief also stated

as follows with respect to section 6015(c):

     Requirements:

     2.   There is a deficiency of tax allocable to the non-
          requesting spouse.
               NOT MET

     3.   The spouse seeking relief did not have actual
          knowledge of the deficiency at the time the return
          was signed.
               NOT MET
                                - 8 -

     4.    He or she is either divorced, widowed, legally
           separated, or for the 12 months preceding the
           election, was living apart from the non-electing
           spouse;
                NOT MET

     On March 10, 2003, we filed petitioner’s timely petition

seeking review of respondent’s determination pursuant to section

6015(e).   The petition, which stated that Mr. Bulger had died,

was the first notification to respondent of Mr. Bulger’s death.6

In the petition, petitioner alleged, in pertinent part, that

respondent erred in concluding petitioner did not qualify for

relief under section 6015(c) and that “Respondent made no effort

to prove, and failed to prove, that Petitioner had actual

knowledge of the factual circumstances which made the tax items

unallowable as a deduction.”    As she had in her initial request

for relief and her administrative appeal, petitioner included an

extensive recitation of the facts on which she relied to support

her allegations, including the following:

     o.    Neither Petitioner nor Mr. Bulger had actual
           knowledge of the underlying problems with the
           transactions, nor could they have discovered that
           Jay Hoyt failed to transfer title of the livestock
           to the partnership and that he was otherwise
           converting partnership assets.

                    *   *   *    *   *   *   *




     6
      On Apr. 14, 2003, after speaking with respondent,
petitioner also provided respondent with a copy of Mr. Bulger’s
death certificate.
                                  - 9 -

     p.     Due to the complexity of Jay Hoyt’s fraud, it was
            impossible for either Petitioner or Mr. Bulger to
            discover the true nature of the transactions.

     q.      Mr. Bulger and all other Hoyt investors were
             deceived by Jay Hoyt as to the nature of their
             investment and were ultimately determined by a
             court of law to be victims of his elaborate fraud.

                      *   *   *    *      *   *   *

     nn.    Petitioner had no actual knowledge of the factual
            circumstances that made the tax items unallowable
            as a deduction.

     On May 1, 2003, we filed respondent’s answer, in which he

denied each of petitioner’s allegations of error.       Respondent

also denied petitioner’s representation that Mr. Bulger had died

and the representations in subparagraphs o., q., and nn. on the

basis of lack of knowledge or information.        Respondent denied the

representation in subparagraph p. without qualification.

     On February 23, 2004, this case was called for hearing

during the Court’s Seattle, Washington, trial session.       The

parties reported that they believed they had reached a basis for

settlement, and the case was scheduled for recall on March 2,

2004.     At the recall, petitioner stated that she wanted to verify

computational adjustments made by respondent and that the issue

of penalties had not been settled.        On March 3, 2004, the parties

reported they were in agreement on the substantive issues in the

case but still disputed the computational adjustments.       We
                               - 10 -

ordered the parties to file simultaneous briefs on the

computations.   On April 29, 2004, however, we received the

parties’ signed stipulation of settlement instead.

     The stipulation of settlement reflected that the parties had

agreed to a section 6015(c) allocation with respect to

petitioner’s and Mr. Bulger’s Federal income tax liabilities as

follows:

                Joint tax liability       Petitioner’s share
      Year       before allocation         under sec. 6015(c)

      1982            $7,896                      -0-
      1983             4,540                      -0-
      1984            10,542                      -0-
      1985             8,244                      -0-
      1986            10,894                      -0-
      1987               464                      -0-
        Total         42,580                      -0-

The allocation of liability under section 6015(c) was made by

treating petitioner’s and Mr. Bulger’s SGE investment as a joint

investment, allocating 50 percent of the partnership items to

petitioner and 50 percent to Mr. Bulger in accordance with

section 6015(d)(1) and (3)(A), and adjusting the allocation, as

required by section 6015(d)(3)(B), to account for the tax benefit

that petitioner’s share of the partnership items provided to Mr.

Bulger on the joint returns.   The parties further agreed that

petitioner was not entitled to relief from joint and several

liability under section 6015(b) or (f).

     On May 7, 2004, we received and filed petitioner’s motion

for litigation and administrative costs.    In her motion,
                              - 11 -

petitioner asserts that she meets all of the requirements under

section 7430 to recover litigation costs of $12,029.05.7     The

litigation costs petitioner claims were computed using an hourly

rate of $195 for two of petitioner’s attorneys and included a

claim of $6,354.05 for petitioner’s alleged share of attorney’s

fees (the group fees) that her attorneys had charged to two

groups of similarly situated Hoyt investor clients with pending

section 6015 claims.   In support of the motion, petitioner’s

counsel attached billing records for petitioner’s account dated

March 15, 2003, through April 30, 2004, that described in detail

the attorney’s fees and costs petitioner incurred individually

and contained generic entries8 denoting monthly charges to

petitioner’s account for her alleged share of the group fees.

Although petitioner alleged that the group fees were reasonable

and reasonably allocated to her, she did not include any

supporting information or documentation with respect to the group



     7
      Petitioner concedes that respondent’s administrative
position was substantially justified and that she is not entitled
to administrative costs because respondent did not receive notice
of Mr. Bulger’s death until Mar. 13, 2003, the date the petition
was served on respondent. Consequently, petitioner seeks only
those litigation costs incurred on or after Mar. 15, 2003.
     8
      Although petitioner agrees that the fee summary for her
account attached to the motion describes her share of the “Group
Innocent Spouse fees” as “flat” fees, petitioner contends that
the flat fee reference is simply the way in which the Pearson-
Merriam (petitioner’s attorneys’ law firm) billing program
described sum certain fees. Petitioner’s representation is
supported by a declaration of petitioner’s counsel.
                              - 12 -

fees that showed the nature of the work performed, the attorneys’

hourly rates, the identity of the person who performed the work,

the number of hours billed for the work, the number of Hoyt

investor clients who shared in the group fees, or the manner in

which the group fees were allocated among petitioner and the

other Hoyt investor clients of petitioner’s attorneys.

     On August 6, 2004, we filed respondent’s response to

petitioner’s motion, in which respondent objected to an award of

costs.   Petitioner requested and was granted leave to file a

reply to respondent’s response to the motion.   On September 15,

2004, we filed petitioner’s reply to respondent’s response, which

included a supplemental declaration but did not provide any

detailed information regarding her counsel’s billing and

allocation arrangements with respect to the group fees.     On

December 6, 2004, we ordered petitioner to submit, on or before

January 7, 2005, an additional declaration with supporting

documentation to support her contention that the group fees were

reasonable and had been reasonably allocated and that her share

of the group fees was incurred in connection with this matter.

In the December 6, 2004, order, we also authorized respondent to

submit a supplemental response addressing the information

contained in petitioner’s supplemental declaration on or before

January 31, 2005.
                               - 13 -

       On January 10, 2005, we received and filed petitioner’s

supplemental declaration, which contained billing records for

fees and costs petitioner’s attorneys had charged to common

accounts for two separate groups of Hoyt investor clients.       The

billing records provided specific information about the nature of

the work performed for the benefit of both groups of Hoyt

investor clients and included charges to common accounts that

were computed using an hourly rate of $195 for two of

petitioner’s attorneys.    On January 27, 2005, we received and

filed respondent’s supplemental response to petitioner’s

supplemental declaration.

                             Discussion

       Section 7430(a) authorizes the award of reasonable

litigation costs to the prevailing party in court proceedings

brought by or against the United States in connection with the

determination of income tax.    In addition to being the prevailing

party, in order to receive an award of reasonable litigation

costs, a taxpayer must exhaust administrative remedies and not

unreasonably protract the court proceedings.     Sec. 7430(b)(1),

(3).    Unless the taxpayer satisfies all of the section 7430

requirements, we do not award costs.      Minahan v. Commissioner, 88

T.C. 492, 497 (1987).

       Section 7430(c)(4)(A) and (B)(i) provides that a taxpayer is

a prevailing party if (1) the taxpayer substantially prevailed
                              - 14 -

with respect to the amount in controversy or the most significant

issue or set of issues, (2) the taxpayer meets the net worth

requirements of 28 U.S.C. section 2412(d)(2)(B), and (3) the

Commissioner’s position in the court proceeding was not

substantially justified.   See also sec. 301.7430-5(a), Proced. &

Admin. Regs.   Although the taxpayer has the burden of proving

that she meets requirements (1) and (2), the Commissioner must

show that his position was substantially justified.    Sec.

7430(c)(4)(B); Rule 232(e).

     Respondent concedes that petitioner exhausted the available

administrative remedies, meets the net worth requirements of 28

U.S.C. section 2412(d)(2)(B), and did not unreasonably protract

the administrative or judicial proceedings.   In addition,

respondent does not dispute that petitioner substantially

prevailed with respect to the amount in controversy.    Respondent

argues, however, that petitioner is not the prevailing party

because respondent’s litigating position was substantially

justified and that the costs petitioner claims are unreasonable.

A.   Whether Respondent’s Litigating Position Was Substantially
     Justified

     For purposes of deciding a motion for reasonable litigation

costs, a court proceeding is any civil action brought in a court

of the United States, including this Court, sec. 7430(c)(6), and

the “position of the United States” in a court proceeding is the

position taken by the Internal Revenue Service (the Service) in a
                              - 15 -

judicial proceeding to which section 7430(a) applies, sec.

7430(c)(7)(A).   Respondent’s litigating position is that taken in

his answer, which was filed on May 1, 2003.   See Huffman v.

Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,

revg. in part and remanding T.C. Memo. 1991-144; Maggie Mgmt. Co.

v. Commissioner, 108 T.C. 430, 442 (1997).    Respondent’s position

in the answer was that the investment in SGE was a joint

investment, and petitioner was not entitled to relief under

section 6015(c) because she did not meet the marital status

requirement and had actual knowledge, when she signed the

returns, of any items giving rise to the deficiency that were

allocable to her spouse.

     The Commissioner’s position is substantially justified if it

has a reasonable basis in both fact and law and is justified to a

degree that could satisfy a reasonable person.    Huffman v.

Commissioner, supra at 1147 n.8 (citing Pierce v. Underwood, 487

U.S. 552, 565 (1988)); Maggie Mgmt. Co. v. Commissioner, supra at

443; sec. 301.7430-5(c)(1), Proced. & Admin. Regs.   The

reasonableness of the Commissioner’s position turns on the

available facts that formed the basis for the position and any

legal precedents related to the case.   Maggie Mgmt. Co. v.

Commissioner, supra at 443; DeVenney v. Commissioner, 85 T.C.

927, 930-931 (1985).   A significant factor in determining whether

the Commissioner’s position is substantially justified as of a
                                - 16 -

given date is whether, on or before that date, the taxpayer has

provided all relevant information under her control and relevant

legal arguments supporting her position to the appropriate

Service personnel.9   Maggie Mgmt. Co. v. Commissioner, supra at

443; sec. 301.7430-5(c)(1), Proced. & Admin. Regs.

     The only issue petitioner raises in her motion is whether

respondent’s position with respect to section 6015(c) was

substantially justified.     In deciding whether to award litigation

costs, therefore, we focus our analysis on the reasonableness of

respondent’s position with respect to section 6015(c).

     1.    Section 6015(c)

     Under section 6015(c), if the requesting spouse is no longer

married to,10 or is legally separated from, the spouse with whom

she filed the joint return, the requesting spouse may elect to

limit her liability for a deficiency as provided in section

6015(d).   Sec. 6015(c)(1), (3)(A)(i)(I).   The election under

section 6015(c) must be made no later than 2 years after the




     9
      “[A]ppropriate Internal Revenue Service personnel” are
those employees who are responsible for reviewing the taxpayer’s
information or arguments, or employees who, in the normal course
of procedure and administration, would transfer the information
or arguments to the reviewing employees. Sec. 301.7430-5(c)(1),
Proced. & Admin. Regs.
     10
      A requesting spouse is no longer married if she is
widowed. Rosenthal v. Commissioner, T.C. Memo. 2004-89.
                              - 17 -

Secretary11 has begun collection activities with respect to the

electing spouse.   Sec. 6015(c)(3)(B).

     In general, section 6015(d) provides that any item giving

rise to a deficiency on a joint return shall be allocated to the

spouses as though they had filed separate returns, and the

requesting spouse shall be liable only for her proportionate

share of the deficiency that results from such allocation.    Sec.

6015(d)(1), (3)(A).   To the extent that the item giving rise to

the deficiency provided a tax benefit on the joint return to the

other spouse, the item shall be allocated to the other spouse in

computing his or her proportionate share of the deficiency.12

Sec. 6015(d)(3)(B); Hopkins v. Commissioner, 121 T.C. 73, 83-86

(2003).

     An election under section 6015(c) is invalid, however, if

the Secretary demonstrates that the requesting spouse had actual

knowledge, when signing the return, of any item giving rise to a

deficiency that is otherwise allocable to the nonrequesting



     11
      The term “Secretary” means “the Secretary of the Treasury
or his delegate”, sec. 7701(a)(11)(B), and the term “or his
delegate” means “any officer, employee, or agency of the Treasury
Department duly authorized by the Secretary of the Treasury
directly, or indirectly by one or more redelegations of
authority, to perform the function mentioned or described in the
context”, sec. 7701(a)(12)(A).
     12
      In addition, the requesting spouse’s proportionate share
of the deficiency shall be increased by the value of any
disqualified asset transferred to her by the nonrequesting
spouse. Sec. 6015(c)(4).
                                  - 18 -

spouse.13   Sec. 6015(c)(3)(C).    In cases involving erroneous

deductions, an individual is deemed to have actual knowledge of

an item giving rise to a deficiency if she has actual knowledge

of the factual basis for the denial of the deductions.     King v.

Commissioner, 116 T.C. 198, 204 (2001).     Although the requesting

spouse bears the burden of proving the portion of the deficiency

that is properly allocable to her, see sec. 6015(c)(2), the

Commissioner bears the burden of proving that the requesting

spouse had actual knowledge of any items giving rise to the

deficiency,    sec. 6015(c)(3)(C).

     2.     Reasonableness of Respondent’s Position

     Respondent contends that the position taken in his answer to

petitioner’s petition was substantially justified because the

information available to the Appeals officer at the time “showed

that petitioner had knowledge of and had been involved with the

Hoyt organization to some degree”, and petitioner had not

verified Mr. Bulger’s death by providing a death certificate.

Respondent further contends that his position was substantially

justified because, without further factual development, it was

impossible to determine whether petitioner had actual knowledge,

to confirm that no disqualified assets had been transferred to



     13
      An election under sec. 6015(c) is also invalid if the
Secretary demonstrates that assets were transferred between the
individuals filing the joint return as part of a fraudulent
scheme. Sec. 6015(c)(3)(A)(ii).
                             - 19 -

petitioner, and to confirm that no assets had been transferred

between petitioner and Mr. Bulger as part of a fraudulent scheme.

Respondent also argues that although the facts available to him

when the answer was filed indicated that the partnership

investments were made jointly, the deficiencies at issue could

not be allocated between petitioner and Mr. Bulger under section

6015(d) because the parties disagreed about whether and to what

extent the investment in SGE was attributable to petitioner.

     Respondent’s argument that he lacked sufficient information

to accept petitioner’s representations regarding section 6015(c)

and that the lack of information was somehow petitioner’s fault

is unsupported by the record for purposes of this motion.    In

petitioner’s statement of disagreement dated September 14, 2001,

appealing the Service’s denial of relief under section 6015,

petitioner stated that she had no knowledge or reason to know of

the true nature of the investment or that the deductions were

erroneous, and she provided respondent with a detailed statement

in support of her request for relief under section 6015.14   On

April 10, 2002, in a letter supplementing her appeal, petitioner

reiterated that she was not involved in the partnership

transactions and “certainly had no substantive knowledge of the


     14
      A party’s statement, if credible, is evidence on which the
finder of fact may rely to establish a relevant fact. In this
case, there is nothing in the record to suggest that petitioner’s
statement regarding her lack of actual knowledge was not
credible.
                              - 20 -

underlying circumstances that caused the deductions to be

denied”.   Petitioner also informed respondent that she had

documentation to support her contentions and offered to provide

respondent additional information upon request.    In her petition,

which was filed on March 10, 2003, petitioner reiterated that she

had no actual knowledge of the factual circumstances that made

the partnership items unallowable, and she included another

recitation of supporting facts.   In her petition, petitioner also

notified respondent of Mr. Bulger’s death.    On April 14, 2003,

more than 2 weeks before the filing of respondent’s answer,

petitioner provided respondent with a copy of Mr. Bulger’s death

certificate.

      In his answer, which was filed on May 1, 2003, respondent

denied petitioner’s representation that Mr. Bulger had died, even

though respondent had received a copy of Mr. Bulger’s death

certificate before the answer was filed.    In his answer,

respondent also denied that petitioner was entitled to any

section 6015(c) relief.   Neither position was reasonable under

the facts and circumstances of this case.

     Respondent has consistently maintained that the partnership

investment made by petitioner and Mr. Bulger was a joint

investment, but he made no effort to evaluate the effect of his

joint investment position under section 6015(c) before he adopted

his litigating position in this case.   Respondent claims that he
                                - 21 -

did not have to evaluate the effect of his joint investment

position under section 6015(c) before adopting his litigating

position because petitioner did not agree that the partnership

interest in question was a joint investment.     Respondent’s

contention confuses a disagreement about the allocation that must

be made under section 6015(d) with his obligation under section

6015(c) to allocate the tax liability if the requirements of

section 6015(c) are met.

     In this case, petitioner properly elected to have the

deficiencies at issue allocated between herself and Mr. Bulger as

required by section 6015(c)(3).     By the time petitioner made her

election, respondent had already conducted an audit of

petitioner’s tax returns and an extensive examination of the Hoyt

organization and had obtained extensive information regarding

petitioner’s claim for relief under section 6015.     Respondent’s

argument in his response to petitioner’s motion that he needed

more information from petitioner to evaluate whether petitioner

was somehow disqualified by section 6015(c)(3)(A)(ii) or (C) from

making an election under section 6015(c) simply does not ring

true.     Respondent’s litigating position as summarized in his

answer did not make any allegation regarding section

6015(c)(3)(A)(ii) or (C);15 respondent simply denied that he had


     15
      The answer did deny, on the basis of lack of knowledge or
information, the representation in the petition as to sec.
                                                   (continued...)
                             - 22 -

erred in determining that petitioner did not qualify for an

allocation under section 6015(c).

     Respondent’s litigating position that petitioner did not

satisfy the marital status requirement of section

6015(c)(3)(A)(i) was not reasonable because respondent had

received a copy of Mr. Bulger’s death certificate more than 2

weeks before respondent’s answer was filed.   Respondent’s

litigating position that petitioner had actual knowledge of the

item giving rise to the deficiency within the meaning of section

6015(c)(3)(C) was also not reasonable because respondent failed

to analyze the applicable legal principles and the factual

information he possessed before he adopted his position.

     When respondent’s answer was filed on May 1, 2003, the

Service had already entered into a settlement agreement with Mr.

Hoyt and was well aware of the basis for adjusting the Hoyt

partnership items at issue in this case.   See River City Ranches

#1, Ltd. v. Commissioner, T.C. Memo. 2003-150, affd. in part,

revd. in part and remanded 401 F.3d 1136 (9th Cir. 2005);

Mekulsia v. Commissioner, T.C. Memo. 2003-138, affd. 389 F.3d 601

(6th Cir. 2004); Durham Farms #1, J.V. v. Commissioner, T.C.

Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003);

Shorthorn Genetic Engg. 1982-2, Ltd. v. Commissioner, T.C. Memo.



     15
      (...continued)
6015(c)(3)(C); that is, that petitioner had no actual knowledge.
                               - 23 -

1996-515; Bales v. Commissioner, T.C. Memo. 1989-568.     Moreover,

it was a matter of public record when respondent adopted his

litigating position that Mr. Hoyt had overstated the number and

value of cattle sold to the partnerships.16   See, e.g., Mora v.

Commissioner, 117 T.C. 279, 292 (2001).

     In King v. Commissioner, 116 T.C. at 204, we held that “the

proper application of the actual knowledge standard in section

6015(c)(3)(C), in the context of a disallowed deduction, requires

respondent to prove that petitioner had actual knowledge of the

factual circumstances which made the item unallowable as a

deduction.”17   In other words, respondent had to prove that

petitioner knew the Hoyt organization had an insufficient number

of cattle to sustain the partnership deductions claimed on the

joint return and knowingly claimed improper deductions.    Nothing

in the record indicates, however, that respondent made any

reasonable effort to identify the grounds for the disallowance of

the Hoyt partnership losses and credits petitioner and Mr. Bulger

claimed, or to evaluate his ability to prove that petitioner had

actual knowledge of the factual circumstances that caused the


     16
      By May 1, 2003, Mr. Hoyt had been indicted, convicted, and
sentenced for his fraudulent activities with respect to the Hoyt
partnerships.
     17
      In our Opinion in Mora v. Commissioner, 117 T.C. 279
(2001), which we filed on Dec. 17, 2001, we rejected the
Commissioner’s argument that the actual knowledge standard
articulated in King v. Commissioner, 116 T.C. 198 (2001), should
not apply to investors in Hoyt limited partnership cases.
                              - 24 -

disallowance of the Hoyt partnership items before taking his

litigating position in this case.   Respondent, who has the burden

of proving actual knowledge under section 6015(c)(3)(C), should

have meaningfully evaluated whether he could prove that

petitioner had actual knowledge by taking into account the

information petitioner supplied, the extensive audit and

litigating history regarding the Hoyt organization and the Hoyt

partnerships, and the specific information regarding the manner

in which the Hoyt organization operated the Hoyt partnerships,

including the ones in which petitioner and Mr. Bulger had

invested.   The record does not indicate that respondent

considered any of the information that was available to him in

April 2003 before adopting his litigating position, other than

the fact that petitioner and Mr. Bulger had made a joint

investment in SGE.   Respondent’s failure to evaluate the

information in his possession and its effect on his ability to

prove that petitioner had actual knowledge of the items giving

rise to the deficiencies cannot be rationalized.    We conclude

that respondent’s litigating position regarding actual knowledge

was not reasonable or justified.    See Stieha v. Commissioner, 89

T.C. 784, 791 (1987) (Commissioner’s lack of diligence in

evaluating impact of recent court opinions not substantially

justified).
                              - 25 -

     Respondent’s failure to properly analyze petitioner’s

marital status under section 6015(c)(3)(A)(i)(I) and the actual

knowledge standard under section 6015(c)(3)(C) is not the only

defect in respondent’s litigating position, however.    If

respondent had made any reasonable effort to make an allocation

under section 6015(c) consistent with his position that

petitioner and Mr. Bulger’s investment in SGE was a joint

investment, he would necessarily have allocated the Hoyt

partnership items between petitioner and Mr. Bulger in accordance

with their respective ownership interests.    If respondent had

actually made a calculation before adopting his litigating

position, he would have realized that petitioner was entitled to

at least some relief under section 6015(c).    If respondent had

conceded in his answer that petitioner was entitled to section

6015(c) relief, the concession might have enabled the parties to

settle this case at a much earlier date.18



     18
      Although respondent’s calculation would not have arrived
at the same tax liability numbers as those reflected in the
settlement because of respondent’s interpretation of sec.
6015(d)(3)(B), see Hopkins v. Commissioner, 121 T.C. 73 (2003),
the computation would nevertheless have confirmed that petitioner
was entitled to sec. 6015(c) relief. When our Opinion in
Hopkins, rejecting respondent’s interpretation of sec.
6015(d)(3)(B), was filed on July 29, 2003, respondent had reason
to know that the application of the tax benefit rule of sec.
6015(d)(3)(B) might increase the relief available to petitioner
under sec. 6015(c). If respondent had revised his calculation at
that time (approximately 3 months after his answer was filed), he
would have arrived at the same allocation of tax liabilities
reflected in the settlement.
                               - 26 -

     3.   Conclusion

     We hold that respondent’s litigating position was not

reasonable under the circumstances and that, therefore, it was

not substantially justified.    Because respondent’s position was

not substantially justified, we conclude petitioner was the

prevailing party as defined by section 7430(c)(4)(A).

B.   Whether Costs Claimed by Petitioner Are Reasonable

     1.   Amount of Costs Claimed

     Section 7430 permits a taxpayer to recover reasonable

litigation costs.   Litigation costs are those costs incurred in

connection with a court proceeding.     Sec. 7430(a)(2), (c)(1).

Reasonable litigation costs include, among other things,

reasonable court costs and reasonable fees paid or incurred for

the services of attorneys.    Sec. 7430(c)(1).

     The amount of attorney’s fees we may award is limited by

statute and adjusted for cost of living.     Sec. 7430(c)(1)(B)(iii)

(and flush language).   For purposes of this motion, the statutory

rate for attorney’s fees is $150 per hour.     See Rev. Proc. 2003-

85, sec. 3.33, 2003-2 C.B. 1184, 1190; Rev. Proc. 2002-70, sec.

3.32, 2002-2 C.B. 845, 850.    A taxpayer may recover attorney’s

fees in excess of the statutory limit in the presence of one or

more of the following special factors:     (1) Limited availability

of qualified attorneys for the proceeding, (2) difficulty of the
                              - 27 -

issues presented in the case, or (3) local availability of tax

expertise.   Sec. 7430(c)(1)(B)(iii).

     Pursuant to Rule 232(d), if the parties disagree as to the

amount of reasonable attorney’s fees, the moving party must

submit an additional affidavit which includes, in relevant part,

(1) a detailed summary of the time expended by each individual

for whom fees are sought, including a description of the nature

of the services performed during each period of time, (2) a

description of the fee arrangement with the client, (3) a

statement whether a special factor exists that justifies a rate

in excess of the statutory limit, and (4) any other information

that will assist the Court in evaluating the award of costs and

fees.

     The amount of petitioner’s claim for litigation costs

includes the costs of professional services that were charged by

her attorneys to her individual account and her share of group

fees that were charged to common accounts for the benefit of

several Hoyt investor clients, including petitioner.   The fees

and costs petitioner claims are summarized as follows:
                               - 28 -

                             Hours      Hourly
          Attorney/Item    expended      rate     Total cost

     Wendy Pearson            4.1        $195       $799.50
     Terri Merriam            6.4         195      1,248.00
     Jennifer Gellner        12.5         150      1,875.00
     Jaret Coles              6.5         125        812.50
     Legal assistants         8.2          75        615.00
     Contract assistance      6.5          50        325.00
     Share of group fees
       and costs1             –-           --      6,354.05
         Total fees and                           12,029.05
           costs
            1
           The amount petitioner claims for her share of the
     group fees and costs represents charges to separate
     accounts for two groups of Hoyt investor clients and
     includes attorney’s fees billed at an hourly rate of
     $195 for some of petitioner’s attorneys and the costs
     of contract assistance, online research, postage,
     copies, and the attorneys’ hotels, meals, and parking
     during the 2004 trials of the sec. 6015 issue, as well
     as the costs of work performed by legal assistants.

     2.     The Parties’ Arguments

     Respondent contends that the costs petitioner claims are

unreasonable because the hourly rate charged by some of

petitioner’s attorneys exceeds the statutory maximum, and

petitioner has not shown that any of the special factors in

section 7430(c)(1)(B)(iii) that justify a higher rate applies.

Respondent further argues that costs petitioner claims for her

share of the group fees are not reasonable because (1) the method

of billing does not properly account for the time expended or the

hourly rate at which the work was performed, and (2) the fees

were charged for work that contributed to the resolution of
                                - 29 -

clients’ cases other than petitioner’s and, therefore, were not

“incurred in connection with” petitioner’s court proceedings as

required by section 7430(a).

     Petitioner contends that an “informal survey” of local

attorneys shows that the prevailing hourly rate for attorneys

specializing in Federal tax practice in the Seattle, Washington,

area is between $225 and $350 and that billing at an hourly rate

that is less than the customary rate for similar work is a factor

that supports the reasonableness of the attorney’s fees.     With

respect to her share of the group fees, petitioner contends that

the group fees were charged to a group of Hoyt investor clients,

all of whom had pending section 6015 claims, for work relating to

common legal and factual issues that directly affected or

contributed to the resolution of each client’s case.     Petitioner

further contends that the group fee arrangement allowed the Hoyt

investor clients to obtain professional advice and assistance at

a reduced cost, that any services related to the development of

factual issues unique to a particular client were charged only to

the individual client, and that no client was charged for work

that did not directly benefit the client’s case.

     3.   Hourly Rate

     We first decide whether the hourly rate for the attorney’s

fees is reasonable.     In the absence of proof that a special

factor applies, petitioner may not recover attorney’s fees in
                               - 30 -

excess of the statutory limit.   See sec. 7430(c)(1)(B)(iii).

Petitioner does not argue, and has otherwise failed to

demonstrate, that there was a limited availability of qualified

attorneys or attorneys with tax expertise to represent her in

this case or that the issues presented were sufficiently

difficult to support her claim for an enhanced hourly rate.     That

petitioner’s attorneys billed her and the other Hoyt investor

clients for professional services at a lower rate than the local

customary rate does not establish that the fees petitioner claims

are reasonable.19   We conclude, therefore, that petitioner may

not recover attorney’s fees in excess of $150 per hour.    See id.

     With respect to the attorney’s fees and costs charged to

petitioner’s individual account, we award petitioner $615 for

work performed by Ms. Pearson20 and $960 for work performed by

Ms. Merriam.21   Because Ms. Gellner’s and Mr. Coles’s hourly

rates do not exceed the statutory limit, we find those fees are

reasonable and award petitioner $1,875 and $812.50 for Ms.

Gellner’s and Mr. Coles’s professional services, respectively.



     19
      The existence of a prevailing hourly rate in the relevant
area that exceeds the statutory rate is not a special factor.
Pierce v. Underwood, 487 U.S. 552, 571-572 (1988); Foothill Ranch
Co. Pship. v. Commissioner, 110 T.C. 94, 102 (1998).
     20
      We compute Ms. Pearson’s fees as follows:   4.1 hours
multiplied by $150 hourly rate equals $615.
     21
      We compute Ms. Merriam’s fees as follows: 6.4 hours
multiplied by $150 hourly rate equals $960.
                              - 31 -

Respondent does not object to the reasonableness of the costs

petitioner claims for the services of legal and contract

assistants that were charged to her individual account.

Consequently, we award petitioner those costs of $940.22

     4.    Allocation of Group Fees

     We next decide whether the attorney’s fees and costs for

petitioner’s share of the group fees are reasonable and were

reasonably allocated among petitioner and the other Hoyt investor

clients.   Section 7430(a) authorizes an award of reasonable

litigation costs incurred in connection with a court proceeding

brought by or against the United States with respect to the

determination, collection, or refund of any tax.   In order for

costs, including attorney’s fees, to qualify as reasonable

litigation costs, they must come within the relevant definition,

sec. 7430(c)(1), and they must be incurred in connection with a

qualifying proceeding.

     Petitioner’s attorneys represent many Hoyt investors.     It is

not surprising or unreasonable that they would perform certain

legal work for the common benefit of similarly situated clients.


     22
      This figure includes $615 for legal assistants and $325
for contract assistance.

     Only fees for the services of an individual who is admitted
to practice before this Court or the Internal Revenue Service may
be awarded as attorney’s fees. Sec. 7430(c)(3)(A). We award
fees for work performed by legal assistants, therefore, as costs
rather than as attorney’s fees. See Fields v. Commissioner, T.C.
Memo. 2002-320; O’Bryon v. Commissioner, T.C. Memo. 2000-379.
                              - 32 -

Under certain circumstances, it may be both efficient and

economical for an attorney to allocate legal research and other

legal work that benefit several clients with the same or similar

issues equitably among those clients as long as the clients

agree, the fees and costs are reasonable, and the attorney

appropriately allocates the common legal work.     See, e.g.,

Minahan v. Commissioner, 88 T.C. 492 (1987), in which we

allocated common costs among several taxpayers who were

represented by the same attorneys under an agreement that

provided for the sharing of costs.     Morever, legal work that

benefits multiple clients is no less relevant to a court

proceeding than work performed solely for one client.     If the

work is performed for multiple clients and enables an attorney to

properly represent a particular client in the court proceeding

described in section 7430, it would seem to satisfy the section

7430(a) requirement that the costs for such work be “incurred in

connection with” the proceeding.

     Petitioner’s counsel produced billing records for accounts

of two Hoyt investor client groups seeking relief from joint and

several liability to substantiate petitioner’s share of the group

fees.   The billing records for both groups identify the attorneys

who performed work on the section 6015 cases and set forth the

time expended by each attorney, the attorneys’ hourly rates, and

the nature of the work performed.    Petitioner’s counsel contend
                               - 33 -

that one group of Hoyt investors (the general group) ranged in

size from 97 to 75 members during the 14-month period that

petitioner participated in the group fee arrangement and that

petitioner’s pro rata share of the general group’s fees was

computed by dividing the total monthly charges equally among all

members of the group.23   Petitioner’s counsel further contend

that there existed a separate group of nine Hoyt investors

including petitioner (the litigation group) whose cases were set

for trial during the Court’s February 2004 trial session and that

the nine Hoyt investors shared the total billing costs of trial

preparation equally, with the exception of approximately 15 hours

that were allocated among the general group.   In addition,

petitioner’s counsel produced a spreadsheet demonstrating how the

total monthly fees incurred by the general group of Hoyt investor

clients in January 2004 were divided equally among petitioner and

the other participants.

     After reviewing the record, we conclude that petitioner’s

share of the group fees was incurred in connection with her

section 6015 proceeding, that petitioner benefited from the work

her attorneys performed for both groups of Hoyt investor clients,

and that petitioner is entitled to recover a reasonable share of

the fees and costs she incurred as a member of the group.     With


     23
      The billing records of the general group’s account appear
to be missing the first page for the month of December 2003. See
infra note 26.
                              - 34 -

respect to the litigation group of Hoyt investor clients, we

award petitioner $3,577.22, which represents a one-ninth share of

the attorney’s fees adjusted to an hourly rate of $150 and

costs.24

     The problem with petitioner’s attempt to recover her

allocable portion of the general group’s fees and costs is that

the information provided does not enable us to fully evaluate the

reasonableness of the group fees or the reasonableness of the

allocation.   The composition of the general group of Hoyt

investors varied from month to month as clients chose to have

their claims dismissed or became widowed and divorced and sought

relief only under section 6015(c).     Because the billing records



     24
      We compute petitioner’s share of the litigation group’s
fees and costs as follows: $37,667 (total fees and costs
incurred by litigation group), minus $13,962 (total attorney’s
fees incurred at $195 hourly rate), plus $10,740 (total
attorney’s fees incurred at $195 hourly rate adjusted to hourly
rate of $150), minus $2,250 (15 hours of work performed at $150
hourly rate), divided by 9 (members of litigation group), equals
$3,577.22.

     We subtracted 15 hours of work performed at an hourly rate
of $150 in computing the total amount of fees and costs incurred
by the litigation group because petitioner’s counsel stated that
approximately 15 billable hours shown on the billing records of
the litigation group’s account were actually charged to members
of the general group. Because petitioner’s counsel have failed
to identify the nature of the work or hourly rate for those 15
hours, we assume that they were billed at the highest hourly rate
allowed. Further, we do not add any charges for the 15 hours to
the total costs and fees incurred by the general group of Hoyt
investors in computing petitioner’s share of that group’s fees
and costs because we lack any information about the 15 hours of
work performed.
                               - 35 -

for both petitioner’s and the general group’s accounts lack

detailed information regarding the number of Hoyt investor

clients who participated in the fee arrangement in each of the

relevant months, it is impossible to verify that the generic

monthly charges for group fees that appear on the records for

petitioner’s individual account are reasonable and were

reasonably allocated among petitioner and the other Hoyt investor

clients.25

     Petitioner bears the burden of proving that the amount of

costs claimed is reasonable.   See Rule 232(e); Powers v.

Commissioner, 100 T.C. 457, 491 (1993), affd. in part, revd. in

part and remanded 43 F.3d 172 (5th Cir. 1995).   We conclude that

because petitioner has failed to fully substantiate her claim for

a share of the general group’s fees, she is entitled to recover

only a portion of the amount she claims.   For purposes of

computing the amount petitioner is entitled to recover, we shall

assume that the composition of the general group of Hoyt investor

clients remained constant at its greatest size, 97, throughout

the 14-month period that petitioner participated in the group fee

arrangement.   Accordingly, we award petitioner $1,348.69, which




     25
      Had petitioner produced documentation for each month that
showed the number of clients who shared the fees, such as a
spreadsheet similar to that produced for the January 2004 fee
allocation, we could have properly determined whether the amount
of costs petitioner claims was reasonable.
                              - 36 -

represents a one-ninety-seventh share of the general group’s

attorney’s fees adjusted to an hourly rate of $150 and costs

incurred on or after March 15, 2003.26

     5.   Conclusion

     To summarize, we award petitioner the following attorney’s

fees and costs:27




     26
      Although the billing records submitted for the general
group’s account were incomplete, see supra note 23, we were able
to construct a complete set of billing records using the records
submitted in related cases involving motions for litigation costs
that were filed by other members of the general group of Hoyt
investors. See Foy v. Commissioner, T.C. Memo. 2005-116; Owen v.
Commissioner, T.C. Memo. 2005-115. We compute petitioner’s share
of the general group’s fees and costs as follows: $152,710.78
(fees and costs incurred by the general group of Hoyt investors
on or after Mar. 15, 2003), minus $94,848 (attorney’s fees
incurred at an hourly rate of $195 on or after Mar. 15, 2003),
plus $72,960 (attorney’s fees incurred at $195 hourly rate on or
after Mar. 15, 2003, adjusted to hourly rate of $150), divided by
97 (members of Hoyt investor group), equals $1,348.69.
     27
      Because respondent makes no argument as to the
reasonableness of his position regarding his denial of relief
from joint and several liability under sec. 6015(b) and (f), we
do not apportion petitioner’s award of attorney’s fees according
to whether respondent’s positions with respect to sec. 6015(b),
(c), or (f) were substantially justified. See Swanson v.
Commissioner, 106 T.C. 76, 102 (1996); Rowe v. Commissioner, T.C.
Memo. 2002-136; O’Bryon v. Commissioner, T.C. Memo. 2000-379.
                               - 37 -

                               Hours       Hourly
         Attorney/Item        expended      rate     Total cost

     Wendy Pearson              4.1         $150      $615.00
     Terry Merriam              6.4          150       960.00
     Jennifer Gellner          12.5          150     1,875.00
     Jaret Coles                6.5          125       812.50
     Costs (legal and
       contract assistance)      --           --       940.00
     Share of group fees
       and costs1                –-           --      4,925.91
         Total fees and                              10,128.41
           costs
          1
           Petitioner’s award for her share of group fees
     and costs includes $3,577.22 (share of fees from the
     litigation group) and $1,348.69 (share of fees from the
     general group).

C.   Conclusion

     We have carefully considered all remaining arguments made by

the parties for results contrary to those expressed herein, and,

to the extent not discussed above, we find those arguments to be

without merit.

     To reflect the foregoing,

                                           An appropriate order and

                                      decision will be entered.
