           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                                            FILED
                                                                         October 22, 2008
                                       No. 07-60647
                                                                      Charles R. Fulbruge III
                                                                              Clerk


GERARD HENNESSEY AND AUDREY KATHLEEN HENNESSEY,

                                                  Petitioners,
v.

COMMISSIONER OF INTERNAL REVENUE,

                                                  Respondent.




                              Appeal from a Decision of
                             the United States Tax Court
                                 No. 1:03-CV-950-LY




Before JONES, Chief Judge, GARWOOD and SMITH, Circuit Judges.
PER CURIAM:*


       Gerard and Audrey Hennessey appeal the Tax Court’s denial of their mo-
tion for costs. We affirm.




       *
         Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
                                 No. 07-60647

                                       I.
      The Hennesseys had three sources of income. First, they were the sole
shareholders of Beacon Telephone Systems, Inc. (“Beacon”). Second, Audrey
Hennessey worked as a professor at Texas Tech University. Third, Audrey dir-
ected research at Texas Tech’s Institute for Studies in Organizational Automa-
tion (“ISOA”) and had formed an unincorporated consulting business with anoth-
er professor based on the work. Audrey completed approximately 150 trips per
year in connection with those positions. The Hennesseys claimed the expenses
from these trips as business deductions.
      The Hennesseys submitted several incomplete, deficient, or conflicting tax
returns beginning in 1992. The IRS received two Forms 1040 from them for
their 1992 taxes, both marked “Estimated.” The Hennesseys submitted four
Forms 1040 for 1993, each starkly different from the others: two were unsigned;
total income varied from $54,300 on the first form to $19,442 on the final form;
and Audrey’s involvement with ISOA earned her $7,706 in income on one form
and saddled her with a $37,098 loss on another. The Hennesseys submitted two
Forms 1040 for 1994 as well, with ISOA income again differing by over $20,000.
For 1995, $195,000 of income from ISOA was not disclosed.
      In 1996, the IRS notified the Hennesseys that their 1992 tax return had
been selected for examination. IRS Agent Susan Sutton requested several spe-
cific documents from the Hennesseys, who produced several “general ledgers”
that listed dates, amounts, and types of expenses but did not supply the purpose
of the expense or documentation. Later, the Hennesseys presented Sutton with
revised ledgers containing some of this information, which Sutton determined
was inconsistent with the deductions. The IRS informed the Hennesseys that
they were deficient on their 1992 tax returns and that the investigation was be-
ing expanded to include other years.
      The IRS issued a letter in 1998 proposing changes to the Hennesseys’ re-


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                                         No. 07-60647

turn, which the Hennesseys appealed internally within the agency. The appeal
ultimately ended with the conclusion that the Hennesseys were deficient on
their personal returns from 1993 to 1996 and that their Beacon tax returns from
the same time period required adjustments. The IRS finally determined that nu-
merous deductions had not been adequately substantiated and that $195,000 of
ISOA income had been improperly deferred on the 1995 return.1
        The Hennesseys filed a petition with the Tax Court charging that their de-
ductions were substantiated and that they did not fail to report taxable income
for ISOA. After the IRS filed an answer, the Hennesseys agreed to file “mockup”
tax returns. Once those returns were provided, the parties negotiated a settle-
ment.
        The Hennesseys moved for costs under 26 U.S.C. § 7430.2 The IRS object-
ed, stating that its position was “substantially justified.”3 After a hearing, the
special trial judge agreed and denied costs. The Tax Court adopted the judge’s
findings of fact and conclusions of law and denied costs.


                                                II.
        “We review the tax court’s denial of a request for litigation costs for abuse
of discretion.” Estate of Cervin v. Comm’r, 111 F.3d 1252, 1256 (5th Cir. 1997)
(citing Nalle v. Comm’r, 55 F.3d 189, 191 (5th Cir. 1995)). We will reverse the
Tax Court’s determination only if we have “a definite and firm conviction that


        1
        In the appeal, the Hennesseys first took the position that this income was properly de-
ferred under the accrual method, as distinguished from the cash method they had initially used
for ISOA income.
        2
         This allows for administrative and litigation costs to be awarded to a “prevailing par-
ty” in a tax case.
        3
             Under 26 U.S.C. § 7430(c)(4)(B)(i), a “party shall not be treated as the prevailing par-
ty . . . if the United States establishes that the position of the United States in the proceeding
was substantially justified.”

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                                   No. 07-60647

an error of judgment was committed.” Nalle, 55 F.3d at 191 (citing Bouterie v.
Comm’r, 36 F.3d 1361, 1367 (5th Cir. 1994)). For the IRS to be substantially jus-
tified, it need only show that its position was “justified to a degree that could sat-
isfy a reasonable person.” Estate of Baird v. Comm’r, 416 F.3d 442, 446 (5th Cir.
2005) (citing Terrell Equip. Co. v. Comm’r, 343 F.3d 478, 482 (5th Cir. 2003)).
      The Hennesseys argue that the IRS was not substantially justified in two
of its positions: first, in disallowing of some of the Hennesseys’ deductions, and
second, in finding that the Hennesseys improperly deferred income. We address
each in turn.


                                         A.
      A deduction is a matter of legislative grace, so the taxpayer has the burden
of showing the deduction was proper. INDOPCO, Inc. v. Comm’r, 503 U.S. 79,
84 (1992) (internal quotations omitted). A taxpayer must substantiate business
travel with the trip’s cost, time, place, and purpose. See 26 U.S.C. § 274(d). Fail-
ure to include that information results in disallowance of the deduction. See Ha-
beeb v. Comm’r, 559 F.2d 435, 437 (5th Cir. 1977).
      The Hennesseys failed to carry their burden of proving their deductions
were proper. They did not provide the IRS with supporting documentation for
all of their trips; some of the documentation they did provide was not consistent
with their deductions; and they did not provide the required business purpose
needed for several deductions. Those errors provided the IRS with the substan-
tial justification it needed to take its administrative position.


                                         B.
      Regarding the issue of deferred income, on their 1995 ISOA return, the
Hennesseys designated the company as a cash basis taxpayer but did not record
$195,000 of ISOA income. The IRS took the position that the income was im-

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                                      No. 07-60647

properly deferred, but the Hennesseys stated in 2000 that it was properly de-
ferred because they had switched to an accrual accounting method for the com-
pany.
        The Hennesseys’ argument for deferred income rests on changing their ac-
counting method from a cash basis to an accrual basis. Title 26 U.S.C. § 446(e),
however, requires that “a taxpayer who changes the method of accounting on the
basis of which he regularly computes his income in keeping his books shall, be-
fore computing his taxable income under the new method, secure the consent of
the Secretary.” The Hennesseys never secured such consent. Thus, the ISOA
returns should have been filed on a cash, not accrual, accounting basis, which
requires that any income received in a given year “be included in the gross in-
come for [that] taxable year.”4 The Hennesseys failed to include income received
in 1995 on their 1995 ISOA tax returns, and that failure provided the IRS with
substantial justification to take its administrative position.
        The decision of the Tax Court is AFFIRMED.




        4
        26 U.S.C. § 451(a); see Arnwine v. Comm’r, 696 F.2d 1102, 1111 (5th Cir. 1983) (“Cash
basis taxpayers are required to include items of income in the taxable year in which such in-
come is actually or constructively received by them” (citations omitted)).

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