                       T.C. Memo. 2005-8



                      UNITED STATES TAX COURT



             DENNIS AND NANCY FLYNN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket No. 7071-03.               Filed January 24, 2005.


     Ned Leiba, for petitioners.

     Lorraine Y. Wu, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   This case is before the Court on

petitioners’ claim for administrative costs under section 7430

and Rule 231.1




     1
        Unless otherwise specified, section references are to the
Internal Revenue Code as amended, and Rule references are to the
Tax Court Rules of Practice and Procedure.
                                 - 2 -

     Petitioners requested that respondent administratively abate

the addition to tax under section 6651(a)(2) for failure to pay

tax for 1993, 1995, and 1996.     Respondent denied their request on

January 13, 2000.     The parties later settled the case, with

respondent conceding the issue for 1993 and petitioners conceding

1995 and 1996.     Petitioners seek $8,162.50 in administrative

costs.

     After concessions, the issue for decision is whether

respondent's position in the administrative proceeding was

substantially justified.     We hold that it was.

     References to petitioner are to Dennis Flynn.

                           FINDINGS OF FACT

     Some of the facts were stipulated and are so found.

A.   Petitioners

     Petitioners were married and resided in Stockton,

California, when they filed the petition.     At all relevant times,

petitioner was a tenured professor at the University of the

Pacific in Stockton, California, and petitioner Nancy Flynn was

employed as an administrator by the Tracy, California, public

school system.

     1.   Petitioners’ Bankruptcy in 1991-92

     Petitioner was a general partner in a ministorage

partnership beginning in 1986.     The ministorage business and

petitioners filed petitions in bankruptcy and received orders
                                - 3 -

releasing them from all of their dischargeable debts under

Chapter 7 of the Bankruptcy Code in 1991 and 1992.2

     2.     Petitioners’ 1993 Income and 1993-97 Tax Returns

     In 1993, petitioners had income of $105,219, including wages

of $87,026 and rental and partnership income of $22,020.    Their

tax liability for 1993 was $14,302, and they had $5,952 withheld

for Federal income tax in 1993.

     Petitioners timely filed their 1993-97 returns.    They did

not pay tax for those years when due other than the amounts

withheld.    Respondent assessed the addition to tax under section

6651(a)(2) for failure to timely pay tax (late payment addition)

of $1,413.66 for 1993 on November 28, 1994; $4,087.25 for 1994 on

November 20, 1995; $714.12 for 1995 on April 22, 1996; $686.07

for 1996 on November 17, 1997; and $192.51 for 1997 on November

16, 1998.

B.   Respondent’s Efforts To Collect Petitioners’ Unpaid Tax for
     1993-96

     1.     Revenue Officer Sims’s Contacts With Petitioners and
            Petitioners’ Representative

     In 1996, Revenue Officer Paul Sims (Sims) was assigned to

collect income tax petitioners owed for 1993-95.    Sims was later

assigned to collect income tax petitioners owed for 1996 and

1997.



     2
          The record does not indicate which debts were discharged.
                                - 4 -

     In a letter dated June 10, 1996, petitioner said that

petitioners had one mortgage with a balance due of $259,492.47

and monthly payments of $2,084.36 for principal and interest.

Petitioner wrote that their certified public accountant and

attorney had told them that foreclosure on petitioners’ home

would generate $61,548 of additional income tax in the year of

the foreclosure.    Petitioner said that their son had been

diagnosed with attention deficit disorder and Tourette’s

syndrome, and that the benefits of the private high school

attended by their son far outweighed the $350 per month tuition

cost.

     Petitioner attached to his June 10, 1996, letter, a letter

from a realtor stating that it was highly likely that the

proceeds from the sale of the home would be less than the balance

due on the mortgage.    Petitioner provided documents showing that

utilities had cost $230.32 per month for the previous 3 months.

Petitioner attached a letter from a dean of the College of the

Pacific stating that petitioner was required to pay $500 per

month for unreimbursed employee expenses.    Petitioner also

attached documents showing the balances of petitioners’

retirement funds.    Petitioner said that petitioners could not

withdraw those funds.

     On September 27, 1996, petitioners filed with respondent an

Application for Taxpayer Assistance Order (Taxpayer’s Application
                               - 5 -

for Relief from Hardship) in which they asked that the late

payment addition for 1993-95 be abated and that a payment plan be

negotiated.

     For January 1997, petitioner Nancy Flynn received gross pay

of $5,734.94 from the Tracy Elementary School District and

$1,204.49 from the Tracy Joint Union High School.    Petitioners’

home was sold on April 3, 1997, due to default under a deed of

trust.

     Petitioner met with Sims on April 24, 1997.    After that

meeting, petitioners retained a new certified public accountant,

Ned Leiba (Leiba).

     On September 2, 1998, petitioners filed an amended return

for 1994, in which petitioners reported a reduced amount of tax

of $27,708.   In it, petitioners reported that they did not have

cancellation of indebtedness income in 1994 under section

108(a)(1)(B) because they were insolvent when a debt was canceled

in January 1994.   On December 21, 1998, (a) petitioners paid the

late payment addition and the tax owed for 1993, 1995, and 1996,

and (b) Leiba gave Sims a letter in which petitioners requested

that respondent abate the late payment addition for 1993-97 and

refund those amounts.

     Respondent accepted petitioners’ amended 1994 return as

substantially correct in that respondent reduced the amount of

tax due from $98,729.52 to $27,719.73.   On January 4, 1999, Sims
                                 - 6 -

wrote petitioners to inform them that he had recommended to his

group manager that respondent abate the late payment addition for

1994.     He also told petitioners that he had denied their request

to abate the late payment addition for 1993 and 1995-97, in part

because petitioners had not had enough tax withheld for those

years.

     On March 3, 1999, Leiba wrote a letter to Sims in which he

argued that petitioners had reasonable cause not to pay tax for

1993, 1995, and 1996.3    Leiba said that the taxpayers had

believed that their withholding was sufficient to pay the tax due

for 1993 and that they had not expected to receive income of

$22,000 from petitioner’s ministorage partnership in 1993.

     Sims wrote a letter to Leiba on March 17, 1999, in which he

said that petitioners’ combined wages in 1993, 1995, and 1996

exceeded the average household income for the area.    Sims denied

petitioners’ request to abate the late payment addition for 1993,

1995, and 1996.

     2.     Respondent’s Appeals Office

     On April 5, 1999, Leiba wrote to Sims to tell him that

petitioners would appeal to respondent’s Appeals Office Sims’s

denial of petitioners’ request to abate the late payment addition

for 1993, 1995, and 1996.    On April 20, 1999, Leiba sent to Sims


     3
        Petitioners allege that respondent abated the late
payment addition for 1997.
                                 - 7 -

a complete set of documents and correspondence that he had

previously submitted to Sims.    Leiba wanted the Appeals Office to

have a complete set of documents to review in evaluating

petitioners’ request.

     On May 25, 1999, Sims prepared a penalty appeal record

regarding petitioners’ late payment addition for 1993, 1995, and

1996.   In it, he pointed out that petitioners had a substantial

amount of wages in 1993 and that petitioners had an inadequate

amount of withholding for 1992 and 1993.

     On June 10, 1999, Appeals Officer Joe Gurnaby (Gurnaby)

wrote Leiba to tell him that he had received petitioners’ request

to abate the late payment addition for 1993, 1995, and 1996.      On

October 13, 1999, Gurnaby wrote Leiba to tell him that he had

reviewed petitioners’ request.    Gurnaby said that petitioners

earned good salaries and that their withholding for 1993, 1995,

and 1996 was significantly less than their tax due.    Leiba faxed

a letter to Gurnaby on November 24, 1999, reminding him of

petitioners’ bankruptcy and foreclosure and enclosing other

documents that he had provided to respondent earlier.

     After reviewing Leiba’s November 24, 1999, letter, Gurnaby

wrote Leiba to tell him that Gurnaby would recommend that

petitioners’ request to abate the late payment addition be

denied.   In that letter, Gurnaby stated his opinion that

petitioners’ bankruptcy and foreclosure did not establish that
                                 - 8 -

petitioners could not have paid tax without undue hardship, and

that respondent’s records show that petitioners’ wages from 1994-

97 exceeded $120,000 per year.

     On January 13, 2000, Gurnaby issued the notice of decision

disallowing petitioners’ request to abate the late payment

addition for 1993, 1995, and 1996.       Respondent had requested

information from petitioners several times before denying their

request.   Respondent had requested but petitioners or their

representative did not provide: (a) Petitioners’ canceled checks

and other bank and financial records showing how petitioners

spent their income; (b) documents showing that petitioners were

either unable to pay the tax or would have suffered undue

hardship if they did; and (c) documents showing that services at

the private school attended by their son, who had been diagnosed

with attention deficit disorder and Tourette’s syndrome, were not

available in the public schools.

     3.    Settlement of Petitioners’ Claim

     On August 17, 2001, Leiba sent to Jack Estoll (Estoll),

Gurnaby’s manager, copies of documents petitioners had previously

submitted to respondent’s Appeals Office relating to their

request to abate the late payment addition and claim for refund.

     On September 27, 2001, at a conference attended by Leiba,

Gurnaby, and Estoll, respondent offered to concede the late

payment addition for 1993 if petitioners would concede the late
                                - 9 -

payment addition for 1995 and 1996.     On October 11, 2001, Leiba

wrote Estoll to accept respondent’s settlement offer.    On October

29, 2001, respondent’s Appeals Office confirmed that respondent

had agreed to abate the late payment addition for 1993.

     On December 10, 2001, Leiba wrote to Charles Checchi

(Checchi), respondent’s area director in San Francisco, to ask

him to approve petitioners’ claim for refund of the late payment

addition for 1995 and 1996.

C.   Administrative Costs Claim

     On January 22, 2002, Leiba wrote to Checchi to request

payment of petitioners’ administrative costs.    On March 28, 2002,

Checchi wrote Leiba to inform him that he had spoken to Estoll

about the case and decided not to reconsider the settlement for

1995 and 1996.

     On April 23, 2002, Checchi wrote to inform Leiba that he was

reassigning petitioners’ claim for administrative costs to an

Appeals Office separate from the one that had considered

petitioners’ previous claims.

     On February 10, 2003, Darwyn Pearl (Pearl), Appeals Team

Manager in Seattle, Washington, wrote to petitioners.    Pearl

stated that petitioners’ claim for administrative costs under

section 7430 was disallowed because (1) petitioners had not

substantially prevailed on the amount in controversy or on the
                              - 10 -

most significant tax issue or issues in question, and (2)

respondent’s position was substantially justified.

                              OPINION

A.   Background

     To qualify for an award of costs incurred in connection with

an administrative proceeding at the Internal Revenue Service, a

taxpayer must, inter alia, be the prevailing party.     Sec.

7430(a)(1).   A taxpayer is not the prevailing party and thus is

not entitled to an award of administrative costs if the position

of the United States in the administrative proceeding was

substantially justified.   Sec. 7430(c)(4)(B).    The Commissioner

bears the burden of proving that the position of the United

States was substantially justified.     Id.   As discussed below, we

hold that respondent has made that showing.4




     4
       To qualify for an award of administrative costs, the
taxpayer also must establish that he or she exhausted
administrative remedies available in the Internal Revenue
Service, did not unreasonably protract the proceedings, and
satisfies certain net worth limitations. Sec. 7430(b) and
(c)(4)(A). Respondent concedes that petitioners met those
requirements.

     In addition, to be a prevailing party, the taxpayer must
substantially prevail as to (1) the amount in controversy, or (2)
with respect to the most significant issue or set of issues
presented. Sec. 7430(c)(4)(A)(i). The parties dispute whether
that requirement is met. In light of our holding that
respondent’s position in the proceeding was substantially
justified, we need not decide whether petitioners substantially
prevailed.
                              - 11 -

B.   Whether Respondent’s Position Was Substantially Justified

     1.   Date of Respondent’s Position for Purposes of Applying
          the Substantially Justified Standard

     For purposes of applying the substantially justified

standard, the position of the United States is the Commissioner’s

position as of the earlier of: (1) The date of receipt by the

taxpayer of the notice of decision of the Appeals Office, or (2)

the date of the notice of deficiency.   Sec. 7430(c)(7)(B)(ii);

Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 77 (2004).

Thus, respondent’s position is the position stated in the Notice

of Decision dated January 13, 2000, in which respondent denied

petitioners’ request to abate the late payment addition for 1993,

1995, and 1996.

     2.   When Is the Commissioner’s Position Substantially
          Justified

     The Commissioner's position is substantially justified if,

based on all of the facts and circumstances, the Commissioner’s

position has a reasonable basis in both law and fact.   Pierce v.

Underwood, 487 U.S. 552, 565 (1988) (construing similar language

in the Equal Access to Justice Act, 5 U.S.C. sec. 504 (2000));

Powers v. Commissioner, 100 T.C. 457, 470, 473 (1993), affd. on

this issue, revd. in part and remanded on other issues 43 F.3d

172 (5th Cir. 1995).   For a position to be substantially

justified, there must be substantial evidence to support it.

Pierce v. Underwood, supra at 564-565; Powers v. Commissioner,
                               - 12 -

supra at 473.    Petitioners contend that respondent’s position was

not substantially justified.    We disagree for reasons stated

below.

       3.   Whether Respondent Had a Reasonable Basis in Fact

            a.   Facts Known by Respondent on January 13, 2000

       Petitioners contend that, on January 13, 2000, respondent

lacked a reasonable basis in fact relating to whether petitioners

were liable for the late payment addition for 1993.    We disagree.

       On January 13, 2000, respondent had the following basis in

fact related to whether petitioners were liable for the addition

to tax for failure to pay tax for 1993: (i) Some debts (not

specified in the record) that petitioners had on January 14,

1992, were discharged in bankruptcy; (ii) petitioners had good

incomes at all relevant times (e.g., for 1993, adjusted gross

income of $105,060 and wages of $87,026); and (iii) other than

the amount withheld, petitioners did not pay tax for 1993 when

due.

            b.   Information Requested by Respondent Before
                 January 13, 2000, Which Petitioners Did Not
                 Provide

        Before January 13, 2000, Gurnaby asked petitioners for

specific information which petitioners did not provide by that

date, including:    (i) Canceled checks and other bank and

financial records to show how petitioners spent their income;

(ii) documents showing that petitioners were either unable to pay
                              - 13 -

the tax or would have suffered undue hardship if they did; and

(iii) documents showing that services at the private school

attended by their son were not available in the public schools.

     Gurnaby and Sims told petitioners and Leiba that petitioners

had not established that they exercised ordinary care in

providing for payment of their 1993 tax and that they had not

showed that they could not pay or would have suffered undue

hardship if they had paid the tax on time.

     Petitioners did not provide all of the information that Sims

and Gurnaby requested.   Instead of responding to Sims’s and

Gurnaby’s requests, petitioners emphasized at the administrative

level and in this case that petitioners had filed for bankruptcy

protection in 1991 and had their home in 1997 sold due to default

under a deed of trust.   Gurnaby made clear that he thought that

those two events did not establish that petitioners were unable

to pay their 1993 tax without undue hardship.

     Petitioners conceded that they could not show that services

at the private school attended by their son were not available in

the public schools.   Petitioners contend that information Gurnaby

requested about petitioners’ withholding was not relevant or

readily available to them.   Leiba said in one of his letters to

respondent’s Appeals officers that it was unlikely that

petitioners would have records to support their withholding for
                              - 14 -

1993.5   Petitioners did not explain to respondent during the

administrative proceedings or to this Court why they did not

provide the other information that Gurnaby had requested.

     In deciding whether respondent had a basis in fact, we may

take into account that respondent diligently sought but

petitioners did not provide certain relevant information.    This

situation differs from that in Powers v. Commissioner, supra, in

which the Commissioner made no effort to contact the taxpayer

before issuing the notice of deficiency.   Id. at 476.    Sims and

Gurnaby communicated extensively with petitioners and Leiba,

stated their objections to petitioners’ claim, and repeatedly

asked them for specific information.

     Respondent had a basis in fact for concluding that

petitioners were liable for the late payment addition for 1993.

Thus, respondent reasonably concluded that petitioners were

liable for the late payment addition for 1993.

           c.   Petitioners’ Contentions

     Petitioners contend that respondent lacked a basis in fact

for concluding that they were liable for the late payment

addition for 1993 because (i) respondent did not adequately

consider petitioners’ bankruptcy and the sale of their home due


     5
        There was considerable disagreement at trial about
whether documents should be admitted in evidence. We have
considered all of the documents in the record, including
documents offered by petitioners but not admitted. The exclusion
of documents did not affect the result in this case.
                                - 15 -

to default under a deed of trust or the fact that their

withholdings increased from $3,424 in 1992 to $5,952 in 1993; and

(ii) respondent incorrectly believed that petitioner Nancy Flynn

separately owned a house worth $400,000 with a $300,000 mortgage.

We disagree that these points show that respondent lacked a

reasonable basis in fact.

     Petitioners allege that respondent lost files and documents

and that losing files is evidence of procedural irregularities in

processing petitioners’ case; however, the record does not

support that allegation.

          d.      Conclusion as to Respondent’s Basis in Fact

     We conclude that respondent had a reasonable basis in fact

on January 13, 2000, for denying petitioners’ request for relief

from the 1993 late payment addition.

     4.   Whether Respondent Had a Reasonable Basis in Law

     We next decide whether respondent had a reasonable basis in

law on January 13, 2000, for concluding that petitioners were

liable for the late payment addition for 1993.

     Respondent’s basis in law for that position is section

6651(a)(2), the regulations thereunder, and numerous cases citing

those sections.    Section 6651(a)(2) and the related regulations

provide respondent with a clear basis in law for respondent’s

position that petitioners are liable for the late payment

addition for 1993.    Section 6651(a)(2) provides that taxpayers
                              - 16 -

are liable for an addition to tax for failure to pay the amount

shown as tax on a return on or before the date prescribed for

payment of that tax, unless the failure was due to reasonable

cause and not willful neglect.   See sec. 301.6651-1(c)(1),

Proced. & Admin. Regs.

     Petitioners contend that (a) respondent failed to provide

impartial Appeals hearings as required by section 601.106(c),

Statement of Procedural Rules; and (b) respondent could have

called Sims, Gurnaby, and Estoll as witnesses but did not.

     We disagree that those points show respondent lacked a basis

in law.   First, there is nothing in the record to suggest that

respondent’s administrative review in this case was improper;

every indication is that it was completely proper.   Thus, this

case is distinguishable from Nguyen v. Commissioner, T.C. Memo.

2001-41, and Leewaye v. Commissioner, T.C. Memo. 1988-129.

Second, the record does not show that petitioners could not have

subpoenaed Sims, Gurnaby, and Estoll as witnesses for trial.    If

a witness is equally available to both parties and neither party

calls that witness at trial, then no adverse inference is

warranted.   See United States v. Rollins, 862 F.2d 1282, 1297-

1298 (7th Cir. 1988); Kean v. Commissioner, 469 F.2d 1183, 1187-

1188 (9th Cir. 1972), affg. on this issue and revg. on another

issue 51 T.C. 337 (1968); Grossman v. Commissioner, T.C. Memo.
                                - 17 -

1996-452, affd. 182 F.3d 275 (4th Cir. 1999); Gaw v.

Commissioner, T.C. Memo. 1995-531.

     Petitioners contend that respondent’s acceptance of

petitioners’ amended 1994 return based on section 108 establishes

that petitioners should be excused from the late payment addition

for 1993.    We disagree.   Respondent’s acceptance of petitioners’

amended 1994 return, which reduced income for forgiveness of

indebtedness based on insolvency under section 108, may show that

petitioners were insolvent when a debt of theirs was discharged

in 1994, not that they could not pay tax on their 1993 income.

     5.     Conclusion

     We conclude that respondent had a reasonable basis in both

fact and law on January 13, 2000, for concluding that petitioners

were liable for the late payment addition for 1993.    Thus,

respondent's position in the administrative proceeding was

substantially justified, and petitioners are not entitled to an

award of administrative costs under section 7430.

     To reflect the foregoing,

                                                Decision will be

                                           entered for respondent.
