                          T.C. Memo. 2003-159



                        UNITED STATES TAX COURT



                    DALLAS R. HALL, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 10308-01.                Filed May 29, 2003.



       Dallas R. Hall, pro se.

       Kelley A. Blaine, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


       LARO, Judge:   Petitioner moves the Court for an award of

administrative costs under section 7430(a)(1).      We decide whether

he is entitled to an award of any of those costs.      We hold he is

not.    Section references are to the applicable versions of the

Internal Revenue Code.
                                -2-

                         FINDINGS OF FACT

     Many facts were stipulated.   We incorporate herein by this

reference the parties’ stipulations of fact and the exhibits

submitted therewith.   We find the stipulated facts accordingly.

Petitioner resided in Ketchum, Idaho, when his petition was

filed.

     Petitioner is a licensed real estate and mortgage broker who

conducts a money-lending operation (operation) through his sole

proprietorship (sole-proprietorship) and his wholly owned

corporation (corporation).   In the operation, third party

investors (investors) lend money to the sole-proprietorship, the

sole-proprietorship lends money to the corporation, and the

corporation lends money to real estate developers and other

contractors (collectively, developers).

     Petitioner filed a 1994 Form 1040, U.S. Individual Income

Tax Return.   Petitioner reported on Schedule C, Profit or Loss

From Business, of that return that the sole-proprietorship had

gross receipts of $16,807, total expenses of $102,989, and a net

loss of $86,182.   Petitioner claimed as one of the expenses

“Other Interest” of $77,872 for interest paid to the investors.

Petitioner claimed as the other expenses “bad debts”, “car and

truck expenses”, “depreciation”, “legal and professional

services”, “travel”, “meals and entertainment”, and “other

expenses”.
                                -3-

     The Commissioner selected petitioner’s 1994 tax return for

examination and mailed to petitioner a letter scheduling an

initial appointment for the examination.     Petitioner did not

appear for that appointment.   Subsequently, on April 24, 1996,

the Commissioner issued to petitioner a 30-day letter disallowing

all amounts claimed for “bad debts”, “interest”, “travel”, “meals

and entertainment”, and “other expenses”,1 and determining that

petitioner was liable for an accuracy-related penalty for

negligence and an addition to tax for failure to file timely.

The 30-day letter provided generally that the expenses were

disallowed because petitioner had not established that:      (1) He

had paid them and (2) they were ordinary and necessary business

expenses.   The 30-day letter informed petitioner that he could

discuss these changes on May 13, 1996, with a representative of

the Internal Revenue Service (IRS).

     At the scheduled time, petitioner met with a tax auditor

named Zora Christian (Christian).     Christian requested

substantiation for the disallowed deductions.     Petitioner

informed her that he did not have with him any of the requested

substantiation for the bad debt or interest expenses.       Christian

delivered to petitioner an information document request (IDR)

specifically requesting that information.     The IDR set a reply



     1
       In all, respondent disallowed $97,330 of the deductions
which petitioner claimed on Schedule C.
                                 -4-

date of May 23, 1996.    Petitioner first delivered some of the

information to the Commissioner on June 4, 1996.

     On July 15, 1996, Christian met with petitioner’s

representative, Dan Jones (Jones).     Jones did not have a power of

attorney from petitioner, and Christian declined to discuss with

him the specifics of petitioner’s case.    Christian later issued

to petitioner a second IDR requesting a breakdown of his Schedule

C gross receipts.    Whereas this IDR requested a reply by July 25,

1996, the Commissioner received the requested information on

August 12, 1996.    On August 13, 1996, Christian revised her

examination report to reflect that information and sent the

revised report to petitioner with a notice advising him that he

could respond to the revised report within 10 days.      Petitioner

did not respond to the revised report.    On September 9, 1996, the

Commissioner issued to petitioner a notice of deficiency that

reflected the adjustments in the revised report.

     Petitioner subsequently requested from the Commissioner

further consideration of his 1994 tax return.    The Commissioner

honored that request by scheduling a meeting for October 22,

1996.   At the scheduled time, petitioner met with a tax auditor

named Shirley Finn (Finn).    Petitioner gave to Finn:   (1) A rough

explanation of his sole-proprietorship’s business, but not

containing any reference to the corporation or to the flow of

funds from the investors to the developers, and (2) certain other
                                 -5-

documents related to the interest expense.   Finn verified from

this information that petitioner had in fact paid $47,737 of the

claimed interest expense but questioned petitioner’s claimed

deduction of this interest as business interest.

     The case was reassigned to another revenue agent, Pamela

Carter (Carter).    Carter also questioned the deductibility of the

interest as business interest and questioned whether petitioner

had issued information returns (Forms 1099) to the people to whom

he had paid the interest.   On November 13, 1996, Carter faxed an

IDR to Jones requesting Forms 1099 issued to the payees of the

interest and certain other information related to the interest’s

characterization.   Two days later, Carter spoke with Jones, and

he gave to her some of the requested information.    Jones did not

mention that the corporation was an intermediary in petitioner’s

operation.

     Carter met with Jones on November 22, 1996.    During the

meeting, Carter determined that petitioner had actually paid

$61,752.86 of interest.   Carter asked Jones for additional

information on the corporation and issued to petitioner an IDR

requesting documentation of petitioner’s loans to the corporation

and an allocation of his interest between business, personal, and

investment pursuits.   Carter also requested that petitioner

identify where on the return he had reported certain items of

income, and she requested that petitioner furnish to her either
                                 -6-

copies of Forms 1099 for interest paid to investors, or an

explanation why no Forms 1099 were filed or required.    On

November 25, 1996, Jones responded to part of the IDR by

telephone and indicated that he would call Carter back on the

next day with other information.   Jones never did so.   Carter

closed the case with no change to the adjustments detailed in the

notice of deficiency.

     Petitioner did not petition this Court with respect to the

notice of deficiency, and, on February 10, 1997, respondent

assessed the deficiency shown in that notice.   Approximately 2

months later, petitioner asked the Commissioner to reconsider the

adjustments underlying that deficiency.   On March 4, 1998, Dennis

Duggan (Duggan), a revenue agent, notified petitioner that Duggan

was assigned to reconsider those adjustments and requested from

petitioner the books and records of the sole-proprietorship and

the corporation.   Petitioner and Duggan met on June 11, 1998.

Petitioner did not provide the requested books and records (or

any other new information) to Duggan.   Duggan concluded his

reconsideration with no change and forwarded the case to Appeals

for its consideration.

     Lydio Sison (Sison), an Appeals officer, considered the case

on behalf of Appeals.    During a conference with Sison, petitioner

discussed the role that his corporation played in his operation.

Petitioner did not at the conference produce to Sison
                                 -7-

documentation regarding the use of the money that he had

borrowed, nor did he produce to Sison a note from the corporation

or other documents which Sison desired.    Following the appeals

conference, petitioner wrote a letter to Sison on September 15,

1998, in an attempt to explain his operation.    The letter did not

mention the corporation, and it did not discuss the corporation’s

role in the operation.    Sison asked John Keegan (Keegan), whom

petitioner had hired to represent him on or about September 15,

1998, to present to Sison the books and records to support

petitioner’s argument.    Keegan declined to do so.   Following the

Appeals conference, Sison allowed certain reductions in the

adjustments listed in the notice of deficiency.    Sison did so

because Sison believed that they had been allowed in the prior

reconsiderations, but not taken into account when the tax was

assessed.

     Following the partial abatement of tax pursuant to Sison’s

recommendation, petitioner made a request under the Freedom of

Information Act (FOIA) for a copy of his 1992 and 1994

administrative files.    On May 15, 1999, Keegan attended an IRS

“Problem Solving Day” and presented to representatives of the IRS

a narrative as to petitioner’s case.    Keegan also presented the

representatives with copies of approximately 500 pages of

documents in the 1992 and 1994 administrative files which he had

received pursuant to the FOIA request.    Keegan’s narrative
                                -8-

partially mentioned the role of the corporation in petitioner’s

operation but did not state that petitioner lent money to the

corporation.

     Subsequent to May 15, 1999, the Commissioner’s Problem

Resolution Program (PRP) referred petitioner’s case to the

Commissioner’s examination division, which assigned the case to a

revenue agent named Michelle Ho (Ho).   Ho received the case on

June 5, 1999, reviewed the file, and requested additional

information from Keegan on June 15, 1999.   Keegan refused to

provide that information, and he declined to meet with Ho at that

time.   Ho determined shortly thereafter that no change to the

prior findings would be appropriate.

     Subsequently, pursuant to a request from PRP, Ho

reconsidered the case and sent to Keegan an offer to allow

petitioner to deduct his verified interest as an expense.     Ho’s

offer conditioned that deduction on petitioner’s recognition of

an equal amount of Schedule C income.   Ho and her manager,

Darline Farr, later met with Keegan on October 28, 1999, to

discuss Ho’s offer.   Following a lengthy discussion between the

three, Ho and Farr agreed to allow the interest expense of

$44,481 without requiring the recognition of a corresponding

amount of income.
                                  -9-

                               OPINION

     Section 7430(a)(1) allows a taxpayer to recover reasonable

administrative costs incurred in certain administrative

proceedings before the Internal Revenue Service.     The Court may

award such a recovery if the taxpayer:     (1) Is the prevailing

party and (2) did not unreasonably protract the administrative

proceeding.    Sec. 7430(a) and (b)(3).   A taxpayer is not a

“prevailing party” if the Commissioner establishes that the

Commissioner’s position in the administrative proceeding was

substantially justified.    Sec. 7430(c)(4)(B)(i).   For purposes of

this case, respondent concedes that petitioner is entitled to an

award of reasonable administrative costs if the Commissioner’s

position in the administrative proceeding was not substantially

justified.    The Commissioner is considered to have taken a

position in that proceeding as of the date of the notice of

deficiency.    Sec. 7430(c)(7)(B).

     The Commissioner’s position is substantially justified if it

had a reasonable basis in both law and fact, or, in other words,

was “justified to a degree that could satisfy a reasonable

person”.   Pierce v. Underwood, 487 U.S. 552, 565 (1988); Han v.

Commissioner, T.C. Memo. 1993-386.      We look to whether the

Commissioner’s position was reasonable given the legal precedents

and available facts and circumstances at the time the

Commissioner took his position.      Maggie Mgmt. Co. v.
                               -10-

Commissioner, 108 T.C. 430, 443 (1997); DeVenney v. Commissioner,

85 T.C. 927, 930 (1985).   The fact that the Commissioner

eventually concedes a case does not necessarily mean that his

position was unreasonable, Sokol v. Commissioner, 92 T.C. 760,

767 (1989), but remains a fact to be considered, Powers v.

Commissioner, 100 T.C. 457, 471 (1993), affd. in part, revd. in

part and remanded on another issue 43 F.3d 172 (5th Cir. 1995).

     We conclude on the basis of the facts and circumstances at

hand that respondent’s position in the administrative proceeding

was substantially justified.   We believe that the Commissioner

acted reasonably in seeking and evaluating information from

petitioner and his representatives as to the correctness of the

determination reflected in the notice of deficiency.    Respondent

is entitled to maintain his position until adequate

substantiation, including oral testimony, is received and

verified.   Sokol v. Commissioner, supra at 765.   We believe that

it was reasonable for the Commissioner to not have conceded the

relevant portion of his determination until the meeting between

Keegan, Ho, and Farr.

     All arguments of the parties have been considered.     Those

arguments not discussed herein have been rejected as without

merit.   Accordingly,

                                           Decision will be entered

                                      for respondent.
