                       T.C. Memo. 1997-402



                     UNITED STATES TAX COURT



   EUGENE J. PHILLIPS AND BARBARA A. PHILLIPS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8990-95.                 Filed September 10, 1997.




     Thomas J. Hall and Neil V. Birkhoff, for petitioners.

     John C. McDougal, for respondent.



                       MEMORANDUM OPINION


     WELLS, Judge: The instant matter is before us on

petitioners' motion for reasonable litigation costs pursuant to

section 7430 and Rule 231.   Unless otherwise noted, all section

references are to the Internal Revenue Code in effect at the

relevant times, and all Rule references are to the Tax Court
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Rules of Practice and Procedure.    Neither party has requested a

hearing on petitioners' motion.    Accordingly, we rule on

petitioners' motion on the basis of the parties' submissions and

the record in the instant case as a whole.    We incorporate by

reference herein the portions of our opinion on the merits in the

instant case, Phillips v. Commissioner, T.C. Memo. 1997-128, that

are relevant to our disposition of the motion.

     On March 11, 1997, we issued our opinion on the substantive

issues in the instant case.    We found that petitioners engaged in

their horse activity for profit and, accordingly, held that

petitioners were entitled to deduct their horse activity expenses

in excess of activity income for the years in issue.

     Generally, section 7430(a) provides for the award of

reasonable administrative and litigation costs to a taxpayer who

is a prevailing party in an administrative or court proceeding

brought against the United States involving the determination of

any tax, interest, or penalty pursuant to the Code.    To be a

"prevailing party", a taxpayer must establish that:    (1) The

position of the United States was not substantially justified;

(2) the taxpayer substantially prevailed with respect to either

the amount in controversy or the most significant issue or set of

issues presented; and (3) as pertinent to the instant matter, the

taxpayer met the net worth requirements of 28 U.S.C. sec.

2412(d)(2)(B) (1994) at the time the petition in the case was

filed.   Sec. 7430(c)(4)(A).   Additionally, an award of litigation
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costs may be made only where a taxpayer has exhausted available

administrative remedies, sec. 7430(b)(1), and no award of costs

may be made with respect to any portion of an administrative or

judicial proceeding that the taxpayer has unreasonably

protracted, sec. 7430(b)(4).   Moreover, the costs claimed must be

reasonable in amount.   Sec. 7430(c).

     Petitioners bear the burden of proving that each of the

foregoing requirements has been satisfied.1   Rule 232(e).   The

requirements are conjunctive, and failure to prove any one will

preclude an award of costs to petitioners.    Minahan v.

Commissioner, 88 T.C. 492, 497 (1987).

     Respondent contends that petitioners have not shown that the

position of the United States was not substantially justified and

that the amount of attorney's fees claimed is reasonable.

Respondent concedes that petitioners have satisfied the other

1
     References to sec. 7430 in this opinion are to that section
as amended by sec. 1551 of the Tax Reform Act of 1986, Pub. L.
99-514, 100 Stat. 2752 (effective for proceedings commenced after
Dec. 31, 1985), and by sec. 6239(a) of the Technical and
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, 102 Stat.
3342, 3743-3746 (effective with respect to proceedings commenced
after Nov. 10, 1988). Sec. 7430 was amended by the Taxpayer Bill
of Rights 2 (TBR2), Pub. L. 104-168, sec. 701, 110 Stat. 1452,
1463-1464 (1996), effective with respect to proceedings commenced
after July 30, 1996. The amendments to the section place on the
Commissioner the burden of establishing that the position of the
Commissioner was substantially justified. Sec. 7430(c)(4)(B). A
judicial proceeding is commenced in this Court with the filing of
a petition. Rule 20(a). Petitioners filed their petition on May
30, 1995. Accordingly, the amendments to sec. 7430 enacted by
TBR2 do not apply here. Maggie Management Co. v. Commissioner,
108 T.C. 430 (1997); Schlicher v. Commissioner, T.C. Memo. 1997-
163; Sicard v. Commissioner, T.C. Memo. 1996-476.
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requirements for the award of reasonable litigation costs.      We

shall first consider whether respondent's position was

substantially justified.

       A position is substantially justified if it is justified to

a degree that could satisfy a reasonable person and has a

reasonable basis in both fact and law.    Pierce v. Underwood, 487

U.S. 552, 565 (1988); Nalle v. Commissioner, 55 F.3d 189, 191

(5th Cir. 1995), affg. T.C. Memo. 1994-182; Swanson v.

Commissioner, 106 T.C. 76, 86 (1996).    The determination of

reasonableness is based on all of the facts and circumstances

surrounding the proceedings.    Nalle v. Commissioner, supra at

191.    A position has a reasonable basis in fact if there is such

relevant evidence as a reasonable mind might accept as adequate

to support a conclusion.    Pierce v. Underwood, supra at 564-565.

The inquiry must be based on the facts reasonably available to

the Commissioner when the position was maintained.    Coastal

Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 689

(1990).

       The fact that the Commissioner loses on the merits does not

establish that a position was not substantially justified, but it

is a factor to be considered.    Nalle v. Commissioner, supra at

192; Wilfong v. United States, 991 F.2d 359, 364 (7th Cir. 1993);

Estate of Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir.

1991); Powers v. Commissioner, 100 T.C. 457, 471 (1993).     The

fact that the evidence favoring the Commissioner's position fails
                               - 5 -

to persuade the trier of fact does not necessarily mean that the

Commissioner's position did not have a reasonable basis in fact,

Gantner v. Commissioner, 92 T.C. 192, 198 (1989), affd. 905 F.2d

241 (8th Cir. 1990), unless that evidence is unusually scanty or

unworthy of belief, VanderPol v. Commissioner, 91 T.C. 367, 370

(1988).   The Commissioner cannot escape an award of costs

pursuant to section 7430 simply because a case presents questions

of fact, Minahan v. Commissioner, supra at 500-502, or of witness

credibility, Windsor Prod. Corp. v. Commissioner, T.C. Memo.

1995-556.   A position is not substantially justified in law if

legal precedent does not substantially support the Commissioner's

position given the facts available to the Commissioner.      Coastal

Petroleum Refiners, Inc. v. Commissioner, supra at 688.

     Respondent's position, which was stated in the notice of

deficiency, was that petitioners' horse activity was an activity

not entered into for profit.   In the answer, respondent denied

certain of petitioners' allegations.

     Petitioners contend that respondent's position was not

substantially justified because:   (1) Respondent failed to

exercise reasonable and appropriate discretion to resolve this

action without a court proceeding, (2) respondent did not conduct

any pretrial discovery, (3) respondent relied on the presumption

of correctness accorded the determination in the notice of

deficiency and did not present any evidentiary or legal support

for respondent's position, (4) the Court found no support for
                               - 6 -

respondent's position on any of the factors provided pursuant to

section 1.183-2(b), Income Tax Regs., (5) the Court found for

petitioners with regard to all of the relevant factors pursuant

to section 1.183-2(b), Income Tax Regs., and (6) respondent knew,

or should have known, that the facts in the instant case

supported petitioners' position.

     Respondent, on the other hand, contends that petitioners

have offered no specific details that establish an overriding

weakness in respondent's circumstantial case or any legal

authority with which respondent's case is clearly inconsistent.

Additionally, respondent contends that petitioners are

essentially arguing that, because petitioners won the case,

respondent's position was not substantially justified.

     Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of factors to be considered in deciding whether

an activity is engaged in for profit.   As stated in our prior

opinion, we considered those factors in reaching a decision on

the merits in the instant case.    No single factor, and not even

the existence of a majority of such factors, is controlling.

Keanini v. Commissioner, 94 T.C. 41, 47 (1990).

     We conclude that respondent's position was substantially

justified.   Among the facts in the record that bore negatively on

petitioners' claimed profit motive were the following:   (1)

Petitioners had no financial plan or written budget; (2)

petitioners went bankrupt; (3) petitioner Eugene J. Phillips had
                                 - 7 -

substantial income that was sheltered from the losses from the

activity in issue; (4) certain expenses taken by petitioners were

not farm related; (5) petitioners' only records on their horses'

bloodlines were registration applications; and (6) petitioners

had a consistent history of losses during 1987 through 1993.

     From the foregoing facts, a reasonable person could infer

that petitioners' horse activity was not entered into for profit.

It was not until petitioners testified at trial and presented

other persuasive evidence to overcome the negative inferences of

such facts that petitioners were able to prevail.          Consequently,

in the instant case, we conclude that respondent had a reasonable

basis in fact and law for the position that petitioners did not

have an actual and honest profit objective.

     As we have concluded that respondent's position was

substantially justified, we need not consider the issue of

whether the amount of attorney's fees claimed by petitioners is

reasonable.

     To reflect the foregoing,


                                              An appropriate order

                                         will be issued.
