                  T.C. Memo. 2003-136



                UNITED STATES TAX COURT



    JAMES L. AND SHERRI R. GOERTLER, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3121-01.               Filed May 13, 2003.



     R determined a deficiency in Ps’ tax for 1998
based on their failure to substantiate deductions for
personal exemptions under sec. 151(c), I.R.C., with
respect to persons claimed as dependents. Ps filed a
petition for redetermination, and R subsequently
conceded the entire case. Ps seek recovery of costs in
the amount of $880 pursuant to sec. 7430, I.R.C.

     Held: R’s position in the proceeding at issue was
substantially justified within the meaning of sec.
7430(c)(4)(B)(i), I.R.C., thereby precluding Ps’
recovery of costs under that section.



James L. and Sherri R. Goertler, pro sese.

Thomas J. Travers, for respondent.
                                - 2 -

                         MEMORANDUM OPINION


     HALPERN, Judge:    This case is before the Court on

petitioners’ motion for costs (the motion) pursuant to section

7430 and Rules 230 through 233.1   Petitioners seek to recover

costs in the amount of $880 incurred in connection with

respondent’s determination of a deficiency in tax with respect to

their taxable (calendar) year 1998.2    Respondent objects.

Neither party requested an evidentiary hearing, and we conclude

that such a hearing is not necessary for the proper disposition

of the motion.   See Rule 232(a)(2).    Accordingly, we shall

proceed on the basis of the parties’ submissions.     For the

reasons discussed below, we shall deny the motion.

                 Factual and Procedural Background

     Petitioners are husband and wife residing in Camas,

Washington.   Petitioners made a joint return of Federal income

tax for 1998 by filing a Form 1040, U.S. Individual Income Tax

Return (1998 return).   Petitioners’ certified public accountant

(C.P.A.), David Austen, prepared the 1998 return.     On the 1998

return, petitioners claimed deductions (the section 151(c)


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
     2
        Petitioners initially sought to recover costs in the
amount of $1,000. After conferring with respondent pursuant to
Rule 232(c), petitioners reduced the amount of costs for which
they seek recovery to $880.
                              - 3 -

deductions) for personal exemptions with respect to three

children claimed as dependents (the children).

     By letter dated September 5, 2000, with which an examination

report was enclosed, a Branch Chief at respondent’s Ogden

Customer Service Center notified petitioners that their 1998

return was under examination and requested documentation

establishing the dependent status of the children. That request

apparently was occasioned by respondent’s discovery of a child

support order with respect to one of the children.3   In pertinent

part, the letter states as follows:

          Based upon our initial review of your return,
     we’ve prepared the enclosed examination report showing
     the proposed changes we will make to items on your
     return if we don’t receive any additional information
     from you. * * *

               *    *    *    *       *   *   *

          If you do not agree with the proposed changes,
     please include the following information with your
     response:

               *    *    *    *       *   *   *

          We will review what you send us and contact you as
     soon as possible. Should you still disagree with our
     findings after we review your response and any
     additional information you provide, you have the right
     to file an administrative appeal * * * . You first
     must have provided relevant information to the Contact
     Person named on this letter before your case can be
     considered by Appeals.


     3
        As listed on the 1998 return, the surname of the child in
question does not match that of petitioners. The surname of the
other two children as listed on the 1998 return matches that of
petitioners.
                                 - 4 -

          If we don’t hear from you within 30 days from the
     date of this letter, we will send you a Notice of
     Deficiency * * * .

Petitioners did not respond to respondent’s September 5, 2000,

letter within the 30-day period prescribed therein.

     By notice of deficiency dated November 29, 2000, respondent

determined a deficiency in tax with respect to petitioners for

1998 in the amount of $3,068.    That deficiency was attributable

entirely to respondent’s disallowance of the section 151(c)

deductions.4

     On February 28, 2001, petitioners filed the petition,

assigning error to respondent’s determination.    Although Mr.

Austen, petitioners’ C.P.A., apparently prepared and mailed the

petition, the petition does not identify Mr. Austen or anyone

else as representing petitioners, nor did Mr. Austen or anyone

else subsequently enter an appearance on behalf of petitioners.5

On an unspecified date, Mr. Austen sent a copy of the petition to

the examiner assigned to the case at the Ogden Customer Service

Center (the Ogden examiner), along with the following handwritten

note:    “Dear Mr. Parizek:   I ran out of time & filed a petition

to Tax Court.    If we can resolve the problem thru you great –


     4
        Although respondent also disallowed the child tax credits
that petitioners had claimed for two of the children, such
disallowance was not reflected in respondent’s computation of
petitioners’ corrected tax liability.
     5
        We note that Mr. Austen is not authorized to practice
before this Court.
                                - 5 -

David Austen [phone number]”.   On April 24, 2001, respondent

filed his answer, denying that he had erred.

     By letter dated April 30, 2001, respondent’s Portland

Appeals Office notified petitioners that it had received

petitioners’ appeal request (which is not contained in the

record) and was transferring the case to respondent’s San

Francisco Appeals Office due to a staffing shortage.   The letter

further indicated that, once the San Francisco Appeals Office had

assigned petitioners’ case to an Appeals officer, that Appeals

officer would contact them.

     By letter dated June 4, 2001, Appeals Officer D.R. Eddings

of respondent’s San Francisco Appeals Office invited petitioners

to contact him to schedule a conference.   Mr. Eddings also sent a

copy of his letter to Mr. Austen as petitioners’ authorized

representative.   On June 27, 2001, Mr. Austen faxed a letter to

Mr. Eddings asking him to “review the documents, provided.”

However, Mr. Austen apparently failed to include the referenced

documents with his letter.6   On July 18, 2001, Mr. Austen sent

documents to Mr. Eddings with a letter identifying the enclosures

as “copies of documents sent to the audit section.”    One of the

documents included with Mr. Austen’s July 18 letter (and attached

as an exhibit to respondent’s objection to the motion) is a copy


     6
        The identifying information generated by Mr. Austen’s fax
machine/software and printed at the top of the letter indicates
that the fax consisted of only two pages.
                                  - 6 -

of a letter from Mr. Austen to the Ogden examiner dated January

29, 2001, purporting to transmit “the documents you requested

in your examination”.      Petitioners make no reference to the

January 29, 2001, letter, and respondent claims that he has

been unable to locate in his files any correspondence prior to

July 18, 2001, containing the requested documentation.      We infer

from the foregoing that respondent did not, in fact, receive the

requested documentation prior to July 18, 2001.

      Petitioners and Mr. Eddings reached a basis of settlement in

October 2001.    Pursuant to that settlement, respondent’s counsel

conceded the entire case.

      Petitioners filed the motion on March 8, 2002.     The costs

petitioners seek to recover consist entirely of fees incurred for

services performed by Mr. Austen.

                              Discussion

I.   Section 7430

      A.   General Scope

      Section 7430 provides that a taxpayer may recover reasonable

costs, including attorney’s fees, incurred in connection with any

tax proceeding (administrative or judicial) against the United

States if the taxpayer is the prevailing party in such

proceeding.     Section 7430(c)(4)(B) provides that a taxpayer shall

not be treated as the prevailing party in any proceeding if the

United States establishes that its position in the proceeding was
                                - 7 -

substantially justified.    The position of the United States in an

administrative proceeding is established as of the earlier of (1)

the date the taxpayer receives notice of a decision of the I.R.S.

Office of Appeals, or (2) the date of the notice of deficiency.

Sec. 7430(c)(7)(B).    The position of the United States in a

deficiency proceeding in this Court is that set forth in the

Commissioner’s answer.   E.g., Maggie Mgmt. Co. v. Commissioner,

108 T.C. 430, 442 (1997); see sec. 7430(c)(7)(A).

     B.   Substantial Justification

     For purposes of section 7430, a position of the United

States is substantially justified if it has a reasonable basis in

both law and fact.    E.g., Maggie Mgmt. Co. v. Commissioner, supra

at 443.   The determination of the reasonableness of that position

is based upon the available facts that formed the basis for the

position, as well as any controlling legal precedent.    Id.    The

inquiry is not a static one; that is, a position of the United

States that was reasonable when established may become

unreasonable in light of changed circumstances.   See, e.g., Wasie

v. Commissioner, 86 T.C. 962, 969 (1986); see also sec. 301.7430-

5(c)(2), Proced. & Admin. Regs. (any award of administrative

costs may be limited to costs attributable to the portion of the

proceeding during which the position of the I.R.S. was not

substantially justified).   The fact that the Commissioner

ultimately concedes an issue does not, by itself, establish that
                                  - 8 -

his prior position with respect to that issue was unreasonable.

Maggie Mgmt. Co. v. Commissioner, supra at 443.      However, it is a

factor that may be considered.      Id.

II.   Analysis

      A.   Characterization of the Motion

      Although the motion is styled “Motion for Administration

[sic] Costs”, it references both an “administrative proceeding”

and a “Court proceeding”.      In addition, the motion states that

petitioners exhausted all administrative remedies, which is a

requirement for the recovery of litigation costs.      See sec.

7430(b)(1).      Finally, the earliest time entry submitted by Mr.

Austen in connection with the motion is dated February 28, 2001,

the date on which petitioners filed the petition.7     We shall

therefore treat the motion as a request for litigation costs.

See, e.g., Eldridge v. Commissioner, T.C. Memo. 1996-44 n.2.

      B.   Respondent Established That His Position Was
           Substantially Justified

      Respondent established the position of the United States in

the subject judicial proceeding as of the date of his answer.


      7
        Because Mr. Austen dealt with respondent’s Appeals
Division on a postpetition basis, his fees relating to such
activity are properly categorized as litigation costs rather than
administrative costs. See, e.g., Han v. Commissioner, T.C. Memo.
1993-386; see also sec. 301.7430-4(c)(3) and (4), Example (2),
Proced. & Admin. Regs. (administrative costs include costs
incurred in working with Appeals up to and including the time of
the filing of the petition, but do not include (1) the costs of
preparing and filing the petition, and (2) postpetition costs).
                                 - 9 -

See sec. 7430(c)(7)(A).   Based on the facts available to

respondent at that time, as well as long-standing legal precedent

regarding the availability of tax deductions, respondent’s

position had a reasonable basis in both law and fact and

therefore was substantially justified.   See Maggie Mgmt. Co. v.

Commissioner, 108 T.C. at 443.    When respondent filed his answer,

he had received none of the documentation requested of

petitioners to substantiate the section 151(c) deductions.    Since

deductions are a matter of “legislative grace”, New Colonial Ice

Co. v. Helvering, 292 U.S. 435, 440 (1934), a taxpayer claiming a

deduction “must be able to point to an applicable statute and

show that he comes within its terms.”    Id.   Furthermore, we have

observed on numerous occasions in the context of section 7430

that whenever the resolution of an adjustment requires a factual

determination, it is reasonable for the Commissioner to stand by

his adjustment until he has received from the taxpayer, and has

had a reasonable period of time to verify, documentation

sufficient to substantiate the item in question.    See, e.g.,

Huynh v. Commissioner, T.C. Memo. 2002-110 (involving section

151(c) deductions).

     We note further that when respondent’s Appeals officer

finally received, by letter dated July 18, 2001, the

documentation requested of petitioners, he agreed to a basis of

settlement within a reasonable period (approximately 90 days)
                                - 10 -

thereafter. Cf. Sliwa v. Commissioner, 839 F.2d 602, 609 (9th

Cir. 1988) (6-month delay between I.R.S. receipt of requested

documents and resulting concession of case was not objectively

unreasonable), affg. an unreported Order of this Court.     Thus,

respondent’s position was substantially justified throughout the

duration of the judicial proceeding.

     In essence, petitioners complain that respondent had no

basis for challenging the section 151(c) deductions in the first

place (at least with regard to two of the children).8    Given

petitioners’ failure to respond to respondent’s September 5, 2000

letter in a timely manner, that is not a valid claim.    See

Roberts v. Commissioner, 62 T.C. 834, 836-837 (1974) (in the

context of a taxpayer’s refusal to substantiate his deductions,

the Court rejected the argument that the Commissioner may assess

deficiencies only when he has specific information that a claimed

deduction is not permitted); cf. Powers v. Commissioner, 100 T.C.

457, 472-474 (1993) (Commissioner’s position in notice of

deficiency was not substantially justified because it had no

factual basis and the Commissioner had made no attempt to obtain

information about the case before adopting the position), affd.

in part and revd. in part on another issue, 43 F.3d 172 (5th Cir.

1995).   Taxpayers must be prepared to substantiate their

deductions upon request.     See sec. 6001 (requiring taxpayers to


     8
         See supra note 3.
                                - 11 -

maintain adequate records with regard to their liability for

tax).

III.    Conclusion

        Because respondent’s position in the subject judicial

proceeding was substantially justified, petitioners are not

entitled to recover any of their claimed costs under section

7430.

        To reflect the foregoing,


                                           An appropriate order and

                                      decision will be entered.
