                       T.C. Memo. 1999-33



                     UNITED STATES TAX COURT



   JOSEPH W. EVANS, JR. AND MILDRED S. EVANS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1673-95.               Filed February 2, 1999.


     Joseph W. Evans, Jr. and Mildred S. Evans, pro sese.

     Howard P. Levine, for respondent.


                       MEMORANDUM OPINION


     DINAN, Special Trial Judge:    This case is before the Court

on petitioners' Motion for An Award of Reasonable Litigation and

Administrative Costs pursuant to section 7430 and Rules 230, 231

and 232,1 filed April 11, 1997.    Neither party requested a


     1
           Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year in issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

hearing, and we conclude that a hearing is not necessary.     Rule

232(a)(3).    We decide the matter before us based on the record.

     In a statutory notice of deficiency dated November 1, 1994,

respondent determined a deficiency in petitioners' 1992 Federal

income tax in the amount of $7,888 and an accuracy-related

penalty pursuant to section 6662 in the amount of $1,578.     In the

notice of deficiency, respondent disallowed the following

expenses claimed by petitioners on their 1992 return on the

ground that petitioners had not substantiated the claimed

deductions:

     Schedule   C     Auto expenses*         $7,583
     Schedule   C     Supplies**              4,639
     Schedule   C     Travel                  1,745
     Schedule   C     Meals and
                      entertainment           1,289
     Schedule E       Expense                10,908
     Schedule E       Depreciation            4,505
     Schedule A       Taxes                     565

     * This amount consists of auto expenses of $3,743 from
     Primerica Schedule C and commissions of $3,840 from the
     Product Wholesale Distribution Schedule C.

     ** This amount consists of $2,886 for supplies claimed
     on the Primerica Schedule C and $1,753 for supplies
     claimed on Product Wholesale Distribution Schedule C.

     Respondent also increased a $5,248 tax on an early

distribution reported by petitioners on their return to $6,268,

resulting in an upward adjustment of $1,020.

     Petitioners timely filed their petition on January 30, 1995,

in which they disagreed with each of respondent's above-mentioned

adjustments.

     After the petition was filed, the case was assigned to an

Appeals officer in Tampa, Florida.      Because the principal issue
                               - 3 -

in the case was the substantiation of the claimed expenses, the

case was referred back to the Examination Office in Jacksonville,

Florida; petitioners then met with one of respondent's auditing

agents.   Petitioners presented to respondent's auditing agent

various documentation to substantiate some of their claimed

Schedule C and E deductions.

     By notice dated December 22, 1995, the Court informed the

parties that the case was set for trial at the Trial Session of

the Court in Jacksonville, Florida, beginning on March 11, 1996.

     In a letter to petitioners dated January 26, 1996,

respondent's District Counsel informed petitioners, in part:

          From a review of the file, it appears that your
     case was forwarded to the Jacksonville District to
     review the documentation that you supplied to support
     various deductions taken on you [sic] 1992 tax return.
     It appears that the examiner made the following
     adjustments to the proposed amounts listed on the
     notice of deficiency: 1) the tax on premature IRA
     distribution was increased to $6,268.00 based upon the
     10% excise tax penalty on premature IRA distribution,
     2) the Schedule C auto expenses were reduced by ½
     because you did not verify the business use of your
     vehicle, 3) the Schedule C travel amounts were
     disallowed in their entirety as you did not keep
     adequate records and documentary evidence for business
     travel away from home, 4) the Schedule C Meals and
     Entertainment expenses were disallowed as you did not
     provide records which establish the amount of each
     expenditure, the date the entertainment took place,
     location of entertainment; business purpose of
     entertainment; and business relationship to the person
     entertained; 5) the Schedule E expenses of $9,250.00
     were allowed in accordance with the verification you
     provided. Additionally, we have determined that you
                              - 4 -

     are liable for a accuracy related penalty pursuant to
     I.R.C. § 6662(a) in the amount of $534.00. You had
     provided documentation regarding these areas and the
     examiner made adjustments to the amounts listed in the
     notice of deficiency accordingly. Enclosed please find
     a Statement of Income Tax Changes prepared on the basis
     of the amounts allowed by the Examiner in the district.
     Additionally, we have enclosed a Statement of Account
     for the tax year 1992.

          If you no longer wish to proceed with a trial, I
     have enclosed a set of decision documents which contain
     the revised liability determined by the examiner. The
     amount now determined to be owed is considerably less
     than the original proposed liability. Please review
     the Statement of Income Tax Changes and the proposal
     for settlement. If you agree with the settlement,
     please sign the original and one copy of the decision
     and return them in the envelope provided. The third
     copy is for your file.

          If you no [sic] do not wish to settle the case
     with the amounts determined by the examiner, please
     contact our office. It is important that we begin the
     stipulation process soon in order to comply with the
     Tax Court's rules. In the meantime, we will begin
     drafting a Stipulation of Facts and will forward it to
     you for you to review.

     The decision document referred to in the aforementioned

letter proposed an agreement to a deficiency in tax in the amount

of $2,670 and an accuracy-related penalty in the amount of $534.

     On February 20, 1996, respondent met with petitioners.    On

February 21, 1996, petitioner Joe Evans wrote to respondent the

following:
                         - 5 -

Mr. Howard Levine
Attorney-IRS
Box 35027
400 West Bay St.
Jacksonville, Florida 32202

Dear Howard:

     Thank you for your courtesy with which you
addressed my case in our meeting this Tuesday. I have
reviewed the items we discussed and my findings are as
follows:

     AUTO EXPENSES - As far as I can tell all of
     these should be legitimate. I have placed a
     call to Bill Ragsdale to see if he can shed
     some further light on this and I will advise
     you accordingly.

     COMMISSIONS AND FEES - You are going to
     review my attachments from the J & R Products
     checkbook ledger and communicate to me at a
     later date.

     SCHEDULE C SUPPLIES - The $2,886.00 in
     expenses are all legitimate expenses of which
     I will be glad to review with you item by
     item if you need. I did find some additional
     documentation supporting some of the items.

     ADVALOREM TAXES $565.00. It is clear in my
     checkbook ledger that I made the payments.
     They were probably for advalorem taxes on the
     tag renewals. I will need to pursue that
     with City Hall and see if they have records
     from 1992.

     10% PENALTY ON $10,200.00 of the IRA Equal
     Payment Plan. You took a copy of my
     BellSouth manual describing the process. You
     are to communicate to me on that at a later
     date.

     Please let me know when you are ready to review
this further. Also, if we cannot resolve this
satisfactorily I definitely want to remove the "S" on
that filing in order to preserve my right to appeal. I
appreciate you pointing that out to me as I was not
aware of the nature of the filing. Thank you for your
message on my answering machine clarifying that it was
unnecessary to file a trial memo.
                              - 6 -

     By letter dated February 29, 1996, respondent mailed to

petitioners proposed stipulations of fact.   Respondent's letter

read, in part:

          In considering what additional documents would be
     helpful to resolve these matters, bear in mind that you
     have to provide to the Court's satisfaction that you
     paid each of the items disallowed by the Internal
     Revenue Service and that these represent deductible
     expenses, that is, that there was a valid business
     purpose. Generally, source documents such as cancelled
     checks, invoices and contemporaneously maintained notes
     will help corroborate oral testimony. Travelling
     expenses, including meals and lodging while away from
     home, are subject to a more rigorous substantiation
     requirement under I.R.C. § 274. These expenses require
     what is referred to as "adequate records" or by
     "sufficient evidence corroborating the taxpayers own
     statement" concerning (1) the amount of the expense;
     (2) the time and place of the travel; (3) the business
     purpose of the expense; and (4) the business
     relationship to the taxpayer of persons entertained.
     I.R.C. § 274(d). To guide you, we have enclosed
     pertinent excerpts from the I.R.C. § 274 regulations.

          Concerning the proposed l0% tax for the individual
     retirement account distribution under I.R.C. § 72(t),
     you are correct in that one of the exceptions is where
     the distributions are part of a series of substantially
     equal periodic payments (not less frequently than
     annually) made over the life expectancy of the employee
     of the joint lives of the employee and a designated
     beneficiary. I.R.C. § 72(t)(2)(A)(iv). In order to
     review this issue, we need documents reflecting the
     transfer of funds into the Twentieth Century and
     Donald, Lufkin & Jenrette accounts which established
     the individual retirement accounts, worksheets that you
     prepared (or an explanation) concerning your
     determination of the period over which the periodic
     payments would be made and the statements reflecting
     the periodic payments that were made from the date
     first made to the present. In this regard, please note
     that under I.R.C. § 72(t)(4), if the distributions are
     modified in the first five years such that I.R.C. §
     72(t)(2)(A)(iv) no longer applies, then the tax (plus
     interest) retroactively applies. I.R.C. § 72(t)(4)(A).
     We need to see the documents between 1993 and the
     present to ensure that the distributions still qualify
     for the exception. For your consideration, enclosed is
     a copy of Notice 89-25, 1989-1 C.B. 662 which discusses
                               - 7 -

     the taxation of individual retirement account
     distributions. Question 12 may be applicable.

          We suggest that the parties meet during the week
     of March 4, 1994 after you have had time to review
     these materials. The Court requires the parties to be
     prepared for trial as of 10:00 a.m. on March 11. Mr.
     Levine is available to meet with you between Monday and
     Thursday, March 4 through 7. Unfortunately, he will be
     out of town on Friday, March 8, and will not be
     available to meet with you on that date.

     In paragraphs 5 and 6 of the proposed stipulations,

respondent wrote:

          5. The petitioners did not appear to an
     examination by the Internal Revenue Service. During
     appellate consideration after this case was docketed,
     the petitioners presented documentation to the Internal
     Revenue Service. Based on this documentation, the
     Internal Revenue Service allowed the following amounts
     which are conceded for purposes of this case:

     Schedule C - Primerica:

          Automobile expense - $1,872.00 allowed as one-half
     of the expense claimed on the Primerica Schedule C as
     what the Internal Revenue Service considered to be a
     reasonable approximation.

          Supplies - $591.00 allowed of the $2,886.00
     claimed on the Primerica Schedule C.

     Schedule E:

          Expense - $9,250.00 allowed of the $10,908.00
     claimed. The petitioners concede the balance of
     $1,658.00.

          Depreciation - $4,505.00 allowed.   The respondent
     concedes this adjustment in full.

          6. The amounts and adjustments that remain in
     issue are as follows:

     Schedule C:

          Automobile Expense - $1,871.00 for the Primerica
     Schedule C.
                              - 8 -

          Commissions - $3,840.00 for the product wholesale
     distribution (J&R products) Schedule C.

          Supplies - $2,295.00 for the Primerica Schedule C
     and $1,753.00 for the product wholesale distribution
     (J&R products) Schedule C.

          Travel - $1,745.00 for the Primerica Schedule C.

          Meals & Entertainment - $1,289.00 for the
     Primerica Schedule C.

          Schedule A taxes - $565.00.

     On March 7, 1996, petitioners filed a motion to continue

this case from March 11, 1996, Jacksonville, trial session.     In

their motion, petitioners represented to the Court, inter alia:

          2. The Petitioners have attended two pre-trial
     meetings with Mr. Howard P. Levine, Senior Attorney
     with the District Counsel and have been trying in a
     timely manner to agree on the "stipulations of facts."
     Mr. Levine has insinuated several times that the case
     may be resolved without trial.

          3. During the second conference on March 5, 1996,
     there were obviously several areas in which Petitioners
     and the Respondents disagree. Millie and I as
     Petitioners, believe that our documentation is
     sufficient (according to the tax code) to prove the
     claims we made on the return. However the Respondents
     will not accept our current documentation as sufficient
     proof. We need more time to obtain affidavits and
     subpoena witnesses, to provide sworn testimony
     regarding our claims. We also need time to secure
     copies of canceled checks, copies of invoices, and
     other records which can be obtained with some effort,
     but it will take more time.

     At the call of the calendar of the March 11, 1996,

Jacksonville, trial session, the Court granted petitioners'

motion to continue, filed March 7, 1996.   After the case was

continued, respondent by letter dated April 9, 1996, asked

petitioners for additional information to substantiate the

disallowed deductions still in issue.
                                - 9 -

     By letter to petitioner, Joseph Evans, Jr., dated June 26,

1996, respondent acknowledged having received various and sundry

documents from petitioner in response to his letter of April 9,

1996.

     By notice dated November 14, 1996, the Court informed the

parties that the case was set for trial at the trial session of

the Court in Jacksonville, Florida, beginning on January 30,

1997.

     The parties met again on December 20, 1996, and subsequently

agreed to settle the case.

     At the call of the calendar of the Jacksonville trial

session on January 30, 1997, the parties handed up to the Court a

decision document that was subsequently filed as a Stipulation of

Settlement on April 11, 1997.

                             Discussion

     A taxpayer who substantially prevails in an administrative

or court proceeding may be awarded reasonable costs incurred in

those proceedings.   Sec. 7430(a).   To be a "prevailing party", a

taxpayer must show that:   (1) The position of the United States

in the proceeding was not substantially justified, (2) the

taxpayer substantially prevailed with respect to either the

amount in controversy or the most significant issue or issues

presented, and (3) the taxpayer met the net worth requirements of

28 U.S.C., sec. 2412(d)(2)(B) (1994), on the date the petition

was filed.   Sec. 7430(c)(4)(A).   The taxpayer must also show that

all administrative remedies have been exhausted (to obtain a
                                - 10 -

judgment for litigation costs), sec. 7430(b)(1), that the

taxpayer has not unreasonably protracted the administrative or

judicial proceedings, sec. 7430(b)(4), redesignated as (b)(3) by

the 1996 Act, and that the costs claimed are reasonable in

amount, sec. 7430(c)(1) and (2).    These requirements are in the

conjunctive and each must be met in order for the Court to

determine that administrative or litigation costs should be

awarded pursuant to section 7430.    Minahan v. Commissioner, 88

T.C. 492 (1987); Renner v. Commissioner, T.C. Memo. 1994-372.

     Petitioners contend that they have substantially prevailed

with respect to the amounts in controversy and on the most

significant issue in this case.    They further contend that they

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

2412(d)(2)(B), that they have exhausted the administrative

proceedings available to them within the Internal Revenue

Service, and that they have not unreasonably protracted the

administrative or court proceedings.     They also argue that the

costs claimed are reasonable.

      Respondent agrees that petitioners have substantially

prevailed, that they meet the net worth requirements of 28

U.S.C., sec. 2412(d)(2)(B), and that they have exhausted the

administrative remedies available to them with the Internal

Revenue Service.   Respondent does not agree that his position was

not substantially justified, he does not agree that petitioners

did not unreasonably protract the litigation, and he does not

agree that the costs claimed are reasonable.
                               - 11 -

     We first consider whether respondent's position was

substantially justified.   For the reasons stated, infra, we find

that it was.

     Whether respondent's position was substantially justified

depends on whether respondent's position and actions were

reasonable in light of the facts of the case and applicable

precedents.    Bragg v. Commissioner, 102 T.C. 715, 716 (1994);

Powers v. Commissioner, 100 T.C. 457, 470-471 (1993), affd. in

part and revd. and remanded in part 43 F.3d 172 (5th Cir. 1995).

The fact that respondent concedes the case is not necessarily

indicative that a position is not substantially justified.     Price

v. Commissioner, 102 T.C. 660, 662-665 (1994), affd. without

published opinion sub nom. TSA/THE Stanford Associates, Inc. v.

Commissioner, 77 F.3d 490 (9th Cir. 1996).    A position is

"substantially justified" when it is "justified to a degree that

could satisfy a reasonable person."     Pierce v. Underwood, 487

U.S. 552, 565 (1988).

     Petitioners did not meet with respondent's auditing agent at

any time during the examination of their 1992 Federal income tax

return.

     The principal issue in this case is one of substantiation.

Subsequent to the filing of the petition in this case on January

30, 1995, the parties diligently communicated with each other to

resolve the substantiation issue.   We have set forth those

continuing communications supra.    As soon as petitioners

submitted to respondent documentation to support their claimed
                               - 12 -

deductions, respondent conceded those issues for which adequate

substantiation was provided.

     On the basis of the facts contained in the record, we find

and hold that respondent exercised due diligence in the

examination of petitioners' 1992 return and that at all relevant

times respondent's position in the administrative and litigation

proceedings was substantially justified.

     Because the provisions of section 7430 are conjunctive,

Minahan v. Commissioner, 88 T.C. at 497, and because we hold that

respondent's position in this case was substantially justified,

we will deny petitioners' motion.   We, therefore, need not

address respondent's other objections to the motion.

                                    An appropriate order and

                               decision will be entered.
