                      T.C. Memo. 2005-214



                    UNITED STATES TAX COURT



  JAMES E. BLASIUS AND MARY JO BLASIUS, ET AL.1, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket Nos. 4366-01, 4367-01,    Filed September 14, 2005.
                4368-01.



         Ps and R have settled all issues in these
    consolidated cases save for Ps’ claims made pursuant to
    sec. 7430, I.R.C., for recovery of administrative and
    litigation costs totaling $8,700.50. Ps’ grounds for
    recovery are that R’s position in these proceeding with
    respect to the capitalization of certain expenditures,
    which position R conceded before trial, was not
    substantially justified within the meaning of sec.
    7430(c)(4)(B)(i), I.R.C.

         Held: R’s position with respect to the
    capitalization of the expenditures in question was
    substantially justified within the meaning of sec.



    1
        Cases of the following petitioners are consolidated
herewith: Steven G. Balan, docket No. 4367-01, and Steven G.
Balan and Rachel Margules, docket No. 4368-01.
                               - 2 -

     7430(c)(4)(B)(i), I.R.C., with the result that Ps’ are
     not entitled to recovery under sec. 7430(a), I.R.C.


     Erwin A. Rubenstein and Nicole R. Tennenhouse, for
petitioners.

     Eric R. Skinner and Phoebe L. Nearing, for respondent.



                        MEMORANDUM OPINION


     HALPERN, Judge:   These cases (the consolidated cases, or,

when referred to prior to consolidation, the cases) are before

the Court on petitioners’ motions for litigation and

administrative fees and costs (the motions) filed October 9,

2002.2   The motions are made pursuant to section 7430 and Rules

230 through 233.3   Petitioners seek to recover (1) attorney’s

fees of $7,131 and costs of $182 in connection with respondent’s

determinations of deficiencies in tax with respect to

petitioners’ taxable (calendar) years 1996, 1997, and 1998 (the

audit years),4 (2) attorney’s fees of $1,357.50 incurred through

August 31, 2002, in connection with filing the motions, plus (3)



     2
        On Oct. 23, 2002, petitioners moved to consolidate the
cases for purposes of disposing of the motions, which motions to
consolidate were granted on Nov. 18, 2002.
     3
        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.
     4
        Docket No. 4366-01 involves calendar years 1996, 1997,
and 1998. Docket No. 4367-01 involves calendar year 1996.
Docket No. 4368-01 involves calendar years 1997 and 1998.
                               - 3 -

“other fees and expenses since August 31, 2002.”    Petitioners

also request that we increase the statutory fee limit based on

the expertise of petitioners’ counsel.    Respondent objects to the

motions in all respects.

     On March 7, 2005, the parties jointly moved pursuant to Rule

141(b) to bifurcate consideration of the issues presented in the

motions.   They requested that the Court first decide the “primary

legal issue”, whether respondent has met his burden of proving

that his position in the consolidated cases was “substantially

justified” within the meaning of section 7430(c)(4)(B)(i).    If,

and only if, the Court were to decide that issue in petitioners’

favor, then the Court would decide the remaining issues, which

involve the amount of the attorney’s fees and other expenses

properly recoverable by petitioners.5    During a March 14, 2005,

teleconference, counsel for the parties agreed that the Court may

decide the substantial justification issue without a trial or

hearing.   On March 17, 2005, the Court issued an order granting

the parties’ joint motion to bifurcate.    No trial or hearing has

been held.

     Because the parties appear to agree on the underlying facts

necessary for us to reach a decision on the substantial



     5
        A decision in respondent’s favor on the substantial
justification issue would result in a denial of the motions and
render moot the issues relating to the amount of any recoverable
attorney’s fees or other expenses. See sec. 7430(c)(4)(B).
                               - 4 -

justification issue, there are no factual issues in that respect

to resolve.6   Therefore, we shall proceed on the basis of the

parties’ submissions.   For the reasons discussed below, we shall

deny the motions.

                 Factual and Procedural Background

     The parties filed a “Stipulation of Agreed Facts”, which,

with accompanying exhibits, is incorporated herein by this

reference.

Petitioners

     Petitioners James E. Blasius (Blasius) and Mary Jo Blasius

are husband and wife who, at the time their petition was filed,

resided in Northville, Michigan.   Petitioners Steven G. Balan

(Balan) and Rachel Margules are husband and wife who, at the time

their petitions were filed, resided in West Bloomfield, Michigan.

During the audit years, Blasius and Balan were the sole

shareholders (Blasius, 80 percent, Balan, 20 percent) of

Automotive Credit Corporation (ACC), an S corporation.7



     6
        Respondent concedes that (1) none of the limitations on
recovery found in sec. 7430(b) limits petitioners’ rights to a
recovery and (2) each petitioner is a “prevailing party”, as that
term is defined in sec. 7430(c)(4)(A), except with respect to the
issue of substantial justification raised by sec. 7430(c)(4)(B)
and herein addressed.
     7
        The term “S corporation” is defined in sec. 1361(a)(1).
In general, an S corporation has no Federal income tax liability,
and its items of income, deduction, credit, and such are passed
through to (i.e., taken into account by) its shareholders. See
secs. 1363(a), 1366(a).
                              - 5 -

History of the Consolidated Cases

     By notices of deficiency dated December 29 and 31, 2000 (the

notices of deficiency), respondent determined deficiencies in the

Federal income taxes of petitioners for the audit years.

Explanations included with the notices of deficiency show

adjustments to petitioners’ incomes resulting from changes in the

treatment of items of ACC passed through to Blasius and Balan on

account of their status as shareholders of ACC.    Respondent

required the capitalization of certain costs incurred (and

deducted) by ACC in connection with (1) “Loan Origination/

Acquisition”, (2) “Offering Expenses”, and (3) “Professional

Fees”.

     On March 30, 2001, petitions were filed in the cases (the

petitions), and, on May 21, 2001, respondent answered the

petitions denying all assignments of error.

     On January 9, 2002, the Court notified the parties that the

cases were set for trial at the trial session of the Court

commencing June 10, 2002, in Detroit, Michigan.

     On March 14, 2002, attorney Oksana O. Xenos, on behalf of

all petitioners, wrote a letter to Eric R. Skinner, one of

respondent’s counsel in this case.    In that letter, Ms. Xenos

requested that, in light of respondent’s position regarding the

deductibility of the types of costs at issue in the consolidated

cases, as stated in Announcement 2002-9, 2002-1 C.B. 536, issued
                                 - 6 -

on February 15, 2002 (discussed infra), respondent “should

without inordinate delay, confess error and concede the instant

cases in their entirety.”

     On April 19, 2002, Mr. Skinner informed Ms. Xenos that, in

light of the March 15, 2002, issuance of Chief Counsel Notice

2002-21 (discussed infra), respondent would concede the

deductibility of the loan origination/acquisition costs at issue

in each of the cases (the loan origination/acquisition costs).8

Sometime previously, Mr. Skinner had been instructed by his

superior, Division Counsel, Large and Mid-Size Business Division

(LMSB), to contact Victoria Balacek, Senior Legal Counsel (LMSB),

to confirm the office’s position with respect to the loan

origination/acquisition costs.    On April 19, 2002, Mr. Skinner

learned from Ms. Balacek that a concession of the issue was

appropriate in light of Chief Counsel Notice 2002-21.      He then

contacted Ms. Xenos.

     On May 29, 2002, Ms. Xenos again wrote Mr. Skinner, alleging

that he was reneging in part on his promise to concede the costs

at issue in the consolidated cases.      Ms. Xenos requested that

“any stipulated decision you propose for our consideration




     8
        Although petitioners argue that respondent did not
concede the deductibility of the loan origination/acquisition
costs and professional fees until June 10, 2002, they do not
dispute Mr. Skinner’s affidavit stating that he informed Ms.
Xenos of the concession on Apr. 19, 2002.
                               - 7 -

provide for an award of reasonable administrative and litigation

fees and costs incurred in these civil proceedings.”9

     On May 31, 2002, we filed respondent’s trial memorandum in

each of the cases.   In those memoranda, respondent concedes the

deductibility of both the loan origination/acquisition costs and

the professional fees at issue.

     On June 10, 2002, the cases were called for trial.     No trial

was held, however, since the Court received from the parties

stipulations of settled issues that resolved all of the then

outstanding issues in the cases.10     A section of each stipulation

is entitled “Adjustments to Automotive Credit Corporation, Inc.

(1120S)”.   In those sections, petitioner(s) in each case

concede(s) that ACC’s “expenditures for commissions and offering

expenses should be capitalized rather than deducted in the year

incurred”, and respondent in each case concedes the deductibility


     9
        Ms. Xenos does not identify the portion of the “costs at
issue” that respondent is alleged to be “reneging on”. We
surmise that Ms. Xenos is not referring to the loan
origination/acquisition costs conceded by respondent on Apr. 19,
2002, because her letter specifically confirms that “the service
has disavowed the position it pursued in the Lychuk case”; i.e.,
the capitalization of loan acquisition costs. (See the
description infra of the costs at issue in Lychuk v.
Commissioner, 116 T.C. 374 (2001).) The request for costs and
fees recoverable under sec. 7430 suggests it is to those costs
(e.g., attorney’s fees) that Ms. Xenos refers in her letter.
     10
        Although stipulations of settled issues were not filed
in the cases until Oct. 9, 2002, the parties urge, and we agree,
that identical stipulations were reached on June 10, 2002. We
shall, therefore, treat June 10, 2002, as the date the parties
stipulated as set forth in the stipulations filed on Oct. 9.
                              - 8 -

of ACC’s (1) loan origination/acquisition costs and (2)

professional fees.

Nature of the Expenses Conceded by Respondent To Be Deductible in
the Year Incurred

     Loan Origination/Acquisition Costs

     ACC is the same S corporation that was the focus of our

report in Lychuk v. Commissioner, 116 T.C. 374 (2001), which

dealt with the 1993 and 1994 tax years of its then shareholders

(including petitioners James E. and Mary Jo Blasius).     In Lychuk

v. Commissioner, supra at 376, we reported certain basic facts

with respect to ACC:

     It was formed to provide alternate financing for
     purchasers of used automobiles or light trucks
     (collectively, automobiles) who have marginal credit.
     Its sole business operation is (1) the acquisition of
     installment contracts from automobile dealers (dealers)
     who have sold automobiles to high credit risk
     individuals and (2) the servicing of those contracts.
     Its primary business activities are credit
     investigation, credit evaluation, documentation, and
     the monitoring of collections on installment contracts.
     * * *

We have no reason to believe that those reported facts have

changed.

     Moreover, the parties appear to agree that the loan

origination/acquisition costs are essentially identical in nature

to costs described in Lychuk v. Commissioner, supra at 377-381,

as incurred by ACC in investigating and acquiring automobile

dealer installment contracts with purchasers of automobiles.

Briefly, the costs at issue were incurred by ACC employees in
                               - 9 -

analyzing credit applications submitted by the dealers’

customers, analyzing credit reports, verifying information

provided by credit applicants (the credit analysis activities),

and purchasing the approved installment contracts from the

dealers.   Those costs consisted of employee salaries and benefits

deemed attributable to the foregoing activities.

     Professional Fees

     The professional fees at issue in the consolidated cases

(professional fees) were payments, apparently to third parties,

relating to the creation of a bank line of credit for ACC, which

extended over 2 calendar years.

Chronology of Administrative and Judicial Developments
Regarding the Capitalization Versus Expense Issues Conceded by
Respondent in the Consolidated Cases

     Cases and Public Pronouncements

     On June 8, 1998, this Court issued its report in PNC

Bancorp, Inc. v. Commissioner, 110 T.C. 349 (1998), revd. 212

F.3d 822 (3d Cir. 2000), in which we held that a bank’s costs

associated with making loans extending beyond the years in which

the costs were incurred, including salaries and benefits paid to

employees, are not currently deductible under section 162(a) and

must be capitalized under section 263(a).

     On March 8, 1999, this Court issued its report in Norwest

Corp. v. Commissioner, 112 T.C. 89 (1999), affd. in part and

revd. in part sub nom. Wells Fargo & Co. & Subs. v. Commissioner,
                                - 10 -

224 F.3d 874 (8th Cir. 2000), in which we held that officer

salaries and outside legal fees incurred in investigating a

potential consolidation that was ultimately consummated are

capital expenditures not currently deductible under section

162(a).

     On March 21, 2000, the Internal Revenue Service (IRS)

released a document entitled “2000 Priority Guidance Plan”, in

which it listed “loan origination costs” among the expenditures

to be addressed in “[g]uidance on deduction and capitalization”.

     On May 19, 2000, the Court of Appeals for the Third Circuit

reversed our decision in PNC Bancorp, Inc. v. Commissioner, 212

F.3d 822 (3d Cir. 2000), revg. 110 T.C. 349 (1998).

     On August 29, 2000, the Court of Appeals for the Eighth

Circuit reversed in part our decision in Norwest Corp. v.

Commissioner, supra, affirming only our capitalization of outside

legal fees incurred after a “final decision” had been made to

enter into the consolidation.    Wells Fargo & Co. and Subs. v.

Commissioner, 224 F.3d 874 (8th Cir. 2000), affg. in part and

revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89

(1999).11


     11
        Before the Court of Appeals, the Commissioner conceded
the deductibility of outside legal fees incurred before a “final
decision” was made on the basis of Rev. Rul. 99-23, 1999-1 C.B.
998 (released on Apr. 30, 1999). Wells Fargo & Co. and Subs. v.
Commissioner, 224 F.3d 874, 888 (8th Cir. 2000), affg. in part
and revg. in part Norwest Corp. v. Commissioner, 112 T.C. 89
                                                   (continued...)
                               - 11 -

     On May 31, 2001, this Court issued its report in Lychuk v.

Commissioner, supra, in which we held that loan acquisition costs

of the type at issue in the consolidated cases and certain

offering expenditures are capital expenditures not deductible

under section 162(a).

     On January 24, 2002, the IRS released an Advance Notice of

Proposed Rulemaking (ANPRM) describing “rules and standards that

the IRS and Treasury Department expect to propose in 2002 in a

notice of proposed rulemaking that will clarify the application

of section 263(a) * * * to expenditures incurred in acquiring,

creating, or enhancing certain intangible assets or benefits.”

67 Fed. Reg. 3461 (Jan. 24, 2002).      The ANPRM invites public

comments “regarding these standards.”      Id. at 3461.   One of the

anticipated proposals is a “12-month rule applicable to

expenditures paid to create or enhance certain intangible rights

or benefits.”   Id. at 3462.   The ANPRM states:

     Under the rule, capitalization under section 263(a)
     would not be required for * * * [certain described
     expenditures paid to create or enhance certain
     intangible rights or benefits] unless that expenditure
     created or enhanced intangible rights or benefits for
     the taxpayer that extend beyond the earlier of (i) 12
     months after the first date on which the taxpayer
     realizes the rights or benefits attributable to the


     11
      (...continued)
(1999). Rev. Rul. 99-23, 1999-1 C.B. at 1000, distinguishes
between investigatory expenses incurred “in order to determine
whether to enter a new business and which new business to enter”
(deductible) and expenses “incurred in the attempt to acquire a
specific business” (nondeductible).
                             - 12 -

     expenditure, or (ii) the end of the taxable year
     following the taxable year in which the expenditure is
     incurred. [Id.]

The list of described expenditures eligible for immediate

deduction under the 12-month rule does not include an expenditure

for, or with respect to, a bank line of credit of the type

acquired by ACC (the professional fees).   The ANPRM also advises

that, as one alternative approach designed “to minimize

uncertainty and to ease the administrative burden of accounting

for transaction costs * * * [,] the rules could allow a deduction

for all employee compensation (including bonuses and commissions

that are paid with respect to the transaction)”.   Id. at 3464.

     On February 15, 2002, the IRS issued Announcement 2002-9,

2002-1 C.B. 536 (originally published in 2002-7 I.R.B. 536),

which is identical to the ANPRM.

     On March 15, 2002, the Chief Counsel, IRS, issued Chief

Counsel Notice (CCN) 2002-21, in which the Chief Counsel

announced that the IRS would no longer “assert capitalization

under section 263(a) for employee compensation (other than

bonuses and commissions that are paid with respect to the

transaction), fixed overhead, or de minimis [under $5000] costs

related to the acquisition, creation, or enhancement of

intangible assets or benefits.”

     On December 19, 2002, the Treasury Department issued

proposed regulations under section 263(a) (the proposed or
                               - 13 -

proposed INDOPCO12 regulations), which contain the 12-month rule

described above, and make it generally applicable to “amounts

paid to create or enhance an intangible asset”.   Sec. 1.263(a)-

4(f)(1), Proposed Income Tax Regs., 67 Fed. Reg. 77719 (Dec. 19,

2002).    The proposed regulations also permit a deduction in the

year incurred for all “compensation paid to employees (including

bonuses and commissions paid to employees)”.   Sec. 1.263(a)-

4(e)(3)(i), Proposed Income Tax Regs., 67 Fed. Reg. 77717 (Dec.

19, 2002).

     The final regulations under section 263(a) (the final or

final INDOPCO regulations), published in the Federal Register on

January 5, 2004, include both rules.    Sec. 1.263(a)-4(e)(4)(i)

and (ii), Income Tax Regs. (“employee compensation * * *

including salary, bonuses and commissions” treated as

deductible), and sec. 1.263(a)-4(f)(l), Income Tax Regs. (12-

month rule, applicable to “amounts paid to create (or to

facilitate the creation of)” an intangible).   Pursuant to section

1.263(a)-4(o), Income Tax Regs., the final regulations apply to

“amounts paid or incurred on or after December 31, 2003", which

is in accord with the statement in the proposed regulations that,

as proposed, section 1.263(a)-4 would apply to “amounts paid or



     12
        So named for the U.S. Supreme Court decision that was
the genesis of the regulations project that ultimately resulted
in the final regulations. See INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992).
                                - 14 -

incurred on or after the date the final regulations are published

in the Federal Register.”   Sec. 1.263(a)-4(o), Proposed Income

Tax Regs., 67 Fed. Reg. 77723 (Dec. 19, 2002).

Internal IRS Developments

     The motions also reference a number of internal IRS

documents released by respondent to petitioners in connection

with July 1, 2002, Freedom of Information Act (FOIA) requests

made by petitioners’ counsel.    One of those documents is entitled

“Case History Report Form, Internal Revenue Service – Office of

Chief Counsel”; it further states:       “Case name: Capitalization of

Self-Created Intangibles Regulation” (case history report form).

It traces the Chief Counsel’s and Treasury Department’s actions

that resulted in the issuance of the proposed INDOPCO

regulations.   It reflects that, on May 7, 2001, Chief Counsel and

Treasury Department officials met to discuss the scope of a

proposed regulations project regarding capitalization of self-

created intangibles and that, throughout the balance of 1991 and

into January 1992, when the ANPRM was issued, there were numerous

Chief Counsel – Treasury Department discussions.      At first, when

the discussions began on August 1, 2001, they were with regard to

the issuance of “a moratorium on capitalization of intangibles in

examinations pending issuance of regulations”.      Beginning on

January 10, 2002 (when “Treasury, the Chief Counsel, and

Commissioner (LMSB) decided that guidance should take the form of
                              - 15 -

an * * * (ANPRM) and should not impose a moratorium on

examination”), the discussions turned to the drafting of the

ANPRM, which was filed with the Federal Register on January 23,

2002, and published the following day.   See 67 Fed. Reg. 3461

(Jan. 24, 2002).

     Another document obtained by petitioners pursuant to their

FOIA request and attached to their reply to respondent’s

objection to the motions is a memorandum dated February 26, 2002,

and entitled “Memorandum for LMSB and SB/SE [Small Business/

Self-Employed Division] Employees” (the LMSB-SB/SE memorandum or

the memorandum).   The memorandum is from the commissioners of

those two divisions, and the subject of the memorandum is:

“Guidelines for the Application of Advance Notice of Proposed

Rulemaking for Intangibles Under Secs. 263(a)”.    The memorandum

advises:   “The rules and standards in the ANPRM are not Service

position and do not provide any authority for the concession of

[capitalization issues discussed in the ANPRM].”   The memorandum

notes, however, the statement in the ANPRM that “the IRS and

Treasury Department expect to propose [the 12-month rule]” and

that that rule “would be consistent with * * * U.S. Freightways

Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001), [revg. 113

T.C. 329 (1999)] * * * [which] recognized a ‘a one-year rule’ for

purposes of allowing a deduction for prepaid license fees and

insurance premiums.”   The memorandum states that, although “the
                              - 16 -

ANPRM does not provide authority for present application of a 12-

month rule, it is likely that Treasury and the Service will

ultimately adopt such a rule in regulations”.   The memorandum

concludes:   “Given this likelihood, and considering the opinion

in U.S. Freightways Corp., we must consider whether it is an

efficient utilization of our resources to propose capitalization

of those expenditures, particularly in light of the relatively

short tax deferral period (one taxable year) that results from

the application of the 12-month rule.”   Accordingly, the

memorandum recommends that, with respect to “examinations

initiated prior to the release of the regulations”, the issue of

whether to capitalize “certain short-term expenditures * * *

should be pursued”, but only where the examination “has [already]

resulted in the preparation of a Form 5701, Notice of Proposed

Adjustment (LMSB), or Form 4549, Revenue Agents Report (SB/SE).”

Otherwise, that issue “should not be pursued, in the absence of

contrary guidance.”

                            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 the proceeding.
                               - 17 -

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

substantially justified.   See sec. 7430(c)(4)(B)(i).   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 IRS 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
                                  - 18 -

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

proceeding during which the position of the IRS was not

substantially justified).    The fact that respondent ultimately

concedes an issue does not, by itself, establish that 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.

      There is a rebuttable presumption of no substantial

justification if the IRS “did not follow its applicable published

guidance in the administrative proceeding.”    Sec.

7430(c)(4)(B)(ii).    The term “applicable published guidance” is

defined to mean “(I) regulations, revenue rulings, revenue

procedures, information releases, notices and announcements, and

(II) * * * private letter rulings, technical advice memoranda,

and determination letters [issued to the taxpayer].”    Sec.

7430(c)(4)(B)(iv).    Section 7430(c)(4)(B)(iii) requires that

courts “take into account whether the United States has lost in

courts of appeal[s] [sic] for other circuits on substantially

similar issues” in determining “whether the position of the

United States was substantially justified”.

II.   Summary of the Parties’ Arguments

      A.   Petitioners’ Arguments

      Petitioners make the following arguments in support of their

position:
                                - 19 -

     (1) Beginning on March 21, 2000, when the IRS released its

2000 Priority Guidance Plan, listing “loan origination costs”

among the expenditures to be addressed in “[g]uidance on

deduction and capitalization”, respondent was “pursuing” the

petitioners for deficiencies “under a litigating position

[capitalization of such costs] that * * * [he] knew * * * would

soon be reversed.”   Petitioners reason that respondent’s

litigating position, even though ultimately successful in Lychuk

v. Commissioner, 116 T.C. 374 (2001), was not substantially

justified because respondent’s placement of the issue of “loan

origination costs” on the tax accounting issues list for priority

guidance “shows not only the high priority accorded to the issue

by the IRS at least as of March 2000, but also the IRS’

affirmative intent to actually publish guidance * * * on this

controversial issue in 2000.”    Petitioners also point to the

internal IRS and joint IRS –- Treasury Department meetings in

2001 through 2002, which ultimately led to the January 24, 2002,

issuance of the ANPRM.   Petitioners consider those meetings

evidence of respondent’s then present intent to concede issues

that petitioners were being forced to litigate in the

consolidated cases during that timeframe.

     (2) Under section 7430(c)(4)(B)(iii), we must take into

account the fact that the Commissioner’s position was overruled

in PNC Bancorp, Inc. v. Commissioner, 212 F.3d 822 (3d Cir.
                               - 20 -

2000), and Wells Fargo & Co. and Subs. v. Commissioner, 224 F.3d

874 (8th Cir. 2000), in determining whether respondent’s present

position seeking to capitalize ACC’s loan origination/acquisition

costs and professional fees was substantially justified.

Petitioners argue that respondent was not substantially justified

in litigating his position before “finally conceding” after “two

years had past [sic] since the PNC and Wells Fargo circuit court

decisions.”

     (3) Because respondent did not concede the loan

origination/acquisition costs and professional fees issues until

June 10, 2002, which was months after the issuance of the ANPRM,

Announcement 2002-9, 2002-1 C.B. 536, and CCN 2002-21, and years

after the issuance of Rev. Rul. 99-23, 1999-1 C.B. 998,13

respondent “did not follow * * * [his] own published guidance,

[and, therefore, he] must meet a higher standard of proof to

rebut the presumption [of no justification] created by * * *

[section] 7430(c)(4)(B)(ii) * * * [, which he] has not met”.

     B.   Respondent’s Arguments

     1.   Loan Origination/Acquisition Costs

     Capitalization is substantially justified by the Court’s

decision in Lychuk v. Commissioner, supra, which upheld the

Commissioner’s capitalization of costs identical to those at

issue in the consolidated cases; i.e., employee salaries and


     13
          See supra note 11.
                                - 21 -

benefits paid by ACC in connection with its loan origination/

acquisition activities.

     2.   Professional Fees

     Capitalization is “consistent with the capitalization

arguments presented for the loan origination/acquisition and

offering expenses of ACC in [Lychuk].”     Respondent argues that

“the professional fees at issue were related to ACC’s securing a

line of credit with NBD Bank, N.A., and, thus, were similar to

the offering expenses incurred in securing the source of

borrowing in Lychuk.”     Also, like the offering expenses

capitalized in Lychuk, they established an intangible asset (a

line of credit) that “extended beyond the year in which the fees

were incurred.”

     3.   Timeliness of Respondent’s Concessions

           a.   Loan Origination/Acquisition Costs

     Respondent’s April 19, 2002, concession that petitioners’

loan origination/acquisition costs for the audit years are

deductible, just over 1 month after the issuance of CCN 2002-21,

on March 15, 2002 (wherein the IRS announced that it would no

longer seek to capitalize employee compensation related to a

capital transaction other than bonuses and commissions paid with

respect to the transaction), was timely.
                                  - 22 -

            b.     Professional Fees

       Respondent does not appear to consider timeliness to be an

issue because the deductibility of petitioners’ professional fees

for the audit years was conceded (first in the trial memorandum

filed May 31, 2002, and, again, in the Stipulation of Settled

Issues filed June 10, 2002), in deference to the anticipated (but

not yet formally adopted) 12-month rule.

III.    Analysis

       A.   Introduction

       Petitioners’ argument that respondent’s proposed

capitalization of the loan origination/acquisition costs and

professional fees at issue was not substantially justified within

the meaning of section 7430(c)(4)(B) appears to proceed down

three separate but, ultimately, converging roads:        Respondent has

been improperly litigating against (1) a position that he knew,

as early as March 21, 2000, would be adopted by the IRS; (2)

controlling, adverse caselaw in certain U.S. Courts of Appeals

(PNC Bancorp, Inc. v. Commissioner, 212 F.3d 822 (3d Cir. 2000),

and Wells Fargo & Co. and Subs. v. Commissioner, 224 F.3d 874

(8th Cir. 2000)); and (3) his own published guidance in the form

of Rev. Rul. 99-23, 1999-1 C.B. 998, the ANPRM issued January 24,

2002, Announcement 2002-9, issued February 15, 2002, and CCN

2002-21 issued March 15, 2002.         Petitioners’ first two approaches

relate to the deductibility of the loan origination/acquisition
                               - 23 -

costs.    Their third approach relates to the deductibility of both

those costs and the professional fees, and it posits that

respondent’s concession in June of 2002 of both issues, almost 3

months after the issuance of CNN 2002-21 and 4 months after

issuance of the ANPRM and Announcement 2002-9 (and some 3 years

after the issuance of Rev. Rul. 99-23) was not timely.    We

consider each argument in turn.

     B.   Effect of Respondent’s Litigating Against a Position
          Likely To Be Adopted in the Future

     Petitioners characterize the listing of “loan origination

costs” as an item slated for 2000 IRS published guidance as a

step that “evidences years of intensive, and ultimately

successful, lobbying by the likes of the INDOPCO Coalition to

impress its views on the IRS.”    Petitioners appear to be

suggesting that the selection of loan origination costs for 2000

published guidance was tantamount to an IRS decision, on March

21, 2000, to treat those costs as deductible in the taxable year

incurred.    Therefore, respondent was not substantially justified

in seeking to capitalize petitioners’ loan origination/

acquisition costs in 2000, despite the subsequent 2001 decision

of the Tax Court in Lychuk v. Commissioner, 116 T.C. 374 (2001),

sustaining the Commissioner’s capitalization of those costs.     We

disagree.

     As noted supra, there is a rebuttable presumption of no

substantial justification if respondent fails to follow his own
                              - 24 -

“applicable published guidance in the administrative proceeding”.

Sec. 7430(c)(4)(B)(ii).   The term “applicable published guidance”

is defined to mean “regulations, revenue rulings, revenue

procedures, information releases, notices, and announcements,”

and, if issued to the taxpayer, “private letter rulings,

technical advice memoranda, and determination letters.”    Sec.

7430(c)(4)(B)(iv); see also Rauenhorst v. Commissioner, 119 T.C.

157, 170-171 (2002), wherein we refused “to allow * * * [the

Commissioner’s] counsel to argue the legal principles of * * *

[court] opinions against the principles and public guidance

articulated in the Commissioner’s currently outstanding revenue

rulings.”

     The 2000 Priority Guidance Plan does not constitute

“applicable published guidance” that would trigger a rebuttable

presumption of no substantial justification pursuant to section

7430(c)(4)(B)(ii) because it is not among the IRS pronouncements

listed in section 7430(c)(4)(B)(iv).   And because it was not a

revenue ruling (or guidance of comparable stature), it did not,

under Rauenhorst, prohibit respondent from litigating to require

the capitalization of loan origination/acquisition costs.    More

fundamentally, the 2000 Priority Guidance Plan is not the type of

“guidance” contemplated by either section 7430(c)(4)(B)(ii) or

Rauenhorst.   It is, on its face, no more that an informal

announcement of anticipated “guidance projects” that “may be
                              - 25 -

published in 2000", not specific guidance to taxpayers on any

particular issue.   Petitioners’ suggestion that the inclusion of

loan origination costs in the list of planned projects was

intended to be an unambiguously favorable response to taxpayer

lobbying efforts to have the IRS treat those costs as deductible

in the year incurred is sheer speculation without support in the

record.

     Petitioners also imply that they were improperly required to

“expend their resources” litigating the deductibility of loan

origination/acquisition costs while the IRS and Treasury

Department had meetings, in May, June, and July 2001, in

connection with the project that eventually led to the IRS’s

“change in litigating position” with respect to those costs.    The

internal IRS and the IRS-Treasury Department meetings and

correspondence referred to in the case history report form

reflect efforts to reach a decision on the capitalization of

various types of expenses, including those at issue in the

consolidated cases, not the decision itself.   In fact, the

discussions, between August 1, 2001, and January 10, 2002,

concerning the issuance of a “moratorium” on IRS examiners

capitalizing intangibles, pending issuance of regulations, were

aborted when it was decided to issue the ANPRM and “not impose a

moratorium on capitalization of intangibles in examinations”.
                                - 26 -

     We conclude that none of the internal administrative actions

referred to by petitioners indicate a present intent to permit a

deduction for loan origination/acquisition costs in the year

incurred.    Moreover, even if they did, those actions do not

constitute “applicable published guidance” under section

7430(c)(4)(B)(ii), (iv), or “public guidance” under Rauenhorst v.

Commissioner, supra.     Therefore, none of those actions is

sufficient to support the conclusion, or even raise a

presumption, that respondent was not substantially justified in

seeking to capitalize ACC’s 1996 through 1998 loan origination/

acquisition costs.

     C.     Controlling Effect of the Courts of Appeals Decisions in
            PNC Bancorp and Wells Fargo

     Petitioners argue that, after the decisions in PNC Bancorp,

Inc. v. Commissioner, 212 F.3d 822 (3d Cir. 2000), and Wells

Fargo & Co. and Subs. v. Commissioner, 224 F.3d 874 (8th Cir.

2000), reversing this Court’s capitalization of employee

salaries, respondent was improperly seeking to establish a split

of authority in the U.S. Courts of Appeals by continuing to

litigate the deductibility of the loan origination/acquisition

costs.    In support of that argument, petitioners cite section

7430(c)(4)(B)(iii), which requires that we “take into account

whether * * * [respondent] has lost in courts of appeal[s] [sic]

for other circuits on substantially similar issues”.    Petitioners

also cite two cases in which the Court of Appeals for the Fifth
                                - 27 -

Circuit awarded attorney’s fees pursuant to section 7430 under

circumstances in which the Commissioner appealed an adverse

decision of the Tax Court in the face of adverse decisions on the

same issue in other courts of appeals.   See Allbritton v.

Commissioner, 37 F.3d 183, 184-185 (5th Cir. 1994), affg. T.C.

Memo. 1993-490; Estate of Perry v. Commissioner, 931 F.2d 1044,

1046 (5th Cir. 1991).

       In Lychuk v. Commissioner, 116 T.C. at 405-406, we

distinguished the facts of that case from the facts in Wells

Fargo & Co. and Subs. v. Commissioner, supra.     We said that, in

Wells Fargo, the services performed by the bank’s employees as to

the capital transaction under consideration “were extraordinary

in the daily course of their employment * * *.    They would have

been paid the same salaries regardless of whether the transaction

was consummated.”    Lychuk v. Commissioner, supra at 405.   By

contrast, in Lychuk (and in the consolidated cases) the employees

spent much or all of their time working on installment contract

acquisitions, and the employees’ compensation “hinged directly on

the number of installment contracts [acquired by ACC]”.      Id. at

405.    We also stated our belief in Lychuk that PNC Bancorp, Inc.

v. Commissioner, supra, is not “so factually distinguishable from

the instant case [and, by extension, from the consolidated cases]

to support contrary results.”    Id. at 407.   The issue, then, is

whether the 2000 reversal of this Court by the Court of Appeals
                             - 28 -

for the Third Circuit in PNC Bancorp requires a finding that

respondent was not substantially justified in seeking to

capitalize ACC’s loan origination/ acquisition costs.   We do not

believe so.

     At the time the notices of deficiency were issued to

petitioners, capitalization of employee salaries allocable to

capital transactions had, in various instances, been upheld by

the Supreme Court in Commissioner v. Idaho Power Co., 418 U.S. 1,

13 (1974), by other U.S. Courts of Appeals (e.g., NCNB Corp. v.

United States, 651 F.2d 942, 963 (4th Cir. 1981), vacated on

other grounds 684 F.2d 285 (4th Cir. 1982); Cagle v.

Commissioner, 539 F.2d 409, 415-416 (5th Cir. 1976) (fee paid to

managing partner of a partnership), affg. 63 T.C. 86 (1974);

Briarcliff Candy Corp. v. Commissioner, 475 F.2d 775, 781 (2d

Cir. 1973), revg. and remanding T.C. Memo. 1972-43), by the Court

of Claims in S. Natural Gas Co. v. United States, 188 Ct. Cl.

302, 412 F.2d 1222, 1265 (1969), and by the Tax Court (e.g.,

Norwest Corp. v. Commissioner, 112 T.C. 89 (1999); PNC Bancorp,

Inc. v. Commissioner, 110 T.C. 349 (1998); Perlmutter v.

Commissioner, 44 T.C. 382, 404 (1965), affd. 373 F.2d 45 (10th

Cir. 1967)).

     The cases cited by petitioners, in which attorney’s fees

were awarded under section 7430, are readily distinguishable.    In

Allbritton v. Commissioner, supra, the Commissioner’s position
                                 - 29 -

had been previously rejected by three U.S. Courts of Appeals, by

this Court (upon reconsideration of a decision that had been

reversed on appeal), and by “several” U.S. District Courts.        The

Court of Appeals stated that it had been unable to “find a single

published opinion supporting the Commissioner’s position.”

Allbritton v. Commissioner, id. at 184.      In Estate of Perry v.

Commissioner, supra at 1046, the Commissioner had lost “identical

appeals in two other circuits”, and the Court of Appeals for the

Fifth Circuit rejected the Commissioner’s argument that a

contrary decision by that same court justified his litigating

position merely because that decision had not been specifically

overruled.   The Court of Appeals noted that, in the context of an

amendment to the Code, “the clear and unequivocal language of

which unmistakably overrules” its earlier decision, “the absence

of a new decision * * * does not equate with unsettled law or

first impression”.     Id.   Unlike the circumstances present in

Allbritton and Estate of Perry, respondent in the consolidated

cases can point to numerous cases that reasonably support his

litigating position.

     We conclude that the decisions of the Courts of Appeals in

PNC Bancorp, Inc. v. Commissioner, supra, and Wells Fargo & Co.

and Subs. v. Commissioner, supra, did not preclude respondent’s

reliance on inconsistent Supreme Court, Courts of Appeals, Court

of Claims, and Tax Court authority (buttressed in May 2001, by
                                 - 30 -

our decision in Lychuk) in litigating the deductibility of the

loan origination/acquisition costs.       Therefore, those cases do

not require us to decide that respondent was not substantially

justified in seeking to capitalize those costs.

     D.   Controlling Effect of Rev. Rul. 99-23, the ANPRM,
          Announcement 2002-9, and U.S. Freightways Corp.

          1.   Rev. Rul. 99-23

     Petitioners argue that respondent’s issuance of Rev. Rul.

99-23, 1999-1 C.B. 998, and his concession based on that ruling

in Wells Fargo & Co. and Subs. v. Commissioner, supra, of the

deductibility of the costs attributable to the “investigatory

stage” of the transaction results in a presumption under section

7430(c)(4)(B)(ii) of no substantial justification for

respondent’s litigating position with respect to the loan

origination/acquisition costs.

     As noted supra note 11, Rev. Rul. 99-23, 1999-1 C.B. at

1000, classifies as an expense eligible for amortization as a

startup expenditure under section 195 (and, in the context of a

business expansion, as a deductible expense) “investigatory

costs” that are “paid or incurred in order to determine whether

to enter a new business and which new business to enter”.

Although there is an undeniable similarity between the

“investigatory costs” described in Rev. Rul. 99-23, supra, as

eligible for amortization under section 195 and the credit

analysis activities performed by ACC’s employees preparatory to
                               - 31 -

ACC’s purchase of any installment contract, we find that

respondent’s refusal to concede the deductibility of the loan

origination/acquisition costs in light of Rev. Rul. 99-23, supra

was substantially justified.

     Respondent does not address the relevance of Rev. Rul. 99-

23, 1999-1 C.B. 998, to the deductibility of the loan

origination/acquisition costs in his objection to the motions.

He does, however, address the applicability of that ruling to

costs incurred in connection with the acquisition of credit card

receivables in an IRS field service advice memorandum to the

Associate Area Counsel (LMSB), Philadelphia (Field Service Advice

200136010 (Sept. 7, 2001)) (the FSA), which we assume expresses

respondent’s position on that issue.14   The costs in question are

described as “expenses of determining whether to acquire certain

loans, and which loans to acquire”, a description that resembles

the credit analysis activities of ACC’s employees.    In the FSA,

respondent concludes that “no expression of congressional intent,

and neither * * * [section] 195 nor its legislative history,

suggest [sic] that costs of investigating the acquisition of a

specific capital asset are currently deductible”.    Respondent

concludes that “the holdings in Rev. Rul. 99-23 are not


     14
        Although they have no precedential status, field service
advice memoranda may be cited as an expression of the
Commissioner’s position. See Rhone-Poulenc Surfactants &
Specialities, L.P. v. Commissioner, 114 T.C. 533, 543 (2000),
appeal dismissed and remanded 249 F.3d 175 (3d Cir. 2001).
                              - 32 -

inconsistent with the capitalization of the acquisition costs at

issue [in the FSA]”.

     The legislative history of section 195 lends support to

respondent’s position in the FSA that that provision was not

intended to apply to the cost of investigating the acquisition of

a specific capital asset.   H. Rept. 96-1278, 1980-2 C.B. 709, is

the report of the Committee on Ways and Means (the committee)

that accompanied H.R. 7956, which, when enacted in the

Miscellaneous Revenue Act of 1980, Pub. L. 96-605, sec. 102, 94

Stat. 3522, added section 195 to the Code.    In describing the

pre-section 195 law, the committee makes the following

observation:

          Expenditures made in acquiring or creating an
     asset which has a useful life that extends beyond the
     taxable year normally must be capitalized. These costs
     ordinarily may be recovered through depreciation or
     amortization deductions over the useful life of the
     asset. However, costs which relate to an asset with
     either an unlimited or indeterminate useful life may be
     recovered only upon a disposition or cessation of the
     business. [H. Rept. 96-1278, 1980-2 C.B. at 712.]

Under the heading “Reasons for change”, the committee expresses

its belief that providing “for the amortization of business

startup and investigatory expenses will encourage formation of

new businesses and decrease controversy and litigation arising

under present law with respect to the proper income tax

classification of startup expenditures.”     Id.   Those statements,

when read together, indicate that the committee viewed
                              - 33 -

investigatory and startup costs in connection with the

acquisition of a new business as particularly apt candidates for

amortization because the taxpayer’s recovery of those costs

otherwise would not be available until disposition or abandonment

of the new business.   The committee, thus, appears to view

section 195 as an exception to the rule that the costs of

“acquiring or creating an asset which has a useful life that

extends beyond the taxable year normally must be capitalized”, a

rule that the committee views as intrinsically fair when the

costs are not incurred in connection with the acquisition of a

business, since, in that situation, the costs are normally

recovered over the useful life of the asset.   Id.

     Also, because (1) ACC was in the business of acquiring

dealer installment contracts and (2) the credit analysis

activities related to specific installment contracts that had

been selected for acquisition, solely contingent on the debtor’s

creditworthiness, it is not at all clear that those activities

are not akin to the post- “final decision” “‘due diligence’

and/or ‘investigatory’ expenses” capitalized by the Court of

Appeals for the Eighth Circuit in Wells Fargo & Co. and Subs. v.

Commissioner, 224 F.3d at 889.

     In light of the foregoing, we find that respondent was

substantially justified in not considering Rev. Rul. 99-23,

supra, to be controlling published guidance requiring the loan
                              - 34 -

origination/acquisition costs to be treated as deductible in the

year incurred.

     2.   The ANPRM and Announcement 2002-9

     Petitioners suggest that, after the January 24, 2002,

issuance of the ANPRM and the February 15, 2002, issuance of (the

identical) Announcement 2002-9, which indicate the future

adoption of the 12-month rule, respondent was not substantially

justified in taking the position, expressed in the LMSB-SB/SE

memorandum, that IRS examiners should pursue the capitalization

of expenses that would be deductible under the 12-month rule

provided the issue had already been raised in a revenue agent’s

report or in a notice of proposed adjustment.   Petitioners also

suggest that the LMSB-SB/SE memorandum is indicative of an

improper IRS policy (pursued in the consolidated cases) “to

continue with a case based on a litigating position that

Respondent will soon change, unless it is decided to be an

inefficient use of their resources.”   We interpret petitioners’

position to be that, after the issuance of the ANPRM and

Announcement 2002-9, respondent was no longer substantially

justified in litigating the capitalization of either the

professional fees or the loan origination/acquisition costs.

     The ANPRM and Announcement 2002-9 do not advise taxpayers of

an IRS decision to cease capitalizing costs related to

intangibles that had been previously subject to capitalization by
                               - 35 -

the Commissioner.   Rather, as noted supra, they describe “rules

and standards” that the IRS and Treasury “expect to propose” (not

final rules and standards), and they invite public comments

“regarding those standards”.   Although they suggest that a

deduction for “all employee compensation” (which would include

ACC’s loan origination/acquisition costs) might be proper, that

approach is only one of several alternative approaches to the

treatment of employee compensation suggested therein; and

deductibility of ACC’s professional fees under the 12-month rule

is, at best, unclear, as those costs are not among the costs

specifically referred to as deductible when they fall within the

12-month rule.   Moreover, to conclude that the ANPRM and

Announcement 2002-9 constitute “applicable published guidance”

under section 7430(c)(4)(B)(iv), binding on respondent with

respect to the capitalization rules discussed therein, would be

to negate the December 31, 2003, effective date provided in the

final INDOPCO regulations and anticipated in the proposed

regulations, a date that respondent has uniformly enforced in

connection with requests to change to a method of accounting

provided by the final regulations (and, in particular, by section

1.263(a)-4(f)(1), Income Tax Regs., which sets forth the 12-month

rule).   See Rev. Proc. 2004-23, sec. 2.07, 2004-1 C.B. 785, 786.

     Under section 7430(c)(4)(B)(iv), “notices” and

“announcements” are included in the list of IRS pronouncements
                               - 36 -

that constitute “applicable published guidance” for purposes of

establishing a rebuttable presumption of “no justification” under

section 7430(c)(4)(B)(ii).    Proposed regulations are not included

in that list.   As an “advance notice of proposed rulemaking”,

both the ANPRM and Announcement 2002-9 are no more than “advance

notice” of a future issuance (proposed regulations) that, when

issued, will not constitute “applicable published guidance”.

Therefore, it is not clear that such pronouncements can, under

any circumstances, constitute “applicable published guidance”.

It is not necessary to resolve that issue in this case, however,

because the ANPRM and Announcement 2002-9 do not constitute

“guidance” in any sense of that term.    They merely suggest

principles of expense capitalization or deductibility that may be

adopted in the future.   They do not purport to change existing

administrative positions.    Therefore, they did not negate the

authorities under the then existing law (discussed supra) that

render respondent’s litigating position with respect to loan

origination/acquisition costs and professional fees substantially

justified.

     Moreover, we find no inequity or impropriety in respondent’s

decision, reflected in the LMSB-SB/SE memorandum, to capitalize

selectively expenses that otherwise would be deductible under the

12-month rule, if and when adopted, in order to accomplish an

“efficient utilization of * * * resources”.    The IRS is not
                              - 37 -

precluded from challenging the tax treatment of an item with

respect to less than all similarly situated taxpayers subject to

such challenge.   As stated by the Court of Federal Claims in City

of Galveston v. United States, 33 Fed. Cl. 685, 707-708 (1995),

affd. 82 F.3d 433 (Fed. Cir. 1996):

     The mere fact that another taxpayer has been treated
     differently from the plaintiff does not establish the
     plaintiff’s entitlement. The fact that all taxpayers
     or all areas of the tax law cannot be dealt with by the
     Internal Revenue Service with equal vigor and that
     there thus may be some taxpayers who avoid paying the
     tax cannot serve to release all other taxpayers from
     the obligation. The Commissioner’s failure to assess
     deficiencies against some taxpayers who owe additional
     tax does not preclude the Commissioner from assessing
     deficiencies against other taxpayers who admittedly owe
     additional taxes on the same type of income. A
     taxpayer cannot premise its right to an exemption by
     showing that others have been treated more generously,
     leniently or even erroneously by the IRS. The fact
     that there may be some taxpayers who have avoided
     paying a tax does not relieve other similarly situated
     taxpayers from paying their taxes. [Fn. refs.
     omitted.]

Accord Austin v. United States, 611 F.2d 117, 119-120 (5th Cir.

1980); Kehaya v. United States, 174 Ct. Cl. 74, 355 F.2d 639, 641

(1966).

     3.   U.S. Freightways Corp.

     We also conclude that the adoption of the 12-month rule by

the Court of Appeals for the Seventh Circuit in U.S. Freightways

Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001), revg. 113

T.C. 329 (1999), does not require a finding that respondent was

not substantially justified in seeking to capitalize expenses
                                - 38 -

otherwise deductible under that rule (in this case, the

professional fees) after the issuance of that decision on

November 6, 2001.   U.S. Freightways Corp. is inconsistent with

the decision of this Court, which it reversed, and with the

decisions of other U.S. Courts of Appeals, which have held or

suggested that expenses that give rise to property with a life

extending beyond the taxable year in which the expense is

incurred must be capitalized.    See, e.g., Jack’s Cookie Co. v.

United States, 597 F.2d 395, 402 (4th Cir. 1979); Am. Dispenser

Co. v. Commissioner, 396 F.2d 137, 138 (2d Cir. 1968), affg. T.C.

Memo. 1967-153; Sears Oil Co. v. Commissioner, 359 F.2d 191, 197

(2d Cir. 1966), affg. in part, revg. in part, and remanding T.C.

Memo. 1965-39; Commissioner v. Boylston Mkt. Association, 131

F.2d 966, 968 (1st Cir. 1942), affg. a Memorandum Opinion of the

Board of Tax Appeals.   Those cases provide substantial

justification for respondent’s attempt to capitalize the

professional fees, despite the decision of the Court of Appeals

in U.S. Freightways Corp.

     E.   Timeliness of Respondent’s Concessions

     Respondent’s initial published guidance that he would no

longer contest or litigate the deductibility of employee

compensation (here, the loan origination/acquisition costs)

appeared on March 15, 2002, with the issuance of CCN 2002-21, and

his initial published guidance adopting the 12-month rule
                              - 39 -

(applicable to the professional fees) was the promulgation of

section 1.263(a)-4(f)(1), Income Tax Regs., as part of the final

INDOPCO regulations, effective December 31, 2003.15     Respondent’s

concession with respect to the deductibility of the professional

fees was obviously timely as it preceded respondent’s adoption of

the 12-month rule.   The only remaining issue is whether

respondent’s April 19, 2002, concession with respect to the

deductibility of the loan origination/acquisition costs was

timely.

     Respondent’s concession with respect to the deductibility of

the loan origination/acquisition costs occurred 1 month and 4

days after issuance of CCN 2002-21.    Respondent argues that “he

should be allowed a reasonable period of time, following his

change in position * * * to concede * * * [the deductibility of

the loan origination/acquisition costs] in pending cases”, and

that the slightly more than 1 month between the issuance of CCN

2002-21 and his concession is reasonable.   We agree.


     15
        The 12-month rule was also contained in the proposed
regulations issued on Dec. 19, 2002. Although proposed
regulations do not constitute “applicable published guidance”
under sec. 7430(c)(4)(B)(ii) and (iv), we have considered them as
representing respondent’s position on an issue (but lacking the
effect of law). See, e.g., F.W. Woolworth Co. v. Commissioner,
54 T.C. 1233, 1265-1266 (1970); Allen v. Commissioner, T.C. Memo.
1988-166 n.44. We are not at this time required to decide
whether proposed regulations constitute a position against which
respondent may not litigate, consistent with the rationale of
Rauenhorst v. Commissioner, 119 T.C. 157, 170-173 (2002), because
the proposed INDOPCO regulations, like the final regulations,
postdate respondent’s concessions in the consolidated cases.
                              - 40 -

     In Stieha v. Commissioner, 89 T.C. 784, 791 (1987), we

stated that the Commissioner must review the taxpayer’s case,

following adverse, controlling litigation, “in a reasonable and

timely manner”.   Accord Mid-Del Therapeutic Ctr., Inc. v.

Commissioner, T.C. Memo. 2000-383.     Correspondingly, respondent

must demonstrate that he acted “in a reasonable and timely

manner” after the issuance of CCN 2002-21 preparatory to

conceding the deductibility of the loan origination/acquisition

costs.   We find that he so acted.   Respondent’s counsel, Mr.

Skinner, was under instructions to confirm his office’s position

with respect to the consolidated cases in light of CCN 2002-21,

and immediately upon obtaining confirmation that he should

concede the deductibility of the loan origination/acquisition

costs, he contacted petitioners’ counsel to concede that issue.

The same or even longer periods between the event requiring the

Commissioner to concede an issue and the actual concession have

been held to be reasonable.   See Harrison v. Commissioner, 854

F.2d 263, 265 (7th Cir. 1988) (Government’s conduct considered

“reasonable” where, after being advised that the partnership in

which the taxpayer was a limited partner had received a “no-

change” letter, the Government’s counsel conceded the case

“within a month” during which time counsel “verified information

demonstrating that that was the proper course”), affg. T.C. Memo.

1987-52; Ashburn v. United States, 740 F.2d 843, 846, 850-851
                             - 41 -

(11th Cir. 1984) (Government’s conduct considered “reasonable”

and “substantially justified” where it took 11 months after the

taxpayer filed his complaint for Government counsel to obtain

from the IRS and review the relevant administrative files and,

after deciding to concede the Government’s case, an additional 40

days to obtain permission to concede from the IRS and the Review

Section of the Department of Justice); White v. United States,

740 F.2d 836, 842 (11th Cir. 1984) (Government’s concession of an

issue less than 3 months after taxpayer raised it in an amended

complaint considered “reasonable” behavior and, therefore,

“substantially justified”); Shifman v. Commissioner, T.C. Memo.

1987-347 (Government’s concession within 2 months after the

petition was filed considered “reasonable” thereby barring

taxpayer’s recovery of litigating costs under section 7430).16


     16
        Harrison v. Commissioner, 854 F.2d 263 (7th Cir. 1998),
affg. T.C. Memo. 1987-52 and Shifman v. Commissioner, T.C. Memo.
1987-347, were decided under sec. 7430 before it was amended by
the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(d)(1), 100
Stat. 2752, to substitute “was not substantially justified” for
“was unreasonable” in describing a Government position that could
give rise to an award of reasonable litigation costs under that
provision. As we noted in Shifman v. Commissioner, supra at note
5: “this Court has previously held that the test of whether a
Government action is ‘substantially justified’ is essentially one
of reasonableness” (citing Baker v. Commissioner, 83 T.C. 822,
828 (1984)), vacated and remanded on another issue 787 F.2d 637
(D.C. Cir. 1986). Ashburn v. United States, 740 F.2d 843 (11th
Cir. 1984), and White v. United States, 740 F.2d 836 (11th Cir.
1984), were decided under the Equal Access to Justice Act (EAJA),
28 U.S.C. sec. 2412 (2000). A principal reason for the enactment
of sec. 7430 was to extend the relief afforded by EAJA to
proceedings in this Court so that “one set of rules * * * [would]
                                                   (continued...)
                              - 42 -

     Petitioners reliance on Stieha v. Commissioner, supra, is

misplaced.   In that case, after this Court issued a dispositive

decision that caused the Commissioner’s position to no longer be

substantially justified, the Commissioner continued to oppose the

taxpayer’s motion to dismiss, ignoring our decision.    The

Commissioner ultimately conceded the case more than 4 months

after the release of our decision.     Under the circumstances, we

found that the Commissioner’s “failure to review petitioners’

case in a reasonable and timely manner” caused the taxpayer to

incur “more attorneys fees than should have been necessary.”

Stieha v. Commissioner, 89 T.C. at 791.     Here, after the issuance

of CCN 2002-21, respondent’s counsel took no steps other than to

confirm his office’s position in the consolidated cases in light

of that notice, and immediately upon being told to concede the

deductibility of the loan origination/acquisition costs at issue,

he did so.

     We conclude that respondent was substantially justified in

not conceding the deductibility of the loan origination/

acquisition costs until April 19, 2002, or the deductibility of

the professional fees until he filed his trial memorandum on May

31, 2002, or, alternatively, until the Stipulation of Settled



     16
      (...continued)
apply to awards of litigation costs in tax cases whether the
action is brought in a U.S. District Court, the Court of Claims,
or the U.S. Tax Court.” H. Rept. 97-404, at 11 (1982).
                              - 43 -

Issues was submitted to the Court on June 10, 2002.

IV.   Conclusion

      Respondent was substantially justified in seeking to

capitalize the loan origination/acquisition costs and

professional fees at issue in the consolidated cases until the

dates on which he conceded those issues as determined herein.



                                       An appropriate order denying

                               petitioners’ motions for costs

                               under section 7430 will be issued.
