                         T.C. Memo. 2002-247



                       UNITED STATES TAX COURT



         ANTONIO ROSARIO AND JOYCE ROSARIO, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1378-00.              Filed September 26, 2002.


     Robert J. Fedor, for petitioners.

     Katherine Lee Kosar, for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    This case is before the Court on

petitioners’ motion for award of administrative and litigation

costs pursuant to section 7430 and Rule 231.1    Neither party


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. All references to sec. 7430 are to that section as in
                                                   (continued...)
                                  - 2 -

requested a hearing, and we see no reason for a hearing on this

matter.     Rule 232(a)(2).   Accordingly, we rule on petitioners’

motion on the basis of the parties’ submissions and the existing

record.     Rule 232(a)(1).   We incorporate by reference portions of

Rosario v. Commissioner, T.C. Memo. 2002-70 (Rosario I), our

opinion on the merits in the instant case, that are relevant to

our disposition of this motion.

        After concessions,2 the issue for decision is whether

petitioners are the “prevailing party” in the underlying tax

case.

Background

        Antonio Rosario (petitioner), an orthopedic surgeon,

executed a Professional Practice Agreement (the practice

agreement) with the Jesse Holman Jones Hospital (the hospital)

which provided that petitioner would receive funds from the

hospital to ensure a monthly income of $33,334 (guarantee

payment).     During 1993, pursuant to the practice agreement,

petitioner received $242,556 in guarantee payments from the

hospital.     In Rosario I, the issue was whether the $242,556



        1
      (...continued)
effect at the time the petition was filed.
        2
        In respondent’s response to petitioners’ motion for
administrative and litigation costs, respondent concedes that:
(1) Petitioners meet the net worth requirements as provided by
law; (2) petitioners have exhausted the administrative remedies
available within the Internal Revenue Service; and (3)
petitioners have not unreasonably protracted the litigation.
                               - 3 -

petitioner received from the hospital in 1993 was taxable income

to him in 1993.   We held that the guarantee payments petitioner

received were not includable in his income in 1993 because those

payments were a loan.

Discussion

     Section 7430 provides for the award of administrative and

litigation costs to a taxpayer in an administrative or court

proceeding brought against the United States involving the

determination of any tax, interest, or penalty pursuant to the

Internal Revenue Code.   An award of administrative or litigation

costs may be made where the taxpayer (1) is the “prevailing

party”, (2) exhausted available administrative remedies,3 (3) did

not unreasonably protract the administrative or judicial

proceeding, and (4) claimed reasonable administrative and

litigation costs.   Sec. 7430(a), (b)(1), (3), and (c).   These

requirements are conjunctive, and failure to satisfy any one will

preclude an award of costs to petitioners.   Minahan v.

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

     To be a “prevailing party” (1) the taxpayer must

substantially prevail with respect to either the amount in

controversy or the most significant issue or set of issues

presented, and (2) at the time the petition in the case is filed,



     3
        This requirement applies only to litigation costs.    Sec.
7430(b)(1).
                                - 4 -

the taxpayer must meet the net worth requirements of 28 U.S.C.

sec. 2412(d)(2)(B) (2000).    Sec. 7430(c)(4)(A).   A taxpayer,

however, will not be treated as the prevailing party if the

Commissioner establishes that the Commissioner’s position was

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

the administrative proceedings, respondent’s position is that

which was articulated in the notice of deficiency.     Sec.

7430(c)(7)(B); Huffman v. Commissioner, 978 F.2d 1139, 1143-1147

(9th Cir. 1992), affg. in part and revg. in part T.C. Memo. 1991-

144; Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997).

For purposes of the court proceedings, respondent’s position is

that which was set forth in the answer.   Sec. 7430(c)(7)(A);

Huffman v. Commissioner, supra at 1147-1148; Maggie Mgmt. Co. v.

Commissioner, supra at 442.

     The substantially justified standard is “essentially a

continuation of the prior law’s reasonableness standard.”

Swanson v. Commissioner, 106 T.C. 76, 86 (1996).     A position is

substantially justified if it is justified to a degree that could

satisfy a reasonable person and has a reasonable basis in both

fact and law.   Pierce v. Underwood, 487 U.S. 552, 565 (1988);4


     4
        Although the dispute in Pierce v. Underwood, 487 U.S. 552
(1988), arose under the provisions of the Equal Access to Justice
Act (EAJA), 28 U.S.C. sec. 2412(d) (1994), the relevant
provisions of the EAJA are almost identical to the language of
sec. 7430. Cozean v. Commissioner, 109 T.C. 227, 232 n.9 (1997).
We, therefore, consider the holding in Pierce v. Underwood,
                                                   (continued...)
                                - 5 -

Huffman v. Commissioner, supra at 1147; Swanson v. Commissioner,

supra at 86.   A position that merely has enough merit to avoid

sanctions for frivolousness will not satisfy this standard.

Pierce v. Underwood, supra at 566.

     The determination of reasonableness is based on all of the

facts and circumstances surrounding the proceeding and the legal

precedents relating to the case.     Coastal Petroleum Refiners,

Inc. v. Commissioner, 94 T.C. 685, 694-695 (1990).     A position

has a reasonable basis in fact if there is such relevant evidence

as a reasonable mind might accept as adequate to support a

conclusion.    Pierce v. Underwood, supra at 565.   A position is

substantially justified in law if legal precedent substantially

supports the Commissioner’s position given the facts available to

the Commissioner.    Coastal Petroleum Refiners, Inc. v.

Commissioner, supra at 688.    Determining the reasonableness of

the Commissioner’s position and conduct requires considering what

the Commissioner knew at the time.      Rutana v. Commissioner, 88

T.C. 1329, 1334 (1987); DeVenney v. Commissioner, 85 T.C. 927,

930 (1985).

     The fact that the Commissioner loses on the merits or

concedes the case does not establish that a position was not

substantially justified; however, it is a factor to be


     4
      (...continued)
supra, to be applicable to the case before us.      Cozean v.
Commissioner, supra.
                               - 6 -

considered.   Powers v. Commissioner, 100 T.C. 457, 471 (1993),

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

     Respondent contends that petitioners are not the prevailing

party because his position is substantially justified in that he

had a reasonable basis in both fact and law.5   Petitioners argue

that they substantially prevailed with respect to the amount in

controversy, as well as with regard to the most significant

issue, whether moneys petitioners received constituted additional

income or qualified as loan proceeds.

     In Rosario I, we were required to examine and interpret the

practice agreement in order to resolve the issue.   We did not

have any testimonial evidence to aid in interpreting the practice

agreement because the parties submitted the case fully

stipulated.   Although we ultimately held for petitioners, our

holding was not easily reached.

     The relevant language in the practice agreement regarding

the guarantee payments was not clear.   The agreement provided, in

part:

     To the extent that Physician’s gross income in any
     month during the term of this Agreement is less than
     $33,334.00, the Hospital will pay Physician by the
     tenth day of the closing of the Physician’s books for
     that month any amount sufficient to raise Physician’s
     income for that month to $33,334.00 (such payment by


     5
        Respondent alternatively argues that the amounts of costs
claimed by petitioners are unreasonable. Because we find that
respondent’s position was substantially justified, we need not
reach respondent’s alternative argument.
                                 - 7 -

     Hospital, will be referred to as a “Gross Guarantee
     Payment”). If, during any month of the term of this
     Agreement, Physician’s income is greater than
     $33,334.00, Physician will pay to Hospital by the tenth
     day after the closing of Physician’s books for the
     month, the excess over $33,334.00, to the extent
     necessary to reimburse hospital for Gross Guarantee
     Payments previously paid. Such payments by Physician
     will be made to the Hospital during the term of this
     Agreement until the total amount of Gross Guarantee
     Payments made by Hospital have been repaid in full.

The main ambiguity in the practice agreement was that the above

language could have been construed to favor respondent’s view

that petitioner would have to repay the hospital only to the

extent his monthly income were over $33,334; therefore, the

guarantee payments would not be characterized as a loan because

there would not be an unconditional obligation for petitioner to

pay them back.     United States v. Henderson, 375 F.2d 36, 39 (5th

Cir.1967); Bouchard v. Commissioner, 229 F.2d 703 (7th Cir.

1956), affg. T.C. Memo. 1954-243; Haag v. Commissioner, 88 T.C.

604, 615-616 (1987), affd. without published opinion 855 F.2d 855

(8th Cir. 1988).    The above language also could have been

construed to favor petitioner’s view that it required petitioner

to pay back the guarantee payments in all events, which would

support characterizing the payments as a loan.

     On January 1, 1994, petitioner and the hospital signed an

amended practice agreement that provided:

     Hospital intended that Physician, upon expiration of
     the Income Guarantee, be required to repay that portion
     of the Income Guarantee not repaid pursuant to the
                                 - 8 -

     Guarantee Payback, regardless of the level of
     Physician’s gross income, * * * .

It was not clear whether the amended practice agreement, which

was not signed until after the year in issue, changed, or instead

merely clarified, the parties’ intentions in the practice

agreement.   To resolve the ambiguity, we examined all stipulated

documents and concluded that the evidence weighed in favor of

treating the guarantee payments as a loan.       Although we did not

agree with respondent’s interpretation in the final analysis, we

believe that respondent’s position had a reasonable basis in law

and in fact given the ambiguity of the language in the practice

agreement.

     Accordingly, we hold that petitioners are not entitled to an

award of administrative or litigation costs.

     To reflect the foregoing,

                                              An appropriate order will

                                         be issued and a decision will

                                         be entered for petitioners.
