                   T.C. Summary Opinion 2009-102



                      UNITED STATES TAX COURT



         NICHOLAS AND KERRI A. FITZPATRICK, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25821-07S.              Filed July 8, 2009.



     Nicholas and Kerri A. Fitzpatrick, pro se.

     Daniel P. Ryan, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.1   Pursuant to

section 7463(b), the decision to be entered is not reviewable by



     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code as amended, Rule references are to the Tax
Court Rules of Practice and Procedure, and amounts are rounded to
the nearest dollar.
                                - 2 -

any other court, and this opinion shall not be treated as

precedent for any other case.

     This case is before the Court on petitioners’ motion under

section 7430 and Rule 231 for recovery of litigation costs.

                            Background

     Petitioners timely filed their 2005 Form 1040, U.S.

Individual Income Tax Return.   They resided in Massachusetts when

they filed the petition.

1.   Administrative Proceedings

     The Internal Revenue Service (IRS) issued a Notice CP2000

dated March 19, 2007, to petitioners.    The notice proposed

adjustments to petitioners’ 2005 Federal income tax for three

unreported items:   $1,000 in gambling income reported on a Form

W-2G, Certain Gambling Winnings, issued by the Massachusetts

State Lottery Commission; and $22,581 reported on two Forms SSA-

1099, Social Security Benefit Statement, issued in the amounts of

$22,388 and $192, respectively, by the Social Security

Administration (SSA).2   The total proposed deficiency in the

notice was $2,872, plus statutory interest.

     Petitioners responded to the notice with a letter dated

March 25, 2007.   In this letter petitioners agreed that they



     2
       With respect to the proposed adjustment resulting from
payments reported by the Social Security Administration (SSA),
the Notice CP2000 indicated that $18,163 was includable in
income.
                               - 3 -

omitted the gambling income from their 2005 return but disputed

the proposed adjustment for Social Security income.   Petitioners

stated that they did not qualify for or receive any benefits from

the SSA in 2005.

     In a reply dated May 14, 2007, the IRS acknowledged

petitioners’ March 25, 2007, letter and instructed them to obtain

written verification from the SSA of the correct amount paid to

them in 2005.

     Petitioners sought correction from the SSA with letters and

telephone calls.   Petitioners discovered that the SSA mailed one

or more Forms SSA-1099 for 2005 to an old address where

petitioner Nicholas Fitzpatrick had not lived since 2001.

Further investigation by petitioners’ representative indicated

that Mr. Fitzpatrick was entitled to a check from the SSA in the

amount of $196 in 2005 to correct errors in amounts due him as

survivor’s benefits between 1995 and 2000.   Petitioners did not

receive any checks or other benefits from the SSA in 2005.

     During the period of April through August 2007, the IRS was

aware that petitioners had made attempts to obtain information

from the SSA, had not received an informed response from the SSA,

and continued to seek documentation from the SSA to resolve this

issue.   The IRS issued a notice of deficiency on August 13, 2007,
                                - 4 -

determining a deficiency of $2,872 (the same amount proposed in

the March 19, 2007, Notice CP2000).3

2.   Petition and Pretrial Proceedings

     Petitioners filed their petition on November 9, 2007.    In

the petition they asserted:    (1) That they did not receive any

benefits from the SSA in 2005; rather, the SSA erroneously

reported income paid to Mr. Fitzpatrick, the SSA was

investigating the issue, and the SSA would correct the error; and

(2) that they inadvertently omitted gambling income of $1,000 and

agreed with that adjustment.

     Respondent filed his answer December 19, 2007, denying for

lack of sufficient information or knowledge that the SSA

erroneously reported income paid to Mr. Fitzpatrick and admitting

that petitioners inadvertently omitted gambling income.

     Respondent assigned petitioners’ case to an Appeals officer

(AO) and mailed a letter explaining the Appeals process to

petitioners on January 3, 2008.    The AO’s activity log indicates

that she received the case on January 15, 2008, and worked on the

case on 5 different days between January and July 2008.

Petitioners’ representative, an enrolled agent with power of

attorney, wrote the AO on January 15, 2008, stating that he had




     3
       The 3-year period of limitations for assessment as to
petitioners’ timely filed 2005 Federal income tax return would
normally expire on Apr. 15, 2009.
                                - 5 -

information that might resolve the case and asking the AO to

contact him.

     The AO’s activity log contains the following notes:

   Date                                 Notes
1/15/08    Analyzed case file. Timely filed. No prior
           involvemt. Petitioners state they disagree w/the
           Social Security in the amt of $22,388. However, the
           unreported gambling income is in fact accurate. The
           petitioners state taht the SSA income is the tps
           mother. The SSA is looking into this matter and
           will be makg the appropriate corrections. Reviewd
           CP2000 notice and acct transcript. Reqtg docs fr
           SSA to substantiate claim.
2/29/08    Conference ltrs issued.
5/29/08    Pc to POA and left message. Pc to petitioners to
           determine if M Casey was representg them. Left
           message.
6/18/08    Pc to petitioners. Phone rang. Contacted POA
           Michael Casey and left message for ret call. Pc fr
           POA stag that petitioners are in the process of
           correcting info with SSA. Discussed the Appeals
           process and taxpayer rights. No addtl info has been
           provided to correct the SS income. POA will be faxg
           addtl info when recd. If addtl info is recvd
           forward to counsel.
6/18/08    Sustain compliance
6/18/08    ACM.
6/18/08    Closg docs for trial.
6/18/08    Email recd fr paralegal in the Boston Counsel
           office. This case is scheduled on the September and
           she reqtd an update if possible on the case status.
6/18/08    Pc to paralegal statg the petitioners can not get
           the needed docs such as the corrected 1099 fr the
           SSA. It appears that no setlemt will be reached.
           POA is currently tryg to resolve this with SSA mgr
           in local office but so far no success. Informed her
           that the petitioners have conceded the gambling
           income and not the SSA benefits.
                               - 6 -

   Date                                Notes
6/19/08    Closing docs.
7/01/08    Pc to POA to state that I recd faxd copies of docs
           provided to explain the issues and how they have
           been attempting to get correctd 1099 fr SSA. The
           docs stated that they were still in the process and
           a corrected copy has not been issued as of yet.
           Informd POA that the case will be closed sustaing
           Compliance. Informd POA that if the correctd copy
           of the 1099 is recvd he can send/fax to me and I
           will send it forward to be assocd w/file.
7/01/08    Recd faxed docs fr POA Michael Casey. However,
           there is no corrected 1099 fr SSA to substantiate
           claim. POA reqts a conference w/supervisor because
           he disagrees w/determination.


     The AO informed petitioners that without proof from the SSA

that the information reported to the IRS for 2005 was incorrect,

she had to process the case for trial.     In his request to meet

with the AO’s supervisor, petitioners’ representative identified

and provided a telephone number for an individual at the SSA who

could explain that the income reported by the SSA was at least

partially inaccurate.   The record does not indicate that the AO’s

supervisor met with petitioners’ representative, nor that Appeals

called the SSA contact petitioners provided.

     Petitioners and their representative corresponded with the

SSA between March 2007 and July 2008, and, as of July 1, 2008,

they had not received documentation from the SSA describing or

correcting any SSA reporting error.
                               - 7 -

     On July 2, 2008, an IRS paralegal hand-delivered a letter to

the Boston SSA office, together with a request for certification

of records regarding the Forms SSA-1099 issued to Mr. Fitzpatrick

for 2005.

     While the IRS paralegal did not directly receive a response,

on July 8, 2008, the SSA issued a letter to petitioners which

stated that the Form SSA-1099 issued to Mr. Fitzpatrick for 2005

was incorrect, that the correct amount appeared to be zero, and

that the corrected Form SSA-1099 was pending as of that date.    It

is not clear from the record precisely which query to the SSA

triggered the July 8, 2008, letter.

     At a July 14, 2008, meeting with IRS counsel in Boston,

petitioners presented the July 8, 2008, letter from the SSA, and

IRS counsel immediately conceded the entire Social Security

income issue, which was the only remaining issue.

3.   Motion for Litigation Costs and Objection

     The parties filed a stipulation of settled issues on

September 16, 2008, and petitioners filed a motion for litigation

costs on the same date.

     Respondent objects to petitioners’ motion for litigation

costs.   In a response filed October 8, 2008, respondent concedes

that petitioners substantially prevailed with respect to the

amount in controversy, did not unreasonably protract the

proceedings, requested reasonable costs, and met the net worth
                               - 8 -

limitation.   Respondent initially objected to petitioners’

request for litigation costs on two grounds:   (1) That

petitioners failed to exhaust all available administrative

remedies; and (2) that respondent’s position was substantially

justified.

     Petitioners replied to respondent’s response on November 28,

2008, and supplemented their reply on December 8, 2008.

Petitioners assert that they exhausted all available

administrative remedies and challenge respondent’s assertion of

substantial justification, arguing that respondent merely relied

on erroneous SSA reporting without any meaningful investigation

while ignoring petitioners’ challenge to the accuracy of the

information reported.

     Respondent concedes in his second response that petitioners

are deemed to have exhausted the available administrative

remedies, pursuant to section 301.7430-1(f)(2), Proced. & Admin.

Regs.   Respondent argues that he was substantially justified in

his administrative and litigation position because petitioners

did not assert a reasonable dispute regarding the income reported

by the SSA until they produced the July 8, 2008, SSA letter well

after both the August 13, 2007, notice of deficiency and the

December 19, 2007, answer.
                               - 9 -

      Finally, respondent asserts that petitioners’ claim for

additional costs is not reasonable with respect to petitioners’

filings after the motion for litigation costs.

      With their motion for litigation costs petitioners requested

costs and fees of $2,610.   They requested additional amounts with

later filings.4   Petitioners claimed the following itemized costs

and fees:

  Date                       Description                     Amount

11/9/07  Petition filing fee                                    $60
9/16/08  Initial claim (petition through sec. 7430
         motion)                                              2,550
10/27/08 Motion to strike                                       400
11/28/08 Reply to respondent’s response                         700
11/28/08 Postage on envelope containing reply                     2
12/8/08 Estimated mailing costs                                  20
1/28/09 Motion to show cause                                    100
4/27/09 Motion for summary judgment                             150
           Total                                              3,982


                            Discussion

      Reasonable litigation costs may be awarded to a taxpayer if

he satisfies the provisions of section 7430, which require that

he:   (1) Qualify as a prevailing party; (2) exhaust all available

administrative remedies; (3) not unreasonably protract the court

proceeding; and (4) demonstrate that the costs claimed are

reasonable litigation costs incurred in connection with the court


      4
       We denied the three motions petitioners filed after filing
the motion for litigation costs on Sept. 16, 2008.
                                - 10 -

proceeding.   Sec. 7430(a), (c)(4), (b)(1), (3).   A taxpayer has

the burden of establishing that he has satisfied each of the

foregoing criteria.   See Rule 232(e); Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430 (1997).

     To qualify as a “prevailing party”, a taxpayer must

establish:    (1) He substantially prevailed with respect to either

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

issues presented; and (2) he met the net worth requirements of 28

U.S.C. section 2412(d)(2)(B) at the time he filed the petition.

Sec. 7430(c)(4)(A).   A taxpayer shall not be treated as a

prevailing party if the IRS establishes that the Government’s

position in the proceeding was substantially justified.    Sec.

7430(c)(4)(B).

     Respondent concedes all requirements for petitioners to

qualify for an award of litigation costs except that petitioners

are a prevailing party, on the ground that respondent’s position

was substantially justified.5    Respondent further asserts that



     5
       Respondent initially asserted that petitioners received a
notice of proposed deficiency (30-day letter). In their motion
and reply, petitioners admitted receipt of a Notice CP2000 but
denied receiving a 30-day letter. In his second response (after
further review and after petitioners’ reply), respondent conceded
that petitioners received only a Notice CP2000 and not a 30-day
letter. This concession implies a distinction between these two
notices. Importantly, a 30-day letter includes instructions for
requesting Appeals Office consideration of the proposed
deficiency. In contrast, the Notice CP2000 in the record did not
provide any such opportunity to request Appeals Office
consideration of the proposed changes.
                                 - 11 -

even if petitioners are entitled to an award, the costs claimed

after they filed the motion for litigation costs are not

reasonable.

     A.    Substantially Justified

     In the Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. 104-168,

sec. 701(a), 110 Stat. 1452, 1463 (1996), Congress amended

section 7430(c)(4), shifting the burden from the taxpayer to the

Government to prove the Government’s position was substantially

justified.    Fla. Country Clubs, Inc. v. Commissioner, 122 T.C.

73, 79 (2004), affd. 404 F.3d 1291 (11th Cir. 2005).

     In evaluating the Commissioner’s justification we must first

identify when the Commissioner took a position and then decide

whether the position taken from that point forward was

substantially justified.    Andary-Stern v. Commissioner, T.C.

Memo. 2002-212.   We generally bifurcate our analysis, considering

the Commissioner’s position in the administrative proceeding

separately from his position in the court proceeding.     Huffman v.

Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,

revg. in part on other grounds and remanding T.C. Memo. 1991-144.

The Appeals Office notice of decision or the notice of deficiency

establishes the administrative position (whichever happens

first).6   Sec. 7430(c)(7)(B).    The Commissioner’s answer


     6
       Petitioners seek litigation costs only. Thus, whether
respondent was substantially justified in his administrative
                                                   (continued...)
                              - 12 -

establishes his litigation position.    Huffman v. Commissioner,

supra at 1148.

     If the Commissioner acted reasonably on all the facts and

circumstances and the legal precedents relating to the case, his

position is substantially justified.    Pierce v. Underwood, 487

U.S. 552 (1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987),

affd. 861 F.2d 131 (5th Cir. 1988).    The Commissioner’s position

may be substantially justified even if incorrect “‘if a

reasonable person could think it correct’”.    Maggie Mgmt. Co. v.

Commissioner, supra at 443 (quoting Pierce v. Underwood, supra at

566 n.2).   The Commissioner’s eventually conceding or losing a

case does not establish that his position was not reasonable.

Sokol v. Commissioner, 92 T.C. 760, 767 (1989).

     It is well settled that the Commissioner is not obliged to

concede a case until he receives the necessary documentation that

proves the taxpayer’s contentions with respect to any factual

determination.   Gealer v. Commissioner, T.C. Memo. 2001-180.

Moreover, after he receives the documentation, the Commissioner



     6
      (...continued)
position is not directly relevant. We note, however,
respondent’s assertion that his answer adopted the position
stated in the notice of deficiency, which would establish his
administrative position in this case. Finally, to the extent
that the administrative actions form a backdrop for respondent’s
litigation position, that history may prove relevant to our
deciding whether the litigation position was substantially
justified. See Hanson v. Commissioner, 975 F.2d 1150, 1153 (5th
Cir. 1992).
                              - 13 -

has a reasonable period in which to analyze it and modify his

position accordingly.   Id. (citing Sokol v. Commissioner, supra

at 765-766).

     In TBOR 2 sec. 602, 110 Stat. 1463, Congress required that

the Government conduct a reasonable investigation of a disputed

information return because of difficulties imposed on a taxpayer

by third parties’ filing fraudulent information returns or

issuing erroneous returns and refusing to correct the

information.   H. Rept. 104-506, at 36 (1996), 1996-3 C.B. 49, 84.

In any Court proceeding where a taxpayer asserts a reasonable

dispute with respect to income reported on a third-party

information return and fully cooperates with the IRS, “the

Secretary shall have the burden of producing reasonable and

probative information concerning such deficiency in addition to

such information return.”7   Sec. 6201(d).   Full cooperation



     7
       Because sec. 6201(d) applies only to court proceedings, it
does not bear directly on the Commissioner’s administrative
position, but it does bear directly on his litigation position.
As indicated, petitioners are not seeking administrative costs.
Thus, we need not decide whether the Commissioner’s position qua
administrative position was reasonable. Nevertheless, it is
conceivable that a position could be reasonable at the
administrative stage but less so at the litigation stage as a
result of the sec. 6201 burden of production. Cf. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992) (the
Commissioner’s administrative position, established by the notice
of deficiency, was not substantially justified, but his
subsequent litigation position was substantially justified
because in his answer he conceded the unreasonable position),
affg. in part, revg. in part on other grounds and remanding T.C.
Memo. 1991-144.
                                - 14 -

requires informing the IRS of the dispute within a reasonable

time.     H. Rept. 104-506, supra at 36, 1996-3 C.B. at 84.   In

addition, a taxpayer must provide timely “access to and

inspection of all witnesses, information, and documents within

the control of the taxpayer”.     Sec. 6201(d).

        Respondent argues that he was substantially justified in his

litigation position, on the basis of information reported to the

IRS by the SSA, until July 14, 2008, when petitioners produced

the July 8, 2008, letter from the SSA indicating that the correct

amount of their Social Security income for 2005 was zero.     The

parties agree that the IRS promptly conceded this issue upon

receipt of the SSA letter, but they disagree as to whether

petitioners raised a reasonable dispute before producing the July

8, 2008, letter.

        Petitioners argue that once they informed the IRS that the

SSA reporting was erroneous, the IRS was not substantially

justified in accepting the veracity of and relying exclusively on

the information return filed by the SSA.     The question we must

decide is whether respondent was substantially justified in the

position he adopted in his answer and maintained in this

litigation; namely, denying for lack of sufficient knowledge or

information petitioners’ allegation that the Form SSA-1099 was

incorrect.
                                - 15 -

       We have held that when a taxpayer did not raise an issue

with a Form 1099, the IRS was substantially justified in relying

on the third-party reporting.    See McDaniel v. Commissioner, T.C.

Memo. 1993-148.    In addition, we have held that where a taxpayer

did not timely furnish information required for the IRS to

concede an issue supported by third-party reporting, the IRS was

substantially justified until the taxpayer provided that

information.    See Uddo v. Commissioner, T.C. Memo. 1998-276.     In

each situation, we have denied litigation fees to the taxpayer

whose delay prevented more expeditious resolution of his case.

This case fits neither situation and also differs from Spurlock

v. Commissioner, T.C. Memo. 2003-124, where we denied litigation

fees sought by a taxpayer who did not fully cooperate and did not

make her dispute known to the third parties who prepared the

information returns she claimed were fraudulent.

       Respondent apparently relies on a vague sentence at the end

of the AO’s activity log entry for January 15, 2008, to show that

the AO requested information from the SSA.    This sentence follows

the AO’s statement that she reviewed the Notice CP2000 and the

transcript.    It also falls at the end of a paragraph where she

describes petitioners’ position and their contentions about the

SSA.    The record does not contain copies of any written request

from the AO to the SSA.    Thus, it is far from clear that the AO

was describing her current or intended actions rather than
                              - 16 -

petitioners’ actions.   Furthermore, that entry at most indicates

that someone was in the process of making a request to the SSA.

In contrast, the AO used the past tense to describe her review of

the file, clearly indicating that she had completed that task.

Her activity log does not state that she actually made any

request to the SSA, and it does not contain any followup by the

AO or any evidence that she either noticed or was concerned that

the SSA did not respond to any query during the more than 5

months she had the case.

     On April 11, 2008, the Court issued a notice of trial

informing the parties that this case was set for trial at the

trial session beginning on September 15, 2008, in Boston.

     It appears that the first time respondent attempted to

obtain information from the SSA was July 2, 2008, when

respondent’s paralegal hand-delivered an inquiry to the SSA.

Thus, on this record, it is clear that between the filing of the

petition on November 9, 2007, and the paralegal’s inquiry on July

2, 2008, respondent did not conduct any independent investigation

despite petitioners’ continuing challenge to the accuracy of the

Form SSA-1099.   Rather, respondent relied solely on the

information returns filed by the SSA.

     Respondent argues that he had no responsibility to obtain

information in addition to the information return from the SSA.

The necessary inference from this assertion is that the petition
                               - 17 -

disputing the Form SSA-1099 did not trigger respondent’s burden

of production under section 6201(d).    Respondent does not allege

and the record does not indicate that petitioners failed to

cooperate fully.    Thus, respondent suggests that petitioners’

dispute was not reasonable and hence respondent’s burden of

production under section 6201(d) did not arise until petitioners

produced the July 8, 2008, SSA letter.8

     Petitioners timely raised the issue of erroneous third-party

reporting, both in their Notice CP2000 response and in their

petition, and they, through their representative, diligently

pursued the SSA to clarify the issue.     Petitioners provided

respondent with copies of their letters to the SSA, together with

SSA contact information, and they did not withhold any requested

documents, information, or witnesses.     Petitioners raised a

specific and credible dispute, and they fully cooperated with

respondent.    Thus, we are satisfied that petitioners asserted a

reasonable dispute and that respondent had an obligation to

comply with section 6201(d).




     8
         In his second response, respondent argues:

     In this case, the burden did not shift to respondent to
     verify the income reported by the SSA because petitioners
     failed to provide documentation from the SSA or any other
     independent source rising to the level of a reasonable
     dispute before the issuance of the notice of deficiency or
     respondent’s answer.
                             - 18 -

     We must decide at what point in this Court proceeding

respondent failed to take steps to procure reasonable and

probative information concerning the deficiency in addition to

the information return issued by the SSA.   Another way to

describe the question before us is:   Given the existing

administrative record in this case and given that a petition had

been filed with the Court disputing an information return, at

what point would respondent be required to satisfy his obligation

under section 6201(d)?

     When he filed his answer, respondent relied on the

presumption of correctness normally afforded his deficiency

notices in adopting his administrative position as his litigation

position, and he placed on petitioners the entire burden of

investigating whether the SSA made a mistake.   However, the

statute does not require a taxpayer to provide independent

documentation proving that a disputed information return is

erroneous as a prerequisite to raising a reasonable dispute under

section 6201(d); rather, in response to a reasonable dispute by a

taxpayer in a court proceeding, the statute requires the

Commissioner to produce reasonable and probative information

concerning the deficiency in addition to the disputed information

return.

     We conclude that respondent’s obligation arose in this case

soon after the petition was filed with this Court.   Petitioners
                              - 19 -

filed the petition November 9, 2007, respondent filed his answer

December 19, 2007, and Appeals first wrote to petitioners January

3, 2008.   However, respondent’s first attempt to procure

reasonable and probative evidence to support the information

return occurred July 2, 2008, approximately 8 months after the

petition was filed.

     Section 6201(d) as amended in 1996 requires the Commissioner

to produce independent evidence supporting an information return

reasonably challenged by a cooperating taxpayer, and section

7430(c)(4)(B)(ii) requires him to prove that his position was

substantially justified.   We note that the cases discussing the

weight to be given to IRS information documents, in a situation

of omitted income, and the effect on the burden of persuasion are

cases decided before the amendment to section 6201.9



     9
       In contrast to Portillo v. Commissioner, 932 F.2d 1128,
1133-1134 (5th Cir. 1991) (requiring the IRS to attempt to
substantiate a disputed charge of unreported income by some means
other than the naked assertion of the third-party reporter),
affg. in part, revg. in part and remanding T.C. Memo. 1990-68,
the Court of Appeals for the First Circuit has held that the
burden of going forward and of ultimate persuasion always rests
on the taxpayer and never shifts to the Commissioner. United
States v. Rexach, 482 F.2d 10, 17 (1st Cir. 1973); see also
Delaney v. Commissioner 99 F.3d 20, 23 (1st Cir. 1996), affg.
T.C. Memo. 1995-378. But for the provisions of sec. 7463(b), the
decision in this case would be appealable to the Court of Appeals
for the First Circuit. See sec. 7482(b)(1)(A). This Court
generally applies the law in a manner consistent with the
holdings of the Court of Appeals to which an appeal of its
decision would lie, see Golsen v. Commissioner, 54 T.C. 742, 757
(1970), affd. 445 F.2d 985 (10th Cir. 1971), even in cases
subject to sec. 7463(b).
                              - 20 -

     Respondent argues that awarding costs in this case would

require the IRS to investigate all third-party information

returns, even Forms 1099 issued by other Federal agencies, before

issuing a notice of deficiency or to risk liability for

litigation costs; that such an award would unfairly hold the IRS

responsible for the SSA’s error and untimely response; and that

the administrative burden flowing from such a holding would be

both unreasonable and overwhelming.

     As indicated, this case does not address the reasonableness

of the administrative position established in the notice of

deficiency because petitioners have not requested administrative

costs or fees.   Furthermore, section 6201(d) does not apply to

prelitigation actions.   Thus, respondent’s argument is

misdirected.   The issue here is whether respondent was reasonable

in adopting and maintaining the administrative position as his

litigation position, in view of the affirmative duty imposed by

section 6201(d) to produce probative information in this Court

proceeding to verify the disputed information return.

     Respondent also complains that awarding litigation costs in

this case holds the IRS liable as a result of third-party errors

and unfairly makes the IRS responsible for another agency’s

untimely response.   Neither assertion is accurate; rather, any

award of litigation costs results from respondent’s failure to

act reasonably in adopting a litigation position without
                               - 21 -

attempting to obtain reasonable and probative information

concerning the deficiency, as required by section 6201(d).

     As indicated, the petition was filed in this matter on

November 9, 2007.   Petitioners explained in the petition:

     The Taxpayer, Nicholas Fitzpatrick, did not at any time in
     the year 2005, receive Social Security benefits from the
     Social Security Administration. This was an error in
     computation of a Workman’s Compensation offset determined to
     be attributable to the Taxpayer's mother, Lynda Fitzpatrick.
     The Social Security Administration is now looking into this
     matter and will be making the appropriate corrections. We
     request that the income relating to Social Security be
     reduced to zero, and the tax deficiency relating to such
     income be eliminated.

Respondent had 60 days to file his answer.   See Rules 173(b),

36(a).   The answer was filed December 19, 2007.   In response to

petitioners’ challenge to the SSA income, respondent asserted:

“Denies for lack of sufficient knowledge or information.”

     Rule 33(b) requires inquiry into both the facts and the law

relevant to any pleading at the time the pleading is filed.

Versteeg v. Commissioner, 91 T.C. 339, 342 (1988).    In this case

that would entail review of information in the administrative

file.    A review of that file would presumably have revealed that

the basis for the determination of omitted income was the

contested Form SSA-1099.   The file would also have revealed

petitioners’ consistent position that the information return was

incorrect as well as petitioners’ attempts to get the SSA to

respond to their inquiries.   At some point respondent’s counsel
                             - 22 -

responsible for this case should have become aware of his

verification obligation under section 6201(d).

     Considering the particular circumstances of this case, we

conclude that respondent’s denial for lack of knowledge or

information with respect to petitioners’ Social Security income

was not reasonable given his duty under section 6201(d).

Assuming respondent’s counsel had the administrative file, he

should have reviewed the file before filing the answer.    Even if

respondent did not have the file and thus was required either to

answer for lack of knowledge or information or to seek additional

time to file the answer, there is nothing in this record to

establish that respondent took any steps before July 2, 2008, to

investigate the disputed Form SSA-1099.   Under these particular

facts and circumstances we conclude that respondent was not

substantially justified in continuing this litigation without any

such investigation.10

     Accordingly, petitioners are a prevailing party, and we hold

that they are entitled to an award of attorney’s fees and

litigation costs.




     10
       The SSA issued its July 8, 2008, letter within days of
respondent’s July 2, 2008, hand-delivered query. It is possible
that a timely inquiry to the SSA by respondent’s counsel upon
receipt of the petition could have resolved this case much
sooner, saving petitioners and the Government costs and expenses.
                               - 23 -

     B.   Reasonable Litigation Costs

     Section 7430(c)(3)(A) provides that

     fees for the services of an individual (whether or not an
     attorney) who is authorized to practice before the Tax Court
     or the Internal Revenue Service shall be treated as fees for
     the services of an attorney.

Furthermore, attorney’s fees may not exceed $125 per hour absent

our finding that an increase in the cost of living or a special

factor justifies a higher rate.   Sec. 7430(c)(1)(B)(iii).

     Petitioners claim attorney’s fees for the services of an

enrolled agent, and the invoices submitted indicate that their

representative charged $100 per hour.   The hourly charges for

their representative may be treated as litigation fees without

adjustment, provided the hours claimed are reasonable.     See

Cozean v. Commissioner, 109 T.C. 227, 234 (1997).

     In his response respondent conceded that petitioners

requested reasonable litigation costs and fees in their motion.

     Respondent contends that costs and fees claimed after the

motion are not reasonable.   As to petitioners’ reply to

respondent’s response to petitioners’ motion, petitioners argued

convincingly that they did not receive a 30-day letter and were

not afforded an opportunity for pre-petition Appeals Office

consideration of their case.   Respondent conceded this issue upon

further consideration and several months after petitioners

submitted their reply.   We find that the $700 claimed for

preparing petitioners’ reply was reasonable, as was the $2
                               - 24 -

postage affixed to the envelope used to mail the reply to the

Court.

     Petitioners filed a motion to strike certain assertions in

respondent’s response.    This motion served no useful purpose, did

not advance this litigation, and was denied.    Petitioners also

claimed $20 in estimated mailing costs but provided no support

for those estimated costs.    Thus, the $400 claimed for the motion

to strike and the $20 claimed for estimated mailing costs are not

reasonable.

     Petitioners’ motion to show cause concerned petitioners’

proposed stipulation of fact that they did not receive a 30-day

letter.   The arguments in petitioners’ previously filed reply and

respondent’s subsequent concession rendered petitioners’ motion

to show cause moot.    Finally, petitioners’ motion for summary

judgment was denied.    Claimed costs of $100 for the show cause

motion and $150 for the summary judgment motion are not

reasonable.

                             Conclusion

     For the reasons discussed above, petitioners are entitled to

an award of litigation costs and fees totaling $3,312.


                                          An appropriate order and

                                     decision will be entered.
