                        T.C. Memo. 2000-256



                      UNITED STATES TAX COURT



 CLIFFORD E. BARBOUR, JR. AND DOROTHY D. BARBOUR, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 3312-97.                      Filed August 14, 2000.



     Brian C. Quist, for petitioner Clifford E. Barbour.

     Rebecca D. Harris and John R. Keenan, for respondent.


                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to Rules 180, 181, and 183.1



     1
        All Rule references are to the Tax Court Rules of
Practice and Procedure. Unless otherwise indicated, all section
references are to the Internal Revenue Code in effect for the
taxable years in issue. However, all references to sec. 7430 are
to such section in effect when the petition was filed (Feb. 20,
1997).
                                - 2 -

The Court agrees with and adopts the Opinion of the Special Trial

Judge, which is set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

     ARMEN, Special Trial Judge:    This matter is before the Court

on the motion filed by petitioner Clifford E. Barbour

(petitioner)2 for an award of litigation costs under section 7430

and Rules 230 through 233.

     The issues for decision are as follows:3

     (1) Whether petitioner substantially prevailed with respect

to the amount in controversy.   We hold that he did not.

     (2) Whether petitioner substantially prevailed with respect

to the most significant issue or set of issues.   We hold that he

did not.

     Neither party requested an evidentiary hearing, and the

Court concludes that such a hearing is not necessary for the


     2
        Although the petition in the underlying case was filed by
both Clifford E. and Dorothy D. Barbour, only Clifford E. Barbour
requests an award of litigation costs. Therefore, in our
discussion of the substantive case, we shall limit all references
to petitioner Clifford E. Barbour.
     3
        Respondent does not concede any of the following: (1)
That petitioner exhausted his administrative remedies, see sec.
7430(b)(1); (2) that petitioner did not unreasonably protract the
proceedings, see sec. 7430(b)(3); (3) that respondent’s position
in the court proceeding was not substantially justified, see sec.
7430(c)(4)(B); (4) that the litigation costs claimed by
petitioner are reasonable, see sec. 7430(a)(2) and (c)(1); and
(5) that petitioner satisfied the applicable net worth
requirement, see sec. 7430(c)(4)(A)(ii). However, in light of
our holdings as to the enumerated issues, we need not address
these matters.
                               - 3 -

proper disposition of petitioner’s motion.   See Rule 232(a)(2).

We therefore decide the matter before us based on the record that

has been developed to date.

Background

     Petitioner resided in Knoxville, Tennessee, at the time that

the petition was filed with the Court.

     For the relevant periods involved herein petitioner owned

stock in several businesses, including White Pine Truck & Trailer

(White Pine), Tamperproof Identification Company, Inc.

(Tamperproof), Identrol Corporation (Identrol), and Barbour Hill

Bakery (Barbour Hill).

     By notice dated December 12, 1996, respondent determined a

deficiency in petitioner’s income tax in the amount of $47,9464

for the taxable year 1992 based on the following adjustments:

     First, respondent determined that petitioner was not

entitled to claim a loss in the amount of $162,033 in connection

with White Pine based on the determination that White Pine was a

passive activity and that the passive activity loss from such

activity would be limited to passive income.   In the alternative,

respondent determined that petitioner would not be entitled to

claim the $162,033 loss because petitioner had not established

any basis in his White Pine stock.




     4
         All monetary amounts are rounded to the nearest dollar.
                              - 4 -

     Second, respondent determined that petitioner had failed to

report income in the amount of $4,958.

     Third, respondent determined that petitioner was entitled to

an additional deduction for interest expense in the amount of

$6,239.

     Finally, respondent made certain mechanical adjustments for

miscellaneous itemized deductions and self-employment tax.

     On February 20, 1997, petitioner filed a timely petition

with the Court disputing the deficiency in tax, as well as

claiming an overpayment in the amount of $96,408.    In the

petition, petitioner alleged that the notice of deficiency was

based on incorrect conclusions and that petitioner possessed

certain documents to support his position on “capital losses,

charitable contributions, and investment interest”.    Petitioner

did not, however, allege any specific errors committed by

respondent in the determination of the deficiency or any specific

facts relating to his claim of an overpayment.

     Respondent filed an answer on April 9, 1997.

     Petitioner’s case was initially calendared for trial at a

trial session commencing in November 1997.   In October 1997,

respondent filed a motion for general continuance.    Respondent

asserted that additional time was needed to verify whether

petitioner was entitled to certain newly claimed deductions not

raised by petitioner in the petition.    In particular, respondent
                               - 5 -

requested additional time to verify original Forms 1120S, U.S.

Income Tax Return for an S Corporation, for Tamperproof and

Identrol for 1990 that had only been filed in September 1997 and

with respect to which petitioner was claiming capital loss

carryovers to the year in issue.   Respondent also requested

additional time to verify certain recently provided documentation

offered in support of petitioner’s alleged entitlement to an

additional charitable contribution deduction and investment

interest deduction.   Petitioner did not oppose a continuance,

respondent’s motion was granted, and the case was continued.

Subsequently, petitioner’s case was calendared for trial at a

trial session commencing in October 1998.

     In September 1998, respondent advised the Court, by trial

memorandum, that petitioner had raised new issues, claiming

additional deductions with respect to Tamperproof, Identrol, and

for a charitable contribution, that petitioner had not pleaded in

his petition and which were therefore issues not properly before

the Court.

     At calendar call, on October 5, 1998, the parties filed with

the Court a stipulation of settled issues whereby petitioner

conceded, as determined in the notice of deficiency, that the

loss from White Pine claimed in 1992 was a passive activity loss,

and that for 1992 petitioner failed to report income in the

amount of $4,958.   Further, the parties stipulated several other
                               - 6 -

adjustments with respect to the charitable contribution deduction

for 1992 (in the amount of $40,000), the amount of total mortgage

interest, passive activity interest, investment interest paid by

petitioner in 1989 through 1992, the amount of long-term capital

loss with respect to Tamperproof and Identrol in 1990, and the

amount of Schedule D, Capital Gains and Losses, loss for Barbour

Hill for 1991.   Because these various other adjustments which the

parties had stipulated were not properly before the Court, the

Court ordered petitioner to file an amended petition to plead

properly the issues raised informally by petitioner.

     The parties stipulated that as a net result of the various

adjustments, the deficiency in income tax for 1992 was greater

than the amount determined in the notice of deficiency, and that

the deficiency for that year should be increased from $47,946 to

$56,002.   The parties further stipulated:

     In making the determination of the deficiency for 1992
     and before entering a Decision document in this case,
     the parties will account for any carryforwards or
     carrybacks to which the petitioners may be entitled.
     The respondent agrees that the above stipulations
     produce additional deductions for the petitioners in
     1993 and 1994.

     At calendar call respondent also agreed to a continuance of

the case in order to allow petitioner to file amended returns to

claim any net operating loss carryback from 1993 to 1992.5


     5
        The issue of a net operating loss carryback could not be
considered by respondent until petitioner filed amended returns
                                                   (continued...)
                                - 7 -

     On October 7, 1998, petitioner filed Forms 1040X, Amended

U.S. Individual Income Tax Return, for 1993 and 1994.    On the

1993 Form 1040X, petitioner claimed a net operating loss of

$681,065 resulting from the sale of a building in 1993.    On the

1994 Form 1040X, petitioner claimed a net operating loss of

$1,694,742 as a result of a loss from the liquidation of White

Pine.    In July 1999, after several negotiations, respondent’s

Examination Division and petitioner reached agreement with

respect to the losses claimed for 1993 and 1994 on petitioner’s

amended returns.    The net operating loss for 1993 created a net

operating loss carryback from 1993 to 1992 entitling petitioner

to a refund for that year.

     Petitioner filed an amended petition on December 28, 1998,

conforming his pleadings to the stipulation of settled issues by

formally alleging, for the first time, entitlement to increased

deductions for (1) a charitable contribution, (2) capital loss

carryforwards with respect to Tamperproof and Identrol, and (3)

capital loss carryforward with respect to Barbour Hill.    Notably,

in the amended petition, petitioner did not allege entitlement to

any carryback.

     Subsequently, on September 22, 1999, the parties filed with

the Court a stipulation of settlement, consisting of a


     5
      (...continued)
for 1993 and 1994.
                               - 8 -

computation of petitioner’s tax liability for 1992 taking into

account the adjustments outlined in the stipulation of settled

issues filed on October 5, 1998, and the agreed allowance for the

net operating loss carryback from 1993 to 1992.   The parties

stipulated that petitioner’s tax liability for 1992, including a

deficiency in the amount of $56,002, was $152,410.   However,

after application of the agreed allowance for the net operating

loss carryback from 1993, and petitioner’s total tax payments in

the amount of $96,408, it was stipulated that petitioner was

entitled to a refund in the amount of $90,137 for 1992.

     Petitioner thereafter filed his motion for litigation costs.

Discussion

     We apply section 7430 as amended by the Taxpayer Bill of

Rights 2 (TBOR2), Pub. L. 104-168, secs. 701-704, 110 Stat. 1452,

1463-1464 (1996).   The amendments made by TBOR2 apply in the case

of proceedings commenced after July 30, 1996.   See TBOR2 secs.

701(d), 702(b), 703(b), and 704(b), 110 Stat. 1463-1464.

Inasmuch as the petition herein was filed on February 20, 1997,

the amendments made by TBOR2 apply in the present case.6


     6
        Congress has amended sec. 7430 twice since the Taxpayer
Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1452 (1996). First,
Congress amended sec. 7430 in the Taxpayer Relief Act of 1997
(TRA), Pub. L. 105-34, secs. 1285, 1453, 111 Stat. 788, 1038-
1039, 1055. Second, Congress amended sec. 7430 in the IRS
Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206,
sec. 3101, 112 Stat. 685, 727-730. However, the amendments made
by TRA and RRA do not apply in the case of proceedings commenced
                                                   (continued...)
                                - 9 -

     A. Requirements for a Judgment Under Section 7430

     A judgment for litigation costs incurred in connection with

a court proceeding may be awarded only if a taxpayer:      (1) Is the

"prevailing party"; (2) has exhausted his or her administrative

remedies within the IRS; and (3) did not unreasonably protract

the court proceeding.    See sec. 7430(a), (b)(1), (3).

     A taxpayer must satisfy each of the respective requirements

in order to be entitled to an award of litigation costs under

section 7430.    See Rule 232(e).   Upon satisfaction of these

requirements, a taxpayer may be entitled to reasonable costs

incurred in connection with the court proceeding.      See sec.

7430(a)(2), (c)(1).

     To be a prevailing party, the taxpayer must establish that

he or she has substantially prevailed with respect to either the

amount in controversy or the most significant issue or set of

issues presented and satisfy the applicable net worth

requirement.    See sec. 7430(c)(4)(A); Rule 232(e).

     Respondent contends that petitioner has not satisfied the

requirements of section 7430(c)(4)(A); i.e, that he has not



     6
      (...continued)
before Aug. 5, 1997 (Specifically, most of the amendments made by
RRA 1998 apply only to costs incurred more than 180 days after
July 22, 1998, and certain amendments made by RRA 1998 apply
retroactively to Aug. 5, 1997.) The petition herein was filed on
February 20, 1997, and petitioner has not claimed costs incurred
more than 180 days after July 22, 1998. The amendments made by
TRA and RRA 1998 therefore do not apply in the present case.
                                - 10 -

substantially prevailed with respect to either the amount in

controversy or the most significant issue or set of issues

presented.

     We consider first whether petitioner prevailed with respect

to the amount in controversy.

     Petitioner asserts that he substantially prevailed with

respect to the amount in controversy because he ultimately became

entitled to a refund in the amount of $90,136 for 1992.    However,

petitioner conceded that he was liable for an increased

deficiency for 1992, and the refund for 1992 results only from

the application of a net operating loss carryback from 1993 to

1992.    In this regard, section 301.7430-5(d), Proced. & Admin.

Regs., provides:

          Amount in controversy. The amount in controversy
     shall include the amount in issue as of the
     administrative proceeding date as increased by any
     amounts subsequently placed in issue by any party. The
     amount in controversy is determined without increasing
     or reducing the amount in controversy for amounts of
     loss, deduction, or credit carried over from years not
     in issue. [Emphasis added.]

        Notably, petitioner would not have been entitled to a refund

without filing amended returns for 1993 and 1994, which amended

returns had not been filed until about 20 months after the

petition in this case had been filed and after the parties had

filed a stipulation with respect to all issues before the Court.

        Given that petitioner conceded an increased deficiency and

that his refund results from a carryback from a year not before
                              - 11 -

the Court, petitioner is not a prevailing party with respect to

the amount in issue for the year 1992.    See sec.

7430(c)(4)(A)(i)(I); sec. 301.7430-5(d), Proced. & Admin. Regs.

     Even though petitioner did not substantially prevail with

respect to the amount in controversy, he may nevertheless be the

prevailing party if he substantially prevailed with respect to

the most significant issue or set of issues presented.    See sec.

7430(c)(4)(A)(i)(II); sec. 301.7430-5(e), Proced. & Admin. Regs.

However, as will be discussed below, petitioner has not

established that he prevailed with respect to any issue before

the Court.   Therefore, we need not decide which was the most

significant issue or set of issues in the case.

     In his original petition, petitioner disputed the entire

amount of the deficiency and claimed an overpayment, but he did

not raise any specific issues.   Therefore, based on the original

petition, the Court cannot consider properly before it any issues

other than those that formed the basis for respondent’s

determination in the notice of deficiency.    Petitioner fully

conceded all substantive issues related to the deficiency

determination.   Specifically, petitioner conceded that White Pine

was a passive activity and that he had failed to report income

in the amount determined by respondent.    Therefore, petitioner

clearly did not prevail with respect to the issues before the

Court as raised in the original petition.
                              - 12 -

     Neither has petitioner established that he prevailed with

respect to any of the issues raised in the amended petition.

     The additional issues raised in the amended petition were

not formally before the Court until December 28, 1998, when the

amended petition was filed.   See Rule 34(b); Sicanoff Vegetable

Oil Corp. v. Commissioner, 27 T.C. 1056, 1066 (1957), and cases

cited therein (holding that an issue not properly raised in the

petition is not before the Court).     Petitioner filed the amended

petition to conform his pleadings to the parties’ stipulations,

but only after a stipulation of settled issues was filed with the

Court.   As such, the pleadings in the amended petition reflected

the adjustments negotiated by the parties.    The amended petition

raised issues with respect to the total mortgage interest paid,

the total passive activity interest paid, and the total

investment interest paid in 1989 through 1992, petitioner’s

entitlement to a capital loss carryforward with respect to

Tamperproof, Identrol, and Barbour Hill, and petitioner’s

entitlement to a charitable contribution deduction.

     Although the stipulation of settled issues reflects that

certain adjustments were made with respect to petitioner’s 1992

tax year, there is (except as noted below) nothing in the record

to allow us to decide to what extent petitioner prevailed with

respect to any of these issues as initially raised by petitioner.

Neither does the record allow us to compute how the various
                              - 13 -

adjustments with respect to 1989 through 1991 affect petitioner’s

tax liability for 1992.   What is clear is that after taking into

account all of the various adjustments stipulated by the parties,

the deficiency for 1992 was increased and that petitioner became

entitled to a refund only as a result of the carryback from

1993.7   Thus, petitioner has not established that he prevailed

with respect to any of the issues for the year before the Court.

     It also appears that petitioner did not substantially

prevail with respect to at least one of the issues raised in the

amended petition.   The record indicates that petitioner initially

claimed that his tax liability for 1992 should be determined by

allowing a deduction for a charitable contribution in the amount

of $405,000.   In the parties’ stipulations, however, petitioner

conceded that he was only entitled to a charitable contribution

deduction in the amount of $40,000.    Petitioner can hardly be

said to have substantially prevailed with respect to that issue.



     7
        Given these facts, we also note that respondent’s
position was substantially justified. Petitioner became entitled
to a refund as a result of a carryback from 1993 only after he
filed amended returns for those years and provided additional
documentation to support his claim. In this regard, respondent
could not have been expected to ferret out all conceivable
carrybacks when determining petitioner’s tax liability for the
year in issue. See Clayton v. Commissioner, T.C. Memo. 1997-327,
affd. 181 F.3d 79 (1st Cir. 1998). Nor could respondent have
been expected to accept petitioner’s claim to a carryback without
substantiating documentation. See Sokol v. Commissioner, 92 T.C.
760, 765 n.10 (1989), Sher v. Commissioner, 89 T.C. 79, 87
(1987), affd. 861 F.2d 131 (5th Cir. 1988); Ellison v.
Commissioner, T.C. Memo. 1992-741.
                             - 14 -

     Based on the foregoing, petitioner has failed to establish

that he substantially prevailed with respect to any issue before

the Court.

     Petitioner is therefore not a prevailing party within the

meaning of section 7430(c)(4)(A)(i).

          To reflect the foregoing,



                                           An appropriate order and

                                      decision will be entered.
