                       T.C. Memo. 1997-157



                     UNITED STATES TAX COURT



                 LAURA E. AUSTIN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

              RICHARD ALAN HASHIMOTO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 15710-94, 16009-94.     Filed March 31, 1997.



     Daniel L. Britt, Jr., for petitioner in docket No. 15710-94.

     Richard A. Hashimoto, pro se.1

     Clinton M. Fried, for respondent.




     1
          Daniel L. Britt, Jr. (Britt), represented Laura Austin
(petitioner) at the trial of this case. Britt withdrew as
counsel to petitioner on Oct. 2, 1996, before petitioner, acting
pro se, moved for an award of attorney's fees. Alan Hashimoto
had legal representation for filing his petition to the Tax
Court; however, he appeared at trial pro se.
                                    -2-

                  MEMORANDUM FINDINGS OF FACT AND OPINION

       PARR, Judge:     These cases are before the Court on Laura

Austin's (petitioner) and Richard Hashimoto's (Hashimoto) motion

for administrative and litigation costs pursuant to section 7430

and Rule 231, filed on November 27, 1996.2      Neither party has

requested a hearing on petitioners' motion.       Accordingly, we rule

on petitioners' motion without a hearing, based on the parties'

submissions and the existing record.       Rule 232(a)(1).   These

cases were consolidated for purposes of trial, briefing, and

opinion.       Rule 141(a).

       After concessions by the parties, the issues for decision

are:       (1) Whether petitioners are the prevailing parties in the

underlying tax case within the meaning of section 7430(c)(4).        We

       2
           Section references are to the Internal Revenue Code in
effect for the year in issue. References to section 7430 in this
opinion are to that section as amended by sec. 1551 of the Tax
Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2752 (effective for
proceedings commenced after Dec. 31, 1985) and by sec. 6239(a) of
the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-
647, 102 Stat. 3342, 3743-3747 (effective with respect to
proceedings commenced after Nov. 10, 1988). Section 7430 was
amended most recently by the Taxpayer Bill of Rights 2, Pub. L.
104-168, sec. 701, 110 Stat. 1452, 1463-1464 (1996), effective
with respect to proceedings commenced after July 30, 1996. The
amendments to the section shift to the Commissioner the burden of
proving whether the position of the United States was
substantially justified (sec. 7430(c)(4)(B)), and changed the
hourly rate for attorney's fees to $110 (sec.
7430(c)(1)(B)(iii)). A judicial proceeding is commenced in this
Court with the filing of a petition. Rule 20(a). Petitioners
filed their petition on June 3, 1994, thus these changes do not
apply here. All Rule references are to the Tax Court Rules of
Practice and Procedure, unless otherwise indicated. All dollar
amounts are rounded to the nearest dollar, unless otherwise
indicated.
                                 -3-

hold petitioner is, to the extent set out below.      (2) Whether the

amounts of administrative and litigation costs claimed by

petitioners are reasonable, within the meaning of section

7430(c)(1).    We hold that in part they are not and adjust the

amounts as provided below.

                          FINDINGS OF FACT

     During 1990, the year at issue, petitioner and Hashimoto

were wife and husband, and filed a joint Federal income tax

return (Form 1040) for that year.      At the time the petition in

this case was filed, petitioner and Hashimoto were divorced and

petitioners resided in Marietta, Georgia.

     During the year at issue, petitioner was the sole

shareholder and president of Associated Services of Accountable

Professionals, Ltd. (ASAP), in addition to being a licensed nurse

and an attorney.    Hashimoto has 2 years of college education and

previously was engaged with petitioner in other business

enterprises.    Although Hashimoto was the corporate secretary of

ASAP, his duties were mainly moving furniture, changing locks,

and other maintenance work for which he was paid by the hour.

     ASAP was incorporated in 1986 under the laws of the State of

Georgia, and elected to be an S corporation on March 15, 1989.

ASAP is in the business of providing nurses to hospitals and

other health care facilities (the clients) at an agreed upon

hourly rate.    After the nurses have worked their shifts for the

clients, ASAP pays the nurses, and bills the clients at the
                                 -4-

contracted rate.   The clients usually pay ASAP within 30 days

after they receive the bills.    ASAP has no inventory, has never

had gross receipts that exceeded $5 million, and has always used

the cash method of accounting.

     Respondent issued petitioners a notice of deficiency on June

3, 1994, reflecting her determination that they were liable for

an $85,835 deficiency in their 1990 Federal income tax and a

$17,167 penalty under section 6662(a).   Prior to issuing the

notice of deficiency, respondent's revenue agent, Mr. Willie

Wimbish, conducted an examination of ASAP and had several

interviews with petitioner and her accountant, Mr. Currie.    After

the examination, the revenue agent proposed the deficiency in

petitioners' 1990 income tax, and prepared a Form 886-A

(Explanation of Items) to explain the proposed adjustments.     The

agent's explanation included the adjustments, along with a

statement of facts, law, and petitioners' position and the

agent's conclusion as to each item of adjustment.   The revenue

agent's report provided the legal and factual bases for the

issuance of the notice of deficiency.

     The adjustments in the notice of deficiency were primarily

attributable to respondent's determination that ASAP's use of the

cash method of accounting did not produce a clear reflection of

income (the method of accounting issue).   Respondent determined

that the proper method of accounting was the accrual method, and

using that method respondent increased ASAP's taxable income for
                                  -5-

1990 by $246,536.   This adjustment flowed through to petitioner

as ASAP's sole shareholder, producing a corresponding increase in

petitioners' income for that year.      Respondent also disallowed

two items petitioners claimed as deductions, a $26,676 deduction

for computer software research and development costs (the

research and development issue), and a $14,842 deduction for

business-related travel expenses (the travel expense issue).

     Petitioners filed the petition in docket number 15710-94 on

August 31, 1994, and respondent filed her answer on September 26,

1994.   Hashimoto filed a separate petition in docket number

16009-94 on September 6, 1994, as an innocent spouse, and

respondent's answer to Hashimoto's petition was filed on October

24, 1994.   On November 10, 1994, respondent's motion to dismiss

Hashimoto from the original case, and retitle the cases in their

separate names was granted.   On March 17, 1995, the attorney for

Hashimoto, D. Robert Autrey, Jr. (Autrey), moved to withdraw; we

granted Autrey's motion on March 22, 1995, and Hashimoto

proceeded pro se.   Both cases were calendared for trial on May 1,

1995; however, upon consideration that all of the cases called

during the trial session required more time than was available,

they were generally continued.    The cases were next calendared

for trial on January 29, 1996.    On January 17, 1996, respondent

moved to consolidate the cases for trial, briefing, and opinion.

We granted respondent's motion.    On the scheduled day of trial,

petitioner asked for a continuance because of complications due
                                 -6-

to the recent death of her grandmother and the sudden request by

her attorney, David L. Britt, Jr. (Britt), to withdraw due to his

ill health.   By February, Britt had recovered sufficiently to

resume representation of petitioner, and this consolidated case

came to trial in Atlanta, Georgia on February 13, 1996.      Shortly

before trial, however, respondent conceded the computer software

issue, and petitioners conceded the travel expense issue.     Thus,

the only issues remaining for decision at trial were the method

of accounting issue; whether the addition to tax under section

6662(a) should attach; and, whether Hashimoto was entitled to

innocent spouse relief pursuant to section 6013(e).

     On September 16, 1996, Britt moved to withdraw as counsel

for petitioner.    We granted Britt's motion on October 2, 1996,

and petitioner proceeded pro se.

     On November 27, 1996, the parties filed a stipulation of

settlement.   In the settlement, respondent conceded the method of

accounting issue and the additions to tax under section 6662(a),

and Hashimoto conceded that he was not an innocent spouse under

section 6013(e).    The parties stipulated that the 1990 deficiency

is $4,898, which is attributable to petitioners' concession of

deductions for travel and entertainment expenses.

     Accordingly, the parties settled all issues in the case

other than litigation and administrative costs.    On November 27,

1996, petitioners timely moved for an award of reasonable

administrative and litigation costs.    Rule 231(a)(2)(C).
                                    -7-

                                  OPINION

       A taxpayer who substantially prevails in an administrative

or court proceeding may be awarded a judgment for reasonable

costs incurred in such proceedings.         Sec. 7430(a)(1) and (2).

Issue 1.       Whether Petitioners Are the Prevailing Parties

       For this Court to award reasonable administrative and

litigation costs under section 7430, several requirements must be

met.       The record must show that: (1) The moving party did not

unreasonably protract the administrative proceeding or the

proceeding in this Court.       Sec. 7430(b)(4).    Based upon the

entire record, we find that petitioner did not unreasonably

protract the proceedings.       (2) The moving party exhausted any

administrative remedies available to him or her in the Internal

Revenue Service.       Sec. 7430(b)(1).3    Based upon the record, we

find that petitioner has met this requirement.         (3) The moving

party was the prevailing party.       Sec. 7430(a).    As discussed

below, we find petitioner has met this requirement.

       Generally, a taxpayer considered to be a prevailing party in

a civil tax proceeding may be awarded a judgment for reasonable

administrative and litigation costs incurred in that proceeding.

Sec. 7430(a)(1) and (2).       A taxpayer must satisfy several

conjunctive requirements to be deemed a prevailing party.         Sec.

7430(c).       The taxpayer must establish: (1) That the position of

       3
          This requirement applies only to a judgment for an
award of reasonable litigation costs. Sec. 7430(b)(1).
                                  -8-

the United States in the civil proceeding was not substantially

justified.   Sec. 7430(c)(4)(A)(i).     (2) The taxpayer

substantially prevailed with respect to the amount in controversy

or with respect to the most significant issue or set of issues

presented.   Sec. 7430(c)(4)(A)(ii).     (3) The taxpayer must either

be an individual whose net worth does not exceed $2 million, or

an owner of an unincorporated business, or any partnership,

corporation, etc., the net worth of which does not exceed $7

million, at the time the petition was filed.      Sec.

7430(c)(4)(A)(iii); 28 U.S.C. sec. 2412(d)(2)(B) (1988).

     A taxpayer has the burden of proving that it meets each

requirement before we may order an award of costs under section

7430.   Rule 230(e); Gantner v. Commissioner, 92 T.C. 192, 197

(1989), affd. 905 F.2d 241 (8th Cir. 1990).

     In her notice of deficiency, respondent determined a

deficiency of $85,835, which was largely attributable to her

determination that ASAP's use of the cash method of accounting

did not clearly reflect income.    In the stipulated settlement,

respondent conceded the method of accounting issue, and the

deficiency was adjusted to $4,898, which is attributable to

petitioners' concession of deductions for travel and

entertainment expenses.   Thus, it is clear from the stipulated

settlement in this case that petitioners have substantially

prevailed on both the amount in controversy and the most

significant issue.   In addition, we are satisfied, based upon
                                 -9-

petitioners' submissions to this Court, that their net worth was

less than $2 million when their petition was filed.    Rule

231(b)(5).    Thus, the only issue remaining for decision is

whether the position of the United States in the administrative

and court proceedings was not substantially justified. Position

of the United States Not Substantially Justified

       To recover administrative and litigation costs, the taxpayer

must establish that the position of the United States was not

substantially justified both in administrative and court

proceedings.    Huffman v. Commissioner, 978 F.2d 1139, 1148 (9th

Cir. 1992), affg. in part and revg. in part T.C. Memo. 1991-144.

A position is not substantially justified in law if legal

precedent does not substantially support the Commissioner's

position given the facts available to the Commissioner.       Coastal

Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 688

(1990).

       In deciding this issue, we must identify the point in time

at which the United States is first considered to have taken a

position, and then decide whether the position taken from that

point forward was not substantially justified.    The "not

substantially justified" standard is applied as of the separate

dates that respondent took a position in the administrative

proceedings as distinguished from the proceedings in this Court.

Sec. 7430(c)(7)(A) and (B); Han v. Commissioner, T.C. Memo. 1993-

386.    The administrative position of respondent means the
                                 -10-

position taken in the administrative proceedings as of the

earlier of the date of receipt of the appeals decision by the

taxpayer or the date of the notice of deficiency.       Sec.

7430(c)(7)(B).   Section 7430(c)(5) defines administrative

proceeding as any procedure or other action before the Internal

Revenue Service.   In this case respondent took a position in the

administrative proceeding as of June 3, 1994, the date of the

notice of deficiency was issued.4       See sec. 7430(c)(7)(B)(ii).

     The position taken by the United States, for purposes of

litigation costs, refers to the position of the United States in

a judicial proceeding.    Sec. 7430(c)(7)(A).     Respondent took

positions in the judicial proceedings herein on the dates

respondent filed her answers; i.e., September 26, 1994, in the

first docket and October 24, 1994, in the second.       Huffman v.

Commissioner, supra.     Although ordinarily the reasonableness of

each of those positions is considered separately to allow

respondent to change her position, Huffman v. Commissioner, supra

at 1144-1147, it appears in this case that respondent took the

same positions in both the notice of deficiency and the answers.

More specifically, respondent's position was that petitioners

overstated deductions for travel and entertainment, overstated

     4
          The record does not show that a notice of decision of
the IRS Appeals Office was ever issued or received by petitioners
prior to the date of the notice of deficiency. Therefore,
respondent is considered to have taken a position in the
administrative proceedings on the date the notice of deficiency
was issued.
                                 -11-

deductions for research and development of computer software, and

most significantly, that ASAP's use of the cash method of

accounting did not yield a clear reflection of income.

     Whether respondent's position was not substantially

justified turns on a finding of reasonableness, based upon all

the facts and circumstances, as well as legal precedents relating

to the case.   Pierce v. Underwood, 487 U.S. 552 (1988); Coastal

Petroleum Refiners, Inc. v. Commissioner, supra at 694-695; Sher

v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th

Cir. 1988); DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).       A

position is substantially justified if the position is "justified

to a degree that could satisfy a reasonable person."     Pierce v.

Underwood, supra at 565; Powers v. Commissioner, 100 T.C. 457,

470-471 (1993).   A position that merely possesses enough merit to

avoid sanctions for frivolousness will not satisfy this standard;

rather it must have a "reasonable basis both in law and fact."

Pierce v. Underwood, supra at 564-565.    A position is not

substantially justified in law if legal precedent does not

substantially support the Commissioner's position given the facts

available to the Commissioner.    Coastal Petroleum Refiners, Inc.

v. Commissioner, supra at 688.    The Commissioner cannot escape an

award for costs pursuant to section 7430 simply because a case

presents a question of fact.     Minahan v. Commissioner, 88 T.C.

492, 500-502 (1987).
                                 -12-

     The fact that respondent eventually loses or concedes the

case is not determinative as to whether the taxpayer is entitled

to an award of administrative or litigation costs.      Sokol v.

Commissioner, 92 T.C. 760, 767 (1989); Wasie v. Commissioner, 86

T.C. 962, 968-969 (1986).    It remains, however, a relevant factor

to consider in determining the degree of the Commissioner's

justification.     Estate of Perry v. Commissioner, 931 F.2d 1044,

1046 (5th Cir. 1991); Powers v. Commissioner, supra at 470, 472.

     Petitioner has the burden of establishing that respondent's

position was not substantially justified.    Rule 232(e); Dixson

Intl. Serv. Corp. v. Commissioner, 94 T.C. 708, 715 (1990).        For

petitioners to prevail, they must show that respondent's

position, in fact as well as in law, was not justified to a

degree that could satisfy a reasonable person.    The

reasonableness of respondent's position and conduct necessarily

requires considering what respondent knew at the time.      Cf.

Rutana v. Commissioner, 88 T.C. 1329, 1334 (1987); DeVenney v.

Commissioner, supra.    Thus, in determining whether respondent

acted reasonably, this Court must "consider the basis for

respondent's legal position and the manner in which the position

was maintained."     Wasie v. Commissioner, supra at 969.

     In some cases courts have adopted an issue-by-issue approach

to section 7430, apportioning the requested awards between those

issues for which the respondent was, and those issues for which

respondent was not, substantially justified.    See Powers v.
                                 -13-

Commissioner, 51 F.3d 34, 35 (5th Cir. 1995); Swanson v.

Commissioner, 106 T.C. 76, 102 (1996).    We follow that approach

here and separately discuss whether respondent's position on each

issue she conceded was substantially justified.

The Method of Accounting Issue

     Respondent concedes that ASAP is a S corporation that is

engaged in a service business, has never had gross receipts in

excess of $5 million, and has always used the cash method of

accounting.   However, in support of her notice of deficiency,

respondent argues that ASAP's use of the cash method of

accounting does not produce a clear reflection of income, because

ASAP accounts for the wages it pays the nurses as a current

deduction, but does not take into income the payments from its

clients until they are received.    According to respondent, the

difference in time of when ASAP takes the current deduction for

the wages expense and the subsequent revenue into income produces

a distortion in its reported income.    As evidence that ASAP's

method does not produce a clear reflection of income, respondent

determined that under the accrual method ASAP's income for 1990

would be increased by $246,536.    Finally, respondent contends

that if petitioners are to establish that respondent has abused

her discretion in determining that ASAP's method of accounting

did not produce a clear reflection of income, petitioners must

demonstrate substantially identical results between ASAP's method

of accounting and the method selected by the Commissioner.
                                 -14-

     Petitioners contend that respondent's position on the method

of accounting issue was not reasonable as a matter of law or

fact.     In support of their contentions, petitioners allege that

ASAP is not expressly prevented from the use of the cash method

of accounting by any section of the Internal Revenue Code (the

Code) or regulations.    In support of their position, petitioners

cite section 446(c)(1) which provides that a taxpayer may compute

taxable income under the cash receipts and disbursements method

of accounting.    In addition, petitioners contend that

respondent's application of the substantial-identity-of-results

test to support her determination is an abuse of discretion.

     The issue we must decide is whether the Commissioner's

determination that ASAP report its income on the accrual method

of accounting constitutes an abuse of discretion.       In reviewing

the Commissioner's determination that the taxpayer's method of

accounting does not clearly reflect income, the function of this

Court is to determine whether there was an adequate basis in law

for the Commissioner's conclusion.       RCA Corp. v. United States,

664 F.2d 881, 886 (2d Cir. 1981).       The Commissioner is granted

broad discretion in determining whether a taxpayer's use of an

accounting method clearly reflects income.       Sec. 446(b); United

States v. Catto, 384 U.S. 102, 114 & n.22 (1966), rehearing

denied 384 U.S. 981 (1966); Commissioner v. Hansen, 360 U.S. 446,

467 & n.12 (1959); Lucas v. Am. Code Co., 280 U.S. 445, 449

(1930).    No method of accounting is acceptable unless, in the
                               -15-

opinion of the Commissioner, it clearly reflects income.     Sec.

1.446-1(a)(2), Income Tax Regs.   Thus, a prerequisite to the

Commissioner's requirement that a taxpayer change its present

method of accounting is a determination that the method used by

the taxpayer does not clearly reflect income.   Sec. 446(b);

Hallmark Cards, Inc. v. Commissioner, 90 T.C. 26, 31 (1988).

Section 446 imposes a heavy burden on the taxpayer disputing the

Commissioner's determination on accounting matters.    Thor Power

Tool Co. v. Commissioner, 439 U.S. 522, 532-533 (1979).    To

prevail, a taxpayer must establish that respondent's

determination is "clearly unlawful" or "plainly arbitrary".      Id.

However, if the taxpayer's method of accounting is specifically

authorized by the Code or the regulations thereunder and has been

applied on a consistent basis, the Commissioner is ordinarily not

permitted to reject the taxpayer's method, as not providing a

clear reflection of income, and require the use of another

method.   Hallmark Cards, Inc. v. Commissioner, supra at 31;

Peninsula Steel Prods. & Equip. Co. v. Commissioner, 78 T.C.

1029, 1050 (1982).   Furthermore, this Court has held that the

Commissioner cannot require a taxpayer to change from an

accounting method which clearly reflects income to an alternate

method of accounting merely because the Commissioner considers

the alternate method to more clearly reflect the taxpayer's

income.   Molsen v. Commissioner, 85 T.C. 485, 498 (1985);

Peninsula Steel Prods. & Equip. Co. v. Commissioner, supra at
                              -16-

1045; Bay State Gas Co. v. Commissioner, 75 T.C. 410, 422 (1980),

affd. 689 F.2d 1 (1st Cir. 1982).

     At the outset, we note that the use of the cash method of

accounting has a long history of acceptance by the Congress.    See

sec. 8(g) of the Revenue Act of 1916, ch. 463, 39 Stat. 756, 763

("An individual keeping accounts upon any basis other than that

of actual receipts and disbursements, unless such other basis

does not clearly reflect income, may * * *   make his return upon

the basis upon which his accounts are kept".). Moreover, section

446 specifically authorizes a taxpayer to use the cash receipts

and disbursements method of accounting (cash method) to compute

taxable income, provided it is the method of accounting the

taxpayer regularly uses to compute his income in keeping his

books, and it clearly reflects income.   Sec. 446(a), (b), (c)(1).

     Generally, under the cash method of accounting, an item of

income or expense is reported when received or paid without

regard to the economic events giving rise to the item.    On the

other hand, under the accrual method of accounting, an item of

income or expense generally is reported for the accounting period

during which all the events have occurred which fix the

taxpayer's right to receive the item of income or which establish

the fact of liability giving rise to the deduction, and the

amount thereof can be determined with reasonable accuracy.

Hallmark Cards, Inc. v. Commissioner, supra at 32; Secs. 1.446-
                                 -17-

1(c)(1)(ii), 1.451-1(a), Income Tax Regs. Thus, each method

properly applied to the same facts, may yield different results.

        This Court is aware that "By definition, the cash method may

result in mismatching between expenses and income where expenses

are paid in a year prior to the receipt of the related income."

RLC Indus. Co. v. Commissioner, 98 T.C. 457, 493 n.29 (1992),

affd. 58 F.3d 413 (9th Cir. 1995).      However, mismatches between

expenses and income will over time tend to cancel out provided no

attempt is made to unreasonably prepay expenses or purchase

supplies in advance.     Van Raden v. Commissioner, 71 T.C. 1083,

1104 (1979), affd. 650 F.2d 1046 (9th Cir. 1981).     Respondent did

not contend that petitioner attempted to unreasonably prepay

expenses or purchase supplies in advance.     Therefore, the fact

that expenses and income are mismatched due to ASAP's use of the

cash method of accounting, by itself, does not provide support

for respondent's determination that the use of the cash method of

accounting does not clearly reflect income.

     Furthermore, respondent's determination that ASAP's use of

the accrual method of accounting would increase its 1990 taxable

income by $246,536 is not, per se, indicative that ASAP's use of

the cash method failed to clearly reflect income.      RLC Indus. Co.

v. Commissioner, supra at 503.     The best method is not

necessarily the one that produces the most tax in a particular

year.    Id.
                                   -18-

       Respondent's final argument was that if petitioners are to

establish that respondent has abused her discretion in

determining that ASAP's use of the cash method of accounting did

not produce a clear reflection of income, petitioners must

demonstrate substantially identical results between ASAP's method

and the method selected by the Commissioner.       We disagree.

Respondent's contention that we must apply the substantial-

identity-of-results test in cases where the taxpayer is not

required to maintain an inventory is without support in the case

law.       Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C. 367,

377 (1995).

       We find that respondent is mistaken in her understanding of

the correct application of the substantial-identity-of-results

test.       Before the substantial-identity-of-results test can be

applied, the Commissioner must determine that the taxpayer is

using a method of accounting that does not clearly reflect

income.       In certain circumstances we apply the substantial-

identity-of-results test to determine whether the method used by

the taxpayer clearly reflects income.5      Respondent's version of

       5
           The substantial-identity-of-results test is a judicial
creation; the test was first articulated in Wilkinson-Beane, Inc.
v. Commissioner, 420 F.2d 352 (1st Cir. 1970), affg. T.C. Memo.
1969-79. In that case, a cash-method taxpayer who was required
to maintain an inventory and thus report income on the accrual
basis, argued that the difference in income determined by the
method it used and the method selected by the Commissioner was
negligible. The Court found that where the Commissioner has
determined that the accounting method used by a taxpayer does not
                                                   (continued...)
                               -19-

how the substantial-identity-of-results test should be applied

would provide the Commissioner unfettered discretion to change

any taxpayer's method of accounting, including a method which is

in conformity with the Code and regulations, and which clearly

reflects income, to a method selected by the Commissioner, if the

income determined under the taxpayer's method was not

substantially identical in result to the income determined under

the method selected by the Commissioner.   We previously have held

that the Commissioner cannot require a taxpayer to change from an

accounting method which clearly reflects income to an alternate

method of accounting merely because the Commissioner considers

the alternate method to more clearly reflect the taxpayer's

income.   Molsen v. Commissioner, 85 T.C. 485, 498 (1985);

Peninsula Steel Prods. & Equip. Co. v. Commissioner, 78 T.C. at

1045; Bay State Gas Co. v. Commissioner, 75 T.C. at 422.


     5
      (...continued)
clearly reflect income, in order to prevail, "the taxpayer must
demonstrate substantial identity of results between his method
and the method selected by the Commissioner." Id. at 356.
     In Ansley-Sheppard-Burgess Co. v. Commissioner, 104 T.C.
367, 377 (1995), we held that a taxpayer that is required to use
the inventory method of accounting must meet the substantial-
identity-of-results test in order to show that the Commissioner's
determination requiring it to change from the cash method to the
accrual method of accounting was an abuse of discretion.
However, respondent's contention that we must apply the
substantial-identity-of-results test in cases where the taxpayer
is not required to use an inventory is without support in case
law. Id.
                               -20-

     Respondent objected to ASAP's use of the cash method,

because under that method deductions and revenues were

mismatched, which allegedly distorted ASAP's reported income.

Respondent's objection is actually a general objection to the

cash method of accounting; the mismatching of deductions and

revenue is inherent to the cash method.   See RLC Indus. Co. v.

Commissioner, supra at 493.   Respondent did not express any legal

argument or proffer any evidence that actually supports her

determination that ASAP is required to use the accrual method of

accounting.   Respondent's argument essentially is that ASAP must

change from the cash method of accounting to the accrual method

because the accrual method would increase petitioners' taxable

income.

     Thus, based on the facts of the instant case, including the

fact that ASAP has consistently used the cash method of

accounting without any evidence that it attempted to prepay

expenses unreasonably or purchase supplies in advance, is not

required to maintain an inventory, and is not otherwise required

by the Code or regulations to use the accrual method of

accounting, we find that respondent's determination that ASAP's

use of the cash method of accounting did not produce a clear

reflection of income was clearly unlawful and plainly arbitrary.

In so finding, we also find that respondent's position was not

substantially justified.   See Mauerman v. Commissioner, T.C.

Memo. 1995-237.   Furthermore, as it is evident from the Form 886-
                                 -21-

A prepared by respondent's revenue agent that the facts of the

case were known to respondent prior to the date that the notice

of deficiency was mailed, we find that respondent's position was

not substantially justified as of all relevant dates.

The Research and Development Issue

     Respondent disallowed the $26,676 deduction petitioners

claimed for research and development costs for computer software,

because petitioners did not establish that they accounted for the

costs in a consistent manner as required by section 174.

Specifically, respondent determined that in prior years

petitioner had capitalized and amortized the costs of computer

software; however, in 1990, petitioner expended $26,676 and

deducted the entire amount in the year it was paid.

     Petitioner contends that the $26,676 paid in 1990 was to

develop a unique computer program, created from "scratch".

Petitioner claims that the software costs incurred in prior

years, which were capitalized and amortized, were not research

and development costs, but were incurred to purchase commercially

available word processing and spreadsheet programs.

     Respondent's position may be incorrect but substantially

justified if a reasonable person could think it correct.     Pierce

v. Underwood, 487 U.S. at 566.    Whether respondent acted

reasonably on this issue ultimately turns on the facts available

to her which formed the legal basis for the position she took in

the deficiency notice and during the litigation.    DeVenney v.
                                -22-

Commissioner, 85 T.C. at 930.   Thus, the determination of whether

respondent was substantially justified in her position turns on

when she knew the facts of this issue.   Following an Appeals

conference, the District Director sent a letter dated September

16, 1993, to petitioner's accountant, Mr. Charles Currie,

offering to concede the software issue if petitioner would

concede the travel expense issue and the method of accounting

issue.   The letter states "the settlement offer is reasonable in

light of the evidence presented in the case."   Neither the letter

nor the record indicates what specific evidence the letter may be

referring to; however, with no further discussion evident in the

record, respondent conceded the software issue on the day of the

trial.   Thus, we conclude that respondent knew the facts of this

issue before the notice of deficiency was mailed.   Accordingly,

we find respondent was not substantially justified in her

position on this issue.

Issues Conceded by Petitioner

     Petitioners concede the $14,842 travel expense issue, and

Hashimoto concedes that he was not an innocent spouse.   As

petitioners are not the prevailing party on these issues, we

shall not award petitioners reasonable litigation or

administrative costs with respect to either of these issues.6


     6
          Hashimoto's motion for litigation costs was limited to
his expenditure for representation in the innocent spouse issue.
Accordingly, we do not award any costs to him.
                                 -23-

Issue 2.     Reasonable Costs

Recovery of Administrative Costs

     Administrative costs are those costs incurred in connection

with an administrative proceeding within the Internal Revenue

Service.     Sec. 7430(a)(1), (c)(5).   Section 7430, for present

purposes, limits recoverable administrative costs to those

incurred on or after the date of notice of deficiency and up to

the time the petition was filed.     Sec. 7430(c)(2); see Huffman v.

Commissioner, 978 F.2d at 1145.

     The statement of the specific litigation and administrative

costs for which petitioners claim an award indicates that the

costs were incurred after the petitions to the Tax Court were

filed. Thus, none of the costs claimed by petitioners are for

reasonable administrative costs.

Recovery of Litigation Costs

     Petitioner seeks recovery of litigation fees and costs of

$32,983.10 that were incurred after the petitions were filed.       We

must decide whether the miscellaneous costs, the number of hours

billed, and the rate at which those hours were billed are

reasonable as claimed by petitioner.

     A.      Attorney's Fees

     Petitioner submitted a statement claiming $8,188 of

attorney's fees for her own time billed at an hourly rate of

$125.     These fees are not allowed.   Section 7430(c) operates to

cover actual expenditures made with regard to representation.
                                -24-

Thus, a pro se petitioner cannot recover fees for self-

representation, even if she is an attorney at law.   United States

v. McPherson, 840 F.2d 244 (4th Cir. 1988); Frisch v.

Commissioner, 87 T.C. 838 (1986).

     Petitioner submitted an itemized statement from her attorney

reflecting costs incurred from July 11, 1995, through September

5, 1996.   Britt billed his time at an hourly rate of either $150

or $200.

     Section 7430(c)(1) defines reasonable litigation costs in

part as reasonable fees paid or incurred for the services of

attorneys in connection with the court proceeding.   Section

7430(c)(1)(B)(iii) limits the hourly rate for attorney's fees to

$75, with allowances for increase in the cost of living and other

special factors.   An issue exists as to whether the cost of

living adjustment (COLA), which applies to an award of attorney's

fees under section 7430, should be computed from October 1, 1981,

or from January 1, 1986.

     Our position on this issue was addressed in Bayer v.

Commissioner, 98 T.C. 19 (1992), where we concluded that

Congress, in providing for cost of living adjustments in section

7430, intended the computation to start on the same date the

COLA's were started under the Equal Access to Justice Act (EAJA),

Pub. L. 96-481, secs. 201-208, 94 Stat. 2321, 2325-2330; i.e.,

October 1, 1981.   Id. at 23.   Citing Lawrence v. Commissioner, 27

T.C. 713 (1957), revd. on other grounds 258 F.2d 562 (9th Cir.
                                 -25-

1958), we stated that we would continue to use 1981 as the

correct year for making the COLA calculation, unless the Court of

Appeals to which an appeal would lie had held otherwise.     Golsen

v. Commissioner, 54 T.C. 742, 756-757 (1970), affd. 445 F.2d 985

(10th Cir. 1971).

     This case is appealable to the Court of Appeals for the

Eleventh Circuit, which has not addressed the question of whether

1981 or 1986 is the correct date for purposes of calculating the

COLA adjustment under section 7430.     Swanson v. Commissioner,

supra at 100-101.    Accordingly, we shall continue our holding in

Bayer, and find October 1, 1981, to be the applicable date from

which to make the adjustment.     Id.

     We use the Consumer Price Index of All-Urban Consumers (CPI-

U) published by the U.S. Department of Labor, Bureau of Labor

Statistics to adjust the $75 hourly limit for increases in the

cost of living.     We award petitioner attorney's fees at an hourly

rate not to exceed $125.74 for 1995 and $129.46 for 1996.7

     1.   1995

     We find that certain charges for attorney's fees, as

itemized in the statement submitted by petitioner, are not

reasonable litigation costs.    Petitioner's attorney billed 3.8

hours between January 31 and February 3, 1995, for the

     7
          The index for the 1982-1984 CPI-U is 100. The CPI-U
index is 90.9 for 1981, 152.4 for 1995, and 156.9 for 1996.
Thus, the maximum hourly rate is $125.74 (152.4/90.9 * $75) for
1995, and $129.46 (156.9/90.9 * $75) for 1996.
                               -26-

preparation of a motion for summary judgment.   The record does

not show that petitioner filed a motion for summary judgment, nor

does it explain why petitioner's attorney would have devoted time

to the preparation of such a motion.    Thus, we shall not award

fees for these hours.   In addition, two charges appear, 0.9 hours

for October 4, 1995, and 0.1 hours for November 28, 1995,

relating to appointments that petitioner did not keep with her

attorney.   We do not award fees for these hours.   Finally,

petitioner was not the prevailing party on the travel expense

issue.   This issue was a relatively simple matter of whether

petitioner could substantiate her travel deductions by adequate

records as required by section 274.    This issue was not addressed

in petitioner's trial memorandum, nor is there any specific

reference in the itemized statement petitioner received from her

attorney concerning how much time he spent on it.    Considering

its simplicity, we find that 3 hours would be a reasonable amount

of time to spend on this issue.   The petitioner may not claim

litigation costs for this time.   Petitioner submits a claim for

7.1 hours (not including the excluded hours) incurred in 1995.

We find this amount to be reasonable.   Petitioner's counsel

billed an additional 9.2 hours for "Professional Services" but

presented no detailed explanation for the services provided.     We

do not award fees for these hours.    Rule 231(d); Bode v. United

States, 919 F.2d 1044, 1047-1048 (5th Cir. 1990).
                               -27-

     2.    1996

     Petitioner's attorney billed her for 69.8 hours for 1996.

Except for the following hours, we find this amount to be

reasonable.   Britt charged petitioner for 0.4 hours on January

16, 1996, for filing a motion to withdraw.   Britt did not

actually withdraw, and he appeared at trial to represent

petitioner.   He also billed her for 0.9 and 0.8 hours, on June 21

and July 5, 1996, respectively, for hours relating to his own

motion for fees.   On September 16, 1996, Britt attempted to file

a lien in the amount of $10,839 for services rendered to

petitioner upon any award of attorney's fees or cost of

litigation in her case.   We ordered the lien returned to Britt,

since this Court does not collect any money or disburse it to

parties.   When the case was settled, Britt was no longer the

attorney for petitioner, and petitioner filed the motion for

reasonable litigation and administrative costs pro se.    Thus, we

find that the costs for his motion to withdraw and his motion for

fees are not reasonable litigation costs.

     B.    Miscellaneous Litigation Costs

     The itemized billing shows $42 for parking and mileage, $37

for copying costs, $30 for messenger services, $31 for visual

displays, and $471 for transcripts.   We find these amounts to be

reasonable.
                                    -28-

     C.      Expert Witness Costs

     Petitioner claims a total of $3,413 for the costs of expert

witnesses.    Section 7430(c)(1)(B) provides the term "reasonable

litigation costs" includes the reasonable expenses of expert

witnesses in connection with a court proceeding, except that no

expert witness shall be compensated at a rate in excess of the

highest rate of compensation for expert witnesses paid by the

United States.    Sec. 7430(c)(1)(B)(i).

     Petitioner submitted copies of itemized bills from Charles

Currie, Jr. (Currie), a certified public accountant, and Louis

Vinson (Vinson), an accountant, and Ed Moyer (Moyer), Director of

Patient Care at Emory Adventist Hospital, for $1,360, $1,800, and

$128, respectively.    Currie prepared petitioners' income tax

returns (Form 1040), and the income tax returns (Form 1120-S) for

ASAP, for 1988 through 1993.    At trial, Currie testified about

the accounting method used by ASAP, and its business operations.

Vinson prepared ASAP's 1120-S return for 1994, analyzed ASAP's

tax returns for previous years, and testified at trial regarding

the accounting practices of small service-based businesses.

Moyer testified as an expert on the business practices of

hospitals that contract with nursing agencies to meet their

temporary staffing requirements.       Although Moyer did not submit a

written report, we allowed him to testify as an expert with

respect to industry practice.       Rule 143(f)(2).   We find these
                                    -29-

expert witnesses' fees to be reasonable, and they are awarded to

petitioner.

     Petitioner seeks reimbursement for $125 paid to Susan

Anderson (Anderson), a staff nurse who did business with ASAP

from 1993 through 1995.     Anderson testified as a witness at

trial; however, her testimony was not relevant because she had no

relationship with ASAP for the year at issue.     Thus, we find the

costs claimed for Anderson's services are not reasonable

litigation costs.

     D.      Legal Research Costs

     Petitioner submitted an itemized statement from Stephen

Joseph (Joseph) for legal research he performed on October 19,

1995, and April 8 through April 11, 1996.    The invoices indicate

Joseph has a J.D. degree and that he charged petitioner for a

total of 20 hours at an hourly rate of $50 to research the method

of accounting issue.    This Court has awarded fees for paralegal

and law clerks and for LEXIS computer research.     Powers v.

Commissioner, supra at 493.     In Powers v. Commissioner, supra, we

determined an hourly rate of $50 was not unreasonable for a

paralegal.    Accordingly, we allow $1,000 for legal research

costs.

     E.    Interest Award

     Petitioner claims interest on the amount of the costs she is

awarded.   The Supreme Court has consistently held that "interest
                               -30-

cannot be recovered in a suit against the Government in the

absence of an express waiver of a sovereign immunity from an

award of interest."   Library of Congress v. Shaw, 478 U.S. 310,

311 (1986).   There is absolutely no language in section

7430(c)(1) that indicates Congress intended to waive the

Government's immunity from interest awards.   Miller v. Alamo, 992

F.2d 766 (8th. Cir. 1993).   Accordingly, we deny petitioner's

request for interest on the award of costs.

     Accordingly, we award petitioner attorney's fees in the

amount of $10,602, miscellaneous litigation costs of $611,

accountant and expert witness fees of $3,288, and

research/paralegal fees of $1,000.

                               Appropriate orders and decisions

                          will be entered.
