                        T.C. Memo. 1997-163



                      UNITED STATES TAX COURT



                JAMES D. SCHLICHER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent




     Docket No. 21305-94.                       Filed April 1, 1997.




     Jon R. Vaught, for petitioner.

     Jeremy McPherson, for respondent.




                        MEMORANDUM OPINION

     PARR, Judge:   This case is before the Court on petitioner's

motion for reasonable litigation costs,1 filed on February 24,


     1
        Petitioner does not request an award of reasonable
administrative costs, because he represented himself throughout
the Internal Revenue Service administrative proceedings.
                                 -2-

1997, pursuant to section 7430 and Rules 230 through 232.2

Neither party requested an evidentiary hearing.     The relevant

facts are taken from the parties' memoranda and our opinion in

Schlicher v. Commissioner, T.C. Memo. 1997-37 (Schlicher I).        At

the time the petition in this case was filed, petitioner resided

in Clayton, California.

       The only issue for decision is:   (1) Whether respondent's

position was substantially justified within the meaning of

section 7430(c)(4) and the regulations thereunder.     We hold it

was.

Background

       In July of 1988, petitioner realized a $419,000 gain from

the sale of his principal residence in Livermore, California.       It

is undisputed that the entire amount therefrom was eligible for

nonrecognition treatment pursuant to section 1034(a).

       In December of 1988, petitioner purchased 51 acres of

undeveloped land in Clayton, California (the Clayton Property),

for $380,000.    Within the 2-year period following the date of

sale of the Livermore residence, petitioner incurred expenses of

$146,922 to construct a residence, garage, and a barn on the

Clayton property, which he used for personal purposes.


       2
        Unless otherwise indicated, all section references     are to
the Internal Revenue Code in effect for the year in issue,     and
all Rule references are to the Tax Court Rules of Practice     and
Procedure, unless otherwise indicated. All dollar amounts      are
rounded to the nearest dollar, unless otherwise indicated.
                               -3-

     By statutory notice of deficiency dated August 29, 1994,

respondent determined a deficiency in petitioner's income tax for

1988 of $98,917, and additions to tax under sections 6651(a)(1)

and 6654(a) of $24,729 and $6,326, respectively.   The deficiency

was based on respondent's determination that petitioner had

capital gain from the sale of his principal residence in

Livermore, California, because he failed to establish how much of

the 51 acres of the new property, which he purchased in Clayton,

California, was used by him as his principal residence.

     In Schlicher I, we held that petitioner used only 7-1/2 of

the 51 acres of the Clayton property for business, that the

remaining land was used as his principal residence, and therefore

that his investment in the latter qualified for nonrecognition

treatment under section 1034(a).

     Thereafter, on February 24, 1997, petitioner filed a motion

for award of reasonable litigation costs (motion).

Discussion

     For this Court to award reasonable litigation costs under

section 7430,3 several requirements must be met.   The record must

     3
        References to sec. 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, 3743-3746 (effective with respect to proceedings
commenced after Nov. 10, 1988). Section 7430 was amended most
recently by the Taxpayer Bill of Rights 2 (TBOR-2), Pub. L. 104-
168, sec. 701, 110 Stat. 1452, 1463-1464 (1996), effective with
                                                   (continued...)
                               -4-

show that: (1) Petitioner exhausted available administrative

remedies;4 (2) petitioner met the net worth requirement of

section 7430(c)(4)(A)(iii); (3) petitioner has substantially

prevailed with respect to the amount in controversy or the most

significant issue presented; and (4) the position of respondent

was "not substantially justified".    Sec. 7430.

     Based upon the entire record, we find that petitioner

satisfies conditions (1) through (3).    However, as discussed

below, we find petitioner has not established that the position

of respondent was not substantially justified.     As discussed

supra at note 3, petitioner bears the burden of proof on this

issue.

Position of the United States Substantially Justified

     In her notice of deficiency, respondent determined a

deficiency against petitioner of $98,917, alleging that

petitioner had capital gains from the sale of his principal

residence in Livermore, California.    Respondent contended at

trial that petitioner used only 1 acre of the Clayton property as

     3
      (...continued)
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). A judicial
proceeding is commenced in this Court with the filing of a
petition. Rule 20(a). Petitioner filed his petition on Nov. 16,
1994. Accordingly, the changes to sec. 7430 enacted by TBOR-2 do
not apply here.
     4
        This requirement applies only to a judgment for an award
of reasonable litigation costs. Sec. 7430(b)(1).
                                 -5-

his principal residence.   In Schlicher I, we held that petitioner

used 43-1/2 of the 51 acres of the Clayton property as his

principal residence.   Thus, petitioner was entitled to defer the

gain therefrom under section 1034(a).

     Petitioner asserts, based on our holding in Schlicher I,

that he has substantially prevailed with respect to both the

amount in controversy and the most significant issue.    We agree

with petitioner on this point.   However, the fact that respondent

loses the underlying litigation does not require a determination

that the position of the Internal Revenue Service (IRS) was

unreasonable so as to mandate an award for attorney's fees.

Broad Ave. Laundry & Tailoring v. United States, 693 F.2d 1387,

1391-1392 (Fed. Cir. 1982).   It does remain, 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).    Thus, we must decide

whether the position of the United States in this court

proceeding was substantially justified.

     A position is "substantially justified" when it is

"justified to a degree that could satisfy a reasonable person."

Pierce v. Underwood, 487 U.S. 552, 565 (1988).    It is not enough

that a position simply has enough merit to avoid sanctions for

frivolousness; it must have a "reasonable basis both in law and

fact".   Id.
                                 -6-

     Whether the position of the United States in this proceeding

was substantially justified depends on whether respondent's

positions and actions were reasonable in light of the facts of

the case and the applicable legal precedents.    Sher v. Commis-

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

1988).    The inquiry must be based on the facts reasonably avail-

able to respondent when the position was maintained.    Coastal

Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 689

(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.   Ordinarily,

respondent takes a litigating position on the date the answer to

the petition is filed.    Huffman v. Commissioner, 978 F.2d 1139,

1148 (9th Cir. 1992), affg. in part and revg. in part on other

grounds and remanding T.C. Memo. 1991-144.   Therefore, we begin

by reviewing the facts reasonably available to respondent on

March 24, 1995, the date she filed her answer to the amended

petition, in order to evaluate the reasonableness of respondent's

position.   Id.

     Respondent's position in this case was that petitioner held

50 acres of the Clayton property for business or investment, and

to that extent, the cost allocable to such use cannot be included

in petitioner's cost of purchasing a new residence.    Respondent
                                 -7-

claimed that petitioner could not have used only 7-1/2 acres of

the Clayton property for his horse activity, because 7-1/2 acres

is not a large enough area on which to exercise approximately 30

boarded horses.    However, petitioner credibly testified that he

does not train horses on his premises, nor does he give riding

lessons or offer horseback riding facilities.   Therefore, a

boarding client who wants to train, ride, or exercise his or her

horse must transport the animal to another facility.

Accordingly, we found that because petitioner used the business

portion of his premises solely for breeding and boarding horses

he needs less land for such business, than for example, someone

who operates a horse training and horseback riding facility.

However, our finding does not negate the reasonableness of

respondent's position.

     In the alternative, respondent argued that petitioner held

the upper portion of the Clayton property for investment.     To

support her contention, respondent noted that such land is zoned

for residential use, and therefore has the potential of being

subdivided into four additional home sites that petitioner could

sell for profit.   Furthermore, this area has a view of the

surrounding mountains and countryside, thus making it a lucrative

investment.   Respondent points to the fact that petitioner had a

280-foot well drilled on one of the home sites for future use as

evidence that he held this portion of the property for

investment.   Although in Schlicher I, we found that petitioner
                                -8-

did not hold such property for investment, based on the entire

record and the facts discussed herein, respondent's argument was

not unreasonable.

     Moreover, given that no bright-line test exists for

determining the number of acres a taxpayer may use as his

principal residence, we find that respondent's position, in fact

as well as in law, was justified to a degree that could satisfy a

reasonable person.   Although, in Schlicher I, we held that

residential use includes "appreciating nature, living in open

spaces, hiking, horseback riding, grazing cattle, and enjoying

unobstructed views of the countryside," we realize that

reasonable minds could differ with respect to the acreage

allocable to such use.   Schlicher v. Commissioner, T.C. Memo.

1997-37.

     Thus we conclude, based on the discussion herein, that

respondent's position had a reasonable basis in both law and

fact.   Pierce v. Underwood, 487 U.S. 552 (1988).   Accordingly, we

hold that respondent's position was substantially justified and

that petitioner is not entitled to litigation costs under section

7430.   Petitioner's motion will therefore be denied.



                          An appropriate order will be issued.
