                        T.C. Memo. 1999-6



                     UNITED STATES TAX COURT



                CAROLYN B. COOPER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13858-97.                   Filed January 14, 1999.



     Bruce Elwyn Gardner, for petitioner.

     Wendy L. Wojewodzki, for respondent.



                       MEMORANDUM OPINION


     PAJAK, Special Trial Judge:   This case is before the Court

pursuant to petitioner's amended motion for award of reasonable

litigation costs under section 7430 and Rules 230 through 232.

Unless otherwise indicated, all section references are to the

Internal Revenue Code in effect for the year in issue.   However,

all references to section 7430 are to such section as in effect
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at the time the petition was filed.    All Rule references are to

the Tax Court Rules of Practice and Procedure.

     The issue for decision is whether petitioner is the

prevailing party within the meaning of section 7430(c)(4).

     In a letter dated June 14, 1996, the District Director

(District Director) of the Internal Revenue Service (Service),

Baltimore, Maryland, informed petitioner that the Service was

examining petitioner's 1993 Federal income tax return.   The

letter also informed petitioner that if she would like the

Service to consider her case further, she should send to the

Service readable copies of the records that she used to prepare

that portion of her return with respect to contributions and

miscellaneous deductions claimed on Schedule A, and the cost of

goods sold and all expenses claimed on Schedule C.

     In a letter dated July 12, 1996, petitioner acknowledged

respondent's letter, and requested that respondent forward to her

a copy of her 1993 Schedule C because she was unable to locate

her copy.   Petitioner said she enclosed corroborating exhibits

for her contributions and miscellaneous deductions.   Petitioner

further stated that she included with the letter the only 2

months of receipts she had in support of her cost of goods sold

deduction and asked respondent to multiply the average to come up

with a 7-month total.   Petitioner concluded her letter by stating

that "we are confident that upon receipt of your copied Schedule
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C, we will provide sufficient documentation to essentially permit

you to accept my 1993 form 1040, as filed."

     In a letter dated August 21, 1996, petitioner submitted to

respondent a second set of documents to substantiate her claimed

1993 deductions for what she now referred to as an 8-month year.

Petitioner advised respondent that "most of [her] original

documents have been displaced or destroyed."   She asked

respondent to "extrapolate" and make estimates.    She stated that

she only had 2 months of electric and gas invoices and

substantiation of these expenses would be forthcoming upon

receipt of copies of statements from the respective utility

companies.

     In a letter dated November 25, 1996, petitioner stated that

she enclosed a copy of a Form 872, Consent to Extend the Time to

Assess Tax, so that she could obtain additional information.

     In a letter dated January 6, 1997, the District Director

informed petitioner that the period of time in which the Service

might assess tax for the tax period ended December 31, 1993, had

been extended to April 15, 1998.

     On April 24, 1997, respondent mailed a notice of deficiency

to petitioner.   In the notice, respondent determined a deficiency

in the amount of $5,495 in petitioner's 1993 Federal income tax.

The deficiency was based on disallowance of itemized deductions,

the cost of goods sold, and Schedule C expenses.   The notice of

deficiency stated that the miscellaneous deduction was disallowed
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because of lack of substantiation, the charitable deduction had

been adjusted to the amount verified, the cost of goods sold was

allowed to the extent shown, and the Schedule C deductions were

allowed as verified.

     On June 30, 1997, petitioner filed a petition with this

Court.   Petitioner resided in Forestville, Maryland, at the time

her petition was filed.   On August 12, 1997, respondent's answer

was filed.

     In a letter dated February 5, 1998, an Appeals officer for

the Service informed petitioner that a conference had been

scheduled for February 13, 1998, for the purpose of attempting to

settle without trial the issues in her case pending before the

Court.   The parties entered into a settlement stipulation, filed

on April 13, 1998, which reflected an overpayment of $600 by

petitioner for taxable year 1993.   On April 14, 1998, this Court

entered a stipulated decision pursuant to the settlement

stipulation.

     Petitioner thereafter filed with the Court a motion seeking

an award of litigation costs in the amount of $10,720.40.

Petitioner later increased this amount to $15,486.35 to correct a

mathematical error and to adjust for the purportedly additional

hours petitioner's attorney spent on this case to date.    In

petitioner's motion for leave to amend motion for an award of

reasonable litigation costs, petitioner expressly stated that the

motion was for an award of attorney's fees and does not include
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administrative costs.    Under the circumstances, we shall consider

the amended motion only as a motion for an award of reasonable

litigation costs.    The stipulated decision was vacated, and the

decision document was filed as a stipulation of settlement on

April 27, 1998.

     Neither party requested an evidentiary hearing, and the

Court concludes that such a hearing is not necessary for the

proper disposition of petitioner's amended motion.     Rule

232(a)(2).   We therefore decide the matter before us based on the

record.

     Under section 7430(a), a judgment for litigation costs

incurred in connection with a court proceeding may be awarded

only if a taxpayer is the "prevailing party", has exhausted his

or her administrative remedies within the Service, and did not

unreasonably protract the court proceeding.     Sec. 7430(a) and

(b)(1), (3).   The taxpayer also must prove that the court costs

are reasonable.    Sec. 7430(c)(1).   The taxpayer must

substantially prevail with respect to either the amount in

controversy or the most significant issue or set of issues

presented and satisfy the applicable net worth requirement.     Sec.

7430(c)(4)(A).    A taxpayer must satisfy each of the respective

requirements in order to be entitled to an award of litigation

costs under section 7430.    Rule 232(e); Minahan v. Commissioner,

88 T.C. 492, 497 (1987).
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     There is an exception.   Petitioner will in any event fail to

qualify as the prevailing party if respondent establishes that

the United States' position in the court proceeding was

substantially justified.   Sec. 7430(c)(4)(B).   We apply section

7430, as amended by the Taxpayer Bill of Rights 2 (TBOR 2), Pub.

L. 104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996),

which requires the United States to establish that the position

of the United States in such proceedings was substantially

justified.   These amendments to section 7430 are effective with

respect to proceedings commenced after July 30, 1996.   TBOR 2

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

Because the petition in this case was filed on June 30, 1997,

section 7430 as amended by TBOR 2 applies.   Maggie Management Co.

v. Commissioner, 108 T.C. 430, 437-441 (1997).

     Respondent argues that petitioner is not the prevailing

party because the position of the United States was substantially

justified and the costs claimed are not reasonable.   Respondent

concedes that petitioner has satisfied the other requirements of

section 7430.

     The United States' position is substantially justified if it

is justified to a degree that could satisfy a reasonable person

and has a reasonable basis in both fact and law.    Pierce v.

Underwood, 487 U.S. 552, 565 (1988) (interpreting similar

language in the Equal Access to Justice Act, 28 U.S.C. sec. 2412

(1988)); Maggie Management Co. v. Commissioner, supra at 443.       A
                                 - 7 -


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

evidence as a reasonable mind might accept as adequate to support

a conclusion.     Pierce v. Underwood, supra at 564-565.   The

determination of reasonableness is based on those "available

facts which formed the basis for the position taken * * * during

the litigation, as well as upon any legal precedents related to

the case."      Maggie Management Co. v. Commissioner, supra at 443.

     Although this Court may determine the reasonableness of

respondent's position with respect to each adjustment in the

notice of deficiency independently, both parties make their

respective arguments for all of the adjustments in the notice of

deficiency collectively.    Thus, we need not determine whether to

apportion the award between those adjustments for which

respondent was, and those adjustments for which respondent was

not, substantially justified.    Cf. Swanson v. Commissioner, 106

T.C. 76, 87-92 (1996).

     The fact that respondent eventually loses or concedes a case

does not by itself establish that the position taken is

unreasonable.     Swanson v. Commissioner, supra at 94.    However, it

is a factor that remains to be considered.     Estate of Perry v.

Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991).

     To decide whether respondent's position was substantially

justified, the Court must first identify the point in time at

which respondent is considered to have taken a position and then

decide whether the position taken from that date forward was
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substantially justified.   Because petitioner's amended motion is

only for litigation costs, and not administrative costs, we look

to respondent's position in the proceeding in this Court which is

set forth in the answer filed on August 12, 1997.   Sec.

7430(c)(7)(A).

     Petitioner contends that respondent's positions in the

answer and trial memorandum were not substantially justified or

were unreasonable based on the facts or the law.    With respect to

the answer, petitioner generally contends that respondent failed

to exercise due diligence in answering the petition by ignoring

documents in respondent's possession.   With respect to the trial

memorandum, petitioner contends that respondent's position was

based on a failure to review the documents in a timely manner.

     Respondent contends that despite the many requests for

documents, petitioner failed to substantiate the greater portion

of her claimed deductions until shortly before the calendar call

on April 13, 1998.   Respondent further contends that respondent

exercised due diligence in answering the petition, did not ignore

any documents in respondent's possession, and allowed

petitioner's deductions to the extent that they were

substantiated as evidenced in the notice of deficiency.

     On this record, we conclude that respondent's position was

substantially justified.   We find that "It was reasonable for

respondent not to concede the adjustments until [respondent] had

received and verified adequate substantiation for the items in
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question."   Simpson Financial Services, Inc. v. Commissioner,

T.C. Memo. 1996-317.   We have stated on many occasions that

deductions are strictly a matter of legislative grace.   INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice

Co. v. Helvering, 292 U.S. 435, 440 (1934).   Taxpayers must

substantiate any deductions claimed through sufficient records.

Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per

curiam 540 F.2d 821 (5th Cir. 1976).

     Respondent's position was based on the examination of

petitioner's return.   In the notice of deficiency issued to

petitioner following the examination, respondent allowed $5,919

of the claimed $23,276 in deductions.   The difference of $17,357

was disallowed because of petitioner's failure to substantiate

the remaining items on her return.

     This was only a substantiation case.   Although petitioner

repeatedly stated in her petition that she had additional

documents or adequate evidence to substantiate the claimed

deductions, there is no evidence in the record that suggests that

the necessary documents were available to respondent until

approximately 7 months after respondent filed the answer.    Prior

to the issuance of the notice of deficiency, petitioner admitted

in her August 21, 1996 letter to respondent that "most of my

original expenditure documents have been misplaced or destroyed

* * * .   Therefore, I must rely on your reasonable judgment by

extrapolating from documents enclosed and professional
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discretion."   We find it difficult to require respondent to

concede a case when documents are missing.   Moreover,

notwithstanding petitioner's allegations, there is no evidence,

nor does petitioner point to any particular instance, in which

respondent ignored documents in respondent's possession.

     At the February 13, 1998 meeting, petitioner provided

documents to respondent's Appeals officer.   However, at that

meeting the Appeals officer determined that additional documents

were needed.   Another meeting was scheduled for March 9, 1998,

but was apparently rescheduled at petitioner's counsel's request

until March 17, 1998.   Petitioner finally provided the additional

substantiation at the March 17, 1998 meeting.   After respondent's

Appeals officer had an opportunity to review those additional

documents, respondent promptly conceded all of the issues in the

notice of deficiency on or before April 10, 1998.

     Prior to respondent's concessions of all of the issues in

the notice of deficiency, respondent submitted to the Court a

trial memorandum pursuant to the Court's standing pre-trial

order.   Petitioner argues that because respondent took the

position in the trial memorandum that petitioner's claimed

deductions were insufficiently substantiated despite having all

of the substantiation documents, respondent's position was

substantially unjustified in the trial memorandum.   In essence,

petitioner contends that respondent failed to review those

documents in a timely manner.
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     We disagree.    As we stated above, petitioner finally

submitted all of the requested documents to respondent's Appeals

officer on March 17, 1998.    On or before April 10, 1998,

respondent conceded all of the issues in the notice of

deficiency, and the signed stipulation was filed with the Court

on April 13, 1998.    In our view, respondent timely reviewed the

documents submitted by petitioner.      Due to the delay by

petitioner in providing adequate documentation, we are persuaded

that respondent's Appeals officer was unable to review the

documents prior to the submission of the trial memorandum.

     Thus, we are satisfied that respondent exercised due

diligence in answering the petition, did not ignore documents in

respondent's possession, and reviewed the documents in a timely

manner.   We note that within 8 months after respondent's answer,

the parties entered into a stipulation of settlement.      The case

would have been resolved earlier if petitioner had provided

respondent with the necessary documents.

     Because respondent had a reasonable basis in fact and law

for the positions taken in the answer and the trial memorandum,

we hold that respondent's position was substantially justified,

and therefore petitioner was not the prevailing party within the

meaning of section 7430(c)(4).    Thus, we need not address the

issue of whether petitioner's claim for litigation costs was

reasonable.
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To reflect the foregoing,

                                 An appropriate order

                             and decision will be entered.
