                        T.C. Memo. 1998-445



                      UNITED STATES TAX COURT



              PRAMOD AND RAJ TANDON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18048-97.           Filed December 22, 1998.


     Joseph J. Ecuyer III, William A. Neilson, and Douglas L.

Salzer, for petitioners.

     John F. Driscoll, for respondent.



                        MEMORANDUM OPINION



     DAWSON, Judge:   This case was assigned to Special Trial

Judge Robert N. Armen, Jr., pursuant to the provisions of section

7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
                                 - 2 -

Rules 180, 181, and 183.1    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 petitioners' Motion for Award of Reasonable Litigation and

Administrative Costs under section 7430 and Rules 230 through

233.

       After concessions by respondent,2 the issues for decision

are as follows:

       (1) Whether respondent's position in the administrative and

court proceedings was substantially justified.    We hold that it

was.

       (2) Whether the administrative and litigation costs claimed

by petitioners are reasonable.    In light of our holding as to the

first issue, we need not address this second issue.

       Neither party requested an evidentiary hearing, and the

Court concludes that such a hearing is not necessary for the


       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1991 and 1992, the
taxable years in issue. However, all references to section 7430
are to such section in effect at the time that the petition was
filed. All Rule references are to the Tax Court Rules of
Practice and Procedure.
       2
        Respondent concedes: (1) Petitioners exhausted their
administrative remedies, see sec. 7430(b)(1); (2) petitioners did
not unreasonably protract the proceedings, see sec. 7430(b)(3);
(3) petitioners substantially prevailed, see sec.
7430(c)(4)(A)(i); and (4) petitioners satisfied the applicable
net worth requirement, see sec. 7430(c)(4)(A)(ii).
                               - 3 -

proper disposition of petitioners' motion.   Rule 232(a)(2).    We

therefore decide the matter before us based on the record that

has been developed to date.

Background

     Petitioners are husband and wife and resided in Kenner,

Louisiana, at the time that their petition was filed with the

Court.   Petitioners moved to the United States from India in

1979.

     Petitioners filed their Federal income tax returns for 1991

and 1992 in August 1993 and January 1994, respectively.

Petitioners filed Federal income tax returns for 1991 and 1992

for RAJ International of Louisiana, Inc. (RAJ), petitioners'

solely owned and controlled "S" corporation, in March 1992 and

January 1994, respectively.   Petitioners failed to file any

Federal income tax returns for the years 1987 through 1990.

     Respondent initiated an examination of petitioners' and

RAJ's tax returns for the taxable years 1991 and 1992.    Revenue

Agent Bacino was assigned to both these examinations.

     RAJ was in the business of selling women's clothing,

jewelry, and accessories through a store in Metairie, Louisiana,

and at various trade shows held throughout the country.   RAJ

conducted a substantial portion of its business activity in cash.

     Revenue Agent Bacino determined that RAJ's books and records

were inadequate and incomplete and that they failed to reflect

accurately RAJ's financial activity.   RAJ's income tax preparer
                                - 4 -

informed Revenue Agent Bacino that the preparer had utilized a

"margin ratio" methodology to estimate a significant number of

both the income and expense figures.    The preparer informed Agent

Bacino that a "margin ratio" methodology is similar to a

percentage markup methodology whereby income is determined based

on the cost of goods sold and the percentage at which the seller

typically marks up the goods.   However, given RAJ's inadequate

recordkeeping with respect to the cost of goods sold, Revenue

Agent Bacino found that the "margin ratio" methodology did not

accurately reflect RAJ's financial activity.

     In conducting the examination of petitioners' individual

returns, Revenue Agent Bacino utilized bank deposits to

reconstruct petitioners' taxable income for the years in issue.

Upon review of petitioners' bank statements, Revenue Agent Bacino

determined that petitioners had made unexplained deposits to

their personal bank accounts substantially in excess of the

income reported on their tax returns for the years in issue.

Specifically, Revenue Agent Bacino determined that petitioners'

bank deposits exceeded petitioners' reported income by $200,713

for 1991 and by $136,063 for 1992.

     To explain this discrepancy, petitioners initially informed

Revenue Agent Bacino that during the years in issue petitioners

were the recipients of a number of loans totaling approximately

$200,000.   At a later time, petitioners informed Revenue Agent

Bacino that during the years in issue they had also received
                                 - 5 -

inheritance in the amount of $9,500 and gifts in the amount of

$8,000.

     Revenue Agent Bacino requested petitioners to provide

substantiation, including written documentation, for their claim

regarding the receipt of loans, inheritance, and gifts.    In this

regard, petitioners provided Revenue Agent Bacino with the names

of certain individual lenders.    Revenue Agent Bacino was able to

confirm the existence of one such loan in the amount of $50,000

and adjusted his bank deposits determination by that figure.

     Revenue Agent Bacino determined that there was no

documentary evidence to establish the existence of any additional

alleged loans.   There were no written agreements or terms or any

principal or interest payments made towards these loans.    He

therefore attempted to verify the existence of the alleged loans

from the listed individuals through telephone conversations,

meetings, and correspondence.

     A number of these individuals provided written or oral

statements attesting to loans to petitioners.   However, Revenue

Agent Bacino determined that he could not rely on the statements

made by these individuals without further substantiation.    He

found that for the most part the individuals that petitioners

listed as lenders were relatives or long-time friends of

petitioners who only provided vague and general statements

regarding the loans.
                                    - 6 -

     Revenue Agent Bacino also concluded that for the most part

these individuals lacked credibility.          For example, in many

instances, their account of the events surrounding the alleged

loans changed from one meeting to the next.             In other instances,

there was a failure to recall the details regarding the alleged

loan transactions.      In one instance, the lender could not be

reached because he was located outside the country.            Revenue

Agent Bacino further determined that even if petitioners had

borrowed such amounts, there was no persuasive evidence that the

loan proceeds were paid in cash and deposited to petitioners'

accounts.

     In concluding his investigation of the leads provided by

petitioners, Revenue Agent Bacino determined that petitioners had

failed to substantiate a nontaxable source of income with respect

to a large portion of the deposits.          His final report with

respect to petitioners' individual returns reflected the

following:

                                             1991              1992

     Total deposits:                        $217,862         $160,345
     Total cash expenditures                                   31,435
     Nontaxable items1                       (68,707)
     Reported income                         (17,149)         (24,282)

         Total adjustment                    132,006          167,498
     1
         Includes "not sufficient funds" items and inter-account transfers.

     Revenue Agent Bacino did not make any adjustments to RAJ's

returns.
                                 - 7 -

     Thereafter, petitioners administratively appealed Revenue

Agent Bacino's determinations.    With additional substantiation at

the appeals level, respondent's Appeals Office determined that

petitioners' cash expenditures during 1992 were $6,152 rather

than $31,435 as determined by Revenue Agent Bacino, and that

there were additional nontaxable deposits to petitioners'

accounts in the amounts of $23,696 for 1991 ($13,065 for "not

sufficient funds" deposits, $6,205 for "insurance loan" and

$4,426 for "insurance proceeds") and $8,485 for 1992 (for "not

sufficient funds" deposits).   Thus, respondent's Appeals Office

redetermined a total adjustment for 1991 in the amount of

$108,310 and for 1992 in the amount of $133,730.

     Petitioners also reasserted their claim that the deposits

were from additional loans, gifts, and inheritances.   However,

they did not provide any further substantiation for this claim,

and respondent's Appeals Office did not accept it.

     At the appeals level, petitioners for the first time

actively argued that a large portion of the deposits to their

personal bank accounts constituted: (1) Corporate gross receipts

previously reported on RAJ's returns, and (2) distributions with

respect to petitioners' stock previously reported at the

corporate level.

     To substantiate the claim that a portion of the deposits

constituted corporate gross receipts previously reported on RAJ's

returns, petitioners provided the Appeals officer with a summary
                                - 8 -

bank deposits analysis prepared by their accountant showing that

RAJ's 1991 and 1992 returns reflected substantially higher gross

receipts than amounts deposited into RAJ's corporate accounts.

Petitioners asserted that a large portion of the deposits to

their personal accounts represented previously reported amounts

on the returns of RAJ.   Apart from the bank deposits analysis

prepared by their accountant, petitioners did not provide any

substantiation for their claim that a portion of the deposits

constituted a distribution with respect to petitioners' stock.

     The Appeals officer rejected petitioners' assertions

regarding the corporate source of deposits based on the following

grounds:   First, RAJ's corporate books and records were

inadequate to establish the corporate gross receipts.   Second,

petitioners did not produce the original bank statements on which

they relied but rather simply produced a summary statement

prepared by their accountant.   Third, contrary to petitioners'

claim that a portion of the deposits represented distributions

with respect to their stock, the 1991 and 1992 returns filed by

RAJ showed no distributions to petitioners.   Finally, given the

inadequacy of RAJ's records concerning the cost of goods sold,

there was no evidence that even if a portion of the deposits did

represent gross receipts reported by RAJ, such deposits did not

in fact represent taxable income to petitioners (for lack of

basis in corporate stock).   Respondent's Appeals officer
                                - 9 -

therefore did not make any adjustments to Revenue Agent Bacino's

determination regarding deposits from a corporate source.

     By notice of deficiency dated June 13, 1997, respondent

determined an increase in petitioners' taxable income in the

amount of $108,310 for 1991 and $133,730 for 1992.    Respondent

determined corresponding deficiencies in the amounts of $34,724

and $42,111, respectively, additions to tax under section

6651(a)(1) in the amounts of $8,681 and $6,317, respectively, and

accuracy-related penalties under section 6662(a) in the amounts

of $6,945, and $8,422, respectively.

     Petitioners filed a petition with this Court on September 2,

1997.    Respondent filed an answer on September 29, 1997.   This

case was called from the calendar on March 9, 1998.    On that day,

the parties filed a stipulation of settlement with the Court

through which each party conceded 50 percent of the

understatement amount.3   Petitioners orally moved for an award of

administrative and litigation costs.    At the Court's discretion,

petitioners filed a written motion on March 20, 1998.

Discussion

     We apply section 7430 as amended by the Taxpayer Relief Act

of 1997 (TRA), Pub. L. 105-34, secs. 1285 and 1453, 111 Stat.


     3
        In addition, the parties agreed that for 1991 and 1992
there are additions to tax under sec. 6651(a)(1) owed by
petitioners in the amounts of $1,546 and $847, respectively, and
accuracy-related penalties under sec. 6662(a) owed by petitioners
in the amounts of $1,237 and $677, respectively.
                              - 10 -

788, 1038-1039, 1055.   The amendments made by TRA apply in the

case of proceedings commenced after August 5, 1997.    Id.

Inasmuch as the petition herein was filed on September 2, 1997,

the amendments made by TRA apply in the present case.4

     A. Requirements for a Judgment Under Section 7430

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

incurred in connection with a court proceeding may only be

awarded 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.      Sec.

7430(a) and (b)(1), (3).   Similarly, a judgment for

administrative costs incurred in connection with an

administrative proceeding may only be awarded under section

7430(a) if a taxpayer: (1) Is the "prevailing party"; and (2) did

not unreasonably protract the administrative proceedings.      Sec.

7430(a) and (b)(3).

     A taxpayer must satisfy each of the respective requirements

in order to be entitled to an award of litigation or

administrative costs under section 7430.   Rule 232(e).   Upon

satisfaction of these requirements, a taxpayer may be entitled to


     4
        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 RRA 1998
apply only to costs incurred more than 180 days after July 22,
1998. Inasmuch as none of the claimed costs were incurred more
than 180 days after July 22, 1998, the amendments made by RRA
1998 do not apply in the present case.
                              - 11 -

reasonable costs incurred in connection with the administrative

or court proceedings.   Sec. 7430(a)(2) and (c)(1).

     To be a prevailing party, 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).

Respondent concedes that petitioners have satisfied the

requirements of section 7430(c)(4)(A).     Petitioners will

nevertheless fail to qualify as the prevailing party if

respondent can establish that his position in the court and

administrative proceedings was substantially justified.       Sec.

7430(c)(4)(B).

     B.   Substantial Justification

     The Commissioner's position is substantially justified if,

based on all of the facts and circumstances and the legal

precedents relating to the case, respondent acted reasonably.

Pierce v. Underwood, 487 U.S. 552 (1988); Sher v. Commissioner,

89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir. 1988).       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 (construing similar language in EAJA).

Thus, the Commissioner's position may even be incorrect but

substantially justified "if a reasonable person could think it

correct".   Maggie Management Co. v. Commissioner, 108 T.C. 430,

443 (1997).
                              - 12 -

     The relevant inquiry is "whether * * * [the Commissioner]

knew or should have known that [his] position was invalid at the

onset".   Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir. 1995),

affg. T.C. Memo. 1994-182.   We look to whether the Commissioner's

position was reasonable given the available facts and

circumstances at the time that the Commissioner takes his

position.   Maggie Management Co. v. Commissioner, supra at 443;

DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

     The fact that the Commissioner eventually loses or concedes

a case does not establish an unreasonable position.     Bouterie v.

Commissioner, 36 F.3d 1361, 1367 (5th Cir. 1994), revg. on other

grounds T.C. Memo. 1993-510; Estate of Perry v. Commissioner, 931

F.2d 1044, 1046 (5th Cir. 1991); Sokol v. Commissioner, 92 T.C.

760, 767 (1989).   However, the Commissioner's concession does

remain a factor to be considered.    Powers v. Commissioner, 100

T.C. 457, 471 (1993), affd. in part, revd. in part and remanded

on another issue 43 F.3d 172 (5th Cir. 1995).

     As relevant herein, the position of the United States that

must be examined against the substantial justification standard

with respect to the recovery of administrative costs is the

position taken by respondent as of the date of the notice of

deficiency.   Sec. 7430(c)(7)(B).   The position of the United

States that must be examined against the substantial

justification standard with respect to the recovery of litigation

costs is the position taken by respondent in the answer to the
                              - 13 -

petition.   Bertolino v. Commissioner, 930 F.2d 759, 761 (9th Cir.

1991), affg. an unpublished decision of the Tax Court; Sher v.

Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988), affg. 89

T.C. 79 (1987).   Ordinarily, we consider the reasonableness of

each of these positions separately.    Huffman v. Commissioner, 978

F.2d 1139, 1144-1147 (9th Cir. 1992), affg. in part, revg. in

part and remanding on other issues T.C. Memo. 1991-144.    In the

present case, however, we need not consider two separate

positions because there is no indication that respondent's

position changed or that respondent became aware of any

additional facts that rendered his position any more or less

justified between the issuance of the notice of deficiency and

the filing of the answer to the petition.

     We now turn to petitioners' contention that respondent's

position was not substantially justified.   In this regard we hold

that respondent has established that he was substantially

justified, having acted reasonably given the legal precedents and

the circumstances surrounding petitioners' case.

     Citing Price v. United States, 335 F.2d 671, 677 (5th Cir.

1964),5 petitioners argue that respondent should have taken into

account any and all nontaxable sources of income of which the



     5
        In Price v. United States, 335 F.2d 671, 677 (5th Cir.
1964), the Court of Appeals held that the taxpayer failed to
sustain his burden of rebutting the presumption of correctness
that attaches to the Commissioner's bank deposits determination.
                              - 14 -

respondent had knowledge.   Petitioners imply that regardless of

whether or not petitioners' claims were substantiated, respondent

should have simply adjusted his bank deposits analysis by

petitioners' claim that the deposits were from loans,

inheritances, gifts, and previously taxed corporate income.     We

do not agree.

     Respondent's position was premised primarily on the bank

deposits method and petitioners' failure to substantiate items

that petitioners claimed as nontaxable deposits.   It is well

established that unexplained bank deposits are presumptively from

taxable sources, see, e.g., Mallette Bros. Constr. Co. v. United

States, 695 F.2d 145, 148 (5th Cir. 1983); Price v. United

States, supra at 677;   DiLeo v. Commissioner, 96 T.C. 858, 868

(1991), affd. 959 F.2d 16 (2d Cir. 1992), and that the taxpayer

bears the burden of proving that the Commissioner's determination

of income based on the bank deposits method is erroneous.

Clayton v. Commissioner, 102 T.C. 632, 645 (1994); DiLeo v.

Commissioner, supra at 868; see Calhoun v. United States, 591

F.2d 1243, 1245 (9th Cir. 1978) (taxpayer's burden to prove that

unexplained bank deposits came from a nontaxable source).

     Thus, respondent was entitled to rely upon his bank deposits

analysis of petitioners' income in the absence of substantiation

regarding nontaxable sources of income.   We do not regard the

information given to respondent's agents prior to the issuance of
                              - 15 -

the notice of deficiency regarding either the alleged loans or

the corporate source of deposits to constitute substantiation of

petitioners' position regarding nontaxability of the deposits.

     We recognize that in utilizing the bank deposits method,

respondent was required to investigate any leads regarding

nontaxable sources of income that were "reasonably susceptible of

being checked".   See Holland v. United States, 348 U.S. 121, 135-

136 (1954).   However, we find that respondent's Revenue Agent

Bacino and respondent's Appeals officer reasonably investigated

petitioners' allegations regarding nontaxable sources.

     After contacting the alleged lenders, Revenue Agent Bacino

determined that with one exception petitioners had failed to

substantiate the loans.   There were no written agreements or

terms for the alleged loans nor was there any evidence of

principal or interest payments towards these loans.    Revenue

Agent Bacino thus sought substantiation of these loans by means

of contacting the individual lenders.   However, he concluded that

the individuals listed as lenders lacked credibility.    He found

no convincing evidence to substantiate the loans, inheritance, or

gifts.   In fact, even at this point, after reviewing all of the

supporting documentation presented by petitioners, the Court is

not convinced of the existence of the alleged loans.    Cf.

Schneebalg v. Commissioner, T.C. Memo. 1988-563 (without

corroborating evidence, the Court was not convinced based on the
                              - 16 -

taxpayer's self-serving testimony that deposits to the taxpayer's

account were nontaxable loan deposits).

     Respondent was also substantially justified in rejecting

petitioners' position regarding the corporate source of deposits

to petitioner's personal accounts.     Section 6001 imposes on

petitioners an affirmative duty to maintain books and records

sufficient to support items reported on their returns.     With this

well-established law in mind, we think that it was reasonable for

respondent to make the adjustments pursuant to the bank deposits

analysis and to refuse to concede any of these adjustments until

he received and verified petitioners' substantiation for these

amounts.   See Harrison v. Commissioner, 854 F.2d 263, 265 (7th

Cir. 1988), affg. T.C. Memo. 1987-52; Sokol v. Commissioner,

supra at 765.   Respondent was not required to accept

unconditionally petitioners' uncorroborated summary bank account

statements prepared by their accountant or petitioners' otherwise

unsubstantiated statements regarding nontaxable income flowing

from a corporate source.

     We also observe that petitioners ultimately conceded that

they failed to report 50 percent of the unreported income

determined in the notice of deficiency.

     Petitioners rely heavily on the fact that respondent's

counsel agreed to settle this case for 50 percent of the

unreported income determined in the notice of deficiency even

though he was given no more information than Revenue Agent Bacino
                              - 17 -

or respondent's Appeals officer.   However, the fact that

respondent's counsel agreed to settle the case is certainly not

conclusive that Revenue Agent Bacino's adjustments and

respondent's subsequent position that resulted therefrom were

unreasonable.   As we have already stated, the Commissioner's

concession of an issue does not necessarily lead to a finding

that the Commissioner's position was not substantially justified.

See, e.g., Wilfong v. United States, 991 F.2d 359, 364 (7th Cir.

1993); Sokol v. Commissioner, supra; Wasie v. Commissioner, 86

T.C. 962, 968-969 (1986).   We are aware that respondent's

attorneys have much more latitude to settle a case based on the

hazards of litigation and other considerations than do

respondent's Appeals officers or revenue agents.

     Finally, petitioners argue that the standard for awarding

costs under section 7430 by the Court of Appeals for the Fifth

Circuit, the circuit to which this case is appealable, supports

their claim for costs.   We have reviewed many Fifth Circuit

cases, including those cited by petitioners, and conclude that

our decision herein properly applies the Fifth Circuit's standard

regarding the award of costs under section 7430 and is consistent

with the precedents established by that court.   See Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971).

     Therefore, we hold that respondent has established that his

position in the administrative and litigation proceedings was
                              - 18 -

substantially justified.   In light of the foregoing, petitioners

are not entitled to recover administrative or litigation costs.

     Based on the foregoing, we need not decide whether

petitioners' claimed costs are reasonable.

     To reflect the foregoing,



                                         An appropriate order and

                                    decision will be entered.
