                        T.C. Memo. 1998-44



                      UNITED STATES TAX COURT



      LARRY L. BEELER AND CYNTHIA J. BEELER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16052-94.                Filed February 5, 1998.



     J. Paul Raymond, for petitioners.

     Judith C. Winkler, for respondent.



                        MEMORANDUM OPINION


     COLVIN, Judge:   This case is before the Court on petitioners'

motion for an award of administrative and litigation costs, as

amended and supplemented, under section 7430 and Rule 231.

     The parties have submitted affidavits and memoranda

supporting their positions.   We decide the motion based on the
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memoranda, affidavits, and exhibits attached to the affidavits.

The parties do not dispute the material facts in the affidavits

or the authenticity of the exhibits attached to the affidavits.

Respondent did not request a hearing.    Although petitioners

requested a hearing, we conclude that a hearing is not necessary

to properly decide the motion.    Rule 232(a)(3).

     Unless otherwise indicated, section references are to the

Internal Revenue Code.   References to section 7430 are to that

section as amended by section 1551 of the Tax Reform Act of 1986,

Pub. L. 99-514, 100 Stat. 2085, 2752 (effective for proceedings

commenced after Dec. 31, 1985) and by section 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).    Rule references are to the Tax

Court Rules of Practice and Procedure.

                            Background

     Petitioners are married and lived in Florida when they filed

their petition in this case.

     The primary issue in the underlying case, Beeler v.

Commissioner, T.C. Memo. 1997-73, was whether petitioners'

disposition of 76.5 acres of land in Pasco County, Florida,

qualified for treatment as a like-kind exchange under section

1031.   Respondent determined in the notice of deficiency and

contended throughout the case that some or all of the gain
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realized by petitioners from the exchange of the 76.5 acres did

not qualify for nonrecognition under section 1031 because

petitioners exchanged assets other than land; i.e., certain

business operating permits issued by Pasco County, goodwill,

going-concern value, and sand.    We found that petitioners did not

exchange assets other than the 76.5 acres of land.    The parties

to the transaction testified and the documents relating to the

transaction showed that petitioners transferred no assets other

than land.   Pasco County did not allow permit holders to transfer

their permits to buyers of their land.   We held that petitioners'

transfer of the land qualified as a like-kind exchange under

section 1031.

                            Discussion

A.   Motion for Administrative and Litigation Costs

     Generally, a taxpayer who has substantially prevailed in

a Tax Court proceeding may be awarded reasonable administrative

and litigation costs.   Sec. 7430(a), (c).    To be entitled to an

award, the taxpayer must:

     1.   Exhaust administrative remedies.1    Sec. 7430(b)(1).

Respondent concedes that petitioners meet this requirement.




     1
       This requirement does not apply to an award for reasonable
administrative costs. Sec. 7430(b)(1).
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       2.   Substantially prevail with respect to the amount in

controversy.    Sec. 7430(c)(4)(A)(ii)(I).    Respondent concedes

that petitioners meet this requirement.

       3.   Be an individual whose net worth did not exceed $2

million, or an owner of an unincorporated business, or any

partnership, corporation, etc., the net worth of which did not

exceed $7 million, when the petition was filed.      Sec.

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

Respondent concedes that petitioners meet this requirement.

       4.   Show that they did not unreasonably protract the

proceedings.    Sec. 7430(b)(4).    Respondent concedes that

petitioners meet this requirement.

       5.   Show that the position of the United States in the

action was not substantially justified.      Sec. 7430(c)(4)(A)(i).

Respondent contends that petitioners do not meet this

requirement.

       6.   Establish that the amount of costs and attorney's fees

claimed by the taxpayers is reasonable.      Sec. 7430(a), (c)(1) and

(2).    Respondent does not dispute the number of hours of legal

services or other costs claimed by petitioners.      Petitioners

initially claimed that they were entitled to more than $75 per

hour adjusted for inflation.    Respondent disputed that

contention.    Petitioners now claim that they are entitled to $75
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per hour adjusted for inflation.     Thus, the amount of costs is

not in dispute.

B.   Whether the Position of the United States Was Substantially
     Justified

     The sole issue for decision is whether respondent's position

in this case was substantially justified.     A taxpayer has the

burden of proving that he or she meets this requirement before

the Court may award administrative and litigation costs under

section 7430.    Rule 232(e).2

     1.   Position of the United States

     The position of the United States is the position taken

by respondent:    (a) In the judicial proceeding, and (b) in the

administrative proceeding as of the earlier of:     (i) the date

the taxpayer receives the notice of the decision of the Internal

Revenue Service Office of Appeals, or (ii) the date of the notice

of deficiency.    Sec. 7430(c)(7).   Respondent determined in the

notice of deficiency and contended in the answer that petitioners

transferred assets other than land.      Thus, that is respondent's

position for both the administrative and the judicial

proceedings.


     2
       The provisions of the Taxpayer Bill of Rights 2, Pub. L.
104-168, sec. 701, 110 Stat. 1452, 1463-1464 (1996), which
amended sec. 7430, are effective for proceedings begun after July
30, 1996. The provisions of the Taxpayer Bill of Rights 2 do not
apply here because petitioners filed the petition in this case on
Sept. 6, 1994. See Maggie Management Co. v. Commissioner, 108
T.C. 430, 441 (1997).
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     2.     Substantially Justified Standard

     A taxpayer must establish that the position of the United

States in the litigation was not substantially justified to be

entitled to an award for administrative and litigation costs.

Sec. 7430(c)(4)(A)(i).    The substantially justified standard

requires that the Government's position be justified to a degree

that would satisfy a reasonable person.     Pierce v. Underwood, 487

U.S. 552, 565 (1988); Rickel v. Commissioner, 900 F.2d 655, 665

(3d Cir. 1990), affg. in part and revg. in part on other grounds

92 T.C. 510 (1989).    That standard applies to motions for

litigation costs under section 7430.     Rickel v. Commissioner,

supra.    Powers v. Commissioner, 100 T.C. 457, 470, 473 (1993),

affd. on this issue and revd. in part and remanded on other

issues 43 F.3d 172 (5th Cir. 1995).

     To be substantially justified, the Commissioner's position

must have a reasonable basis in both law and fact.     Pierce v.

Underwood, supra; Hanover Bldg. Matls., Inc. v. Guiffrida, 748

F.2d 1011, 1015 (5th Cir. 1984); Powers v. Commissioner, supra.

For a position to be substantially justified, there must be

substantial evidence to support it.     Pierce v. Underwood,

supra at 564-565; Powers v. Commissioner, supra at 473.

     The fact that the Commissioner eventually loses or concedes

the case does not in itself establish that a position is

unreasonable.    Wilfong v. United States, 991 F.2d 359, 364 (7th
                                  - 7 -


Cir. 1993); Hanson v. Commissioner, 975 F.2d 1150, 1153 (5th Cir.

1992).    However, it is a factor to be considered.    Estate of

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

Powers v. Commissioner, supra at 471.

C.   Whether Respondent Had a Basis in Fact and Law for the
     Position in the Notice of Deficiency

     1.     Basis in Fact

     Respondent contends that respondent's position that

petitioners transferred sand, their business of selling sand,

business operating permits, and land was based on facts learned

from an investigation; a visit to petitioners' land; interviews

of realtors, appraisers, Pasco County officials, and State

officials; and a review of petitioners' documents and affidavits,

and that respondent had some of this information before sending

the notice of deficiency.      Respondent also contends that the

like-kind exchange contract and addenda provide that petitioners

transferred the permits.

     We disagree.   The documents of the sale and statements of

the parties to the transaction show that petitioners transferred

land and no other assets.      Respondent does not indicate what the

individuals told respondent's agents during the interviews.        We

infer that the interviews did not provide a factual basis for

respondent's position because the trial testimony totally

supported petitioners.      Respondent contends that the trial

testimony of the Pasco County Code enforcement officer and the
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Pasco County ordinance provided a factual basis for respondent's

position that petitioners transferred their permits.    We

disagree.   The Code enforcement officer testified that nothing in

the Pasco County file indicates that petitioners acknowledged

transferring the permit to Mr. Dakic; and that, under the Pasco

County Code, a buyer must go through the staff review and public

hearing process, even if the seller held a permit; a permittee

cannot guarantee that the County will issue a permit to a new

owner; and, if land is sold, any permit issued to the prior owner

is automatically suspended.   We conclude that respondent had no

basis in fact for the contention that petitioners transferred

their Pasco County permits when they sold their land.

     Respondent points out that petitioners previously sold sand

from the 76.5-acre tract.   Respondent contends that this provides

a basis in fact for respondent's contention that petitioners

transferred sand held for sale.   We disagree.   Respondent's

reliance on the fact that petitioners had been in the sand mining

business is misplaced because the documents for the transaction,

as confirmed by other evidence, show that petitioners transferred

only land, and not the sand mine, sand, or any other assets.

     We conclude that respondent's position had no basis in fact

when respondent issued the notice of deficiency or during the

litigation of this case.
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     2.     Basis in Law

            a.   Permits

     Respondent points out that the Tax Court has not previously

considered whether private parties can convey Pasco County

permits.    Respondent contends that this issue is one of first

impression, which provides a basis in law for respondent's

position.    We disagree.   Respondent's position that petitioners

may transfer their permits has no basis in law because the Pasco

County Code did not permit them to do so and there is no other

authority that says that they may.       Beaty v. United States, 937

F.2d 288, 292-293 (6th Cir. 1991) (none of Government's arguments

had a chance of succeeding as a matter of law); see Coastal

Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 688 (1990)

(taxpayer must show that legal precedent does not substantially

support respondent's position); DeVenney v. Commissioner, 85 T.C.

927, 930-931 (1985).    Respondent has no basis in law for the

position that private parties can convey Pasco County permits.

Beaty v. United States, supra.

            b.   Sand

     Respondent contends that Watson v. Commissioner, 345 U.S.

544 (1953), is substantial authority that petitioners transferred

sand separately from the land.    We disagree.    In Watson, the

taxpayer sold a crop of growing oranges and the real property on

which the orange trees grew.    The Supreme Court said that the
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buyer and seller in Watson attributed substantial value to the

unmatured crop.   Id. at 550.    Watson is not analogous to this

case because here the parties to the exchange attributed no value

to sand which had not been mined or otherwise separated from the

realty.

     We conclude that respondent's position in the notice of

deficiency that petitioners transferred assets other than land

had no basis in law.

D.   Conclusion

     We conclude that respondent's position had no basis in fact

or law and was not substantially justified.    Thus, petitioners

are entitled to an award for administrative and litigation costs

under section 7430.

     To reflect the foregoing,


                                           An appropriate order will

                                      be issued granting petitioners'

                                      motion for an award of

                                      administrative and litigation

                                      costs, as amended and

                                      supplemented.
