                        T.C. Memo. 2009-177



                      UNITED STATES TAX COURT



               STEPHEN J. TROLLOPE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 25907-06.           Filed July 30, 2009.



     David B. Porter, for petitioner.

     Trent D. Usitalo, for respondent.



                         MEMORANDUM OPINION


     HAINES, Judge:   This case is before the Court on

petitioner’s motion for recovery of administrative and litigation

costs brought under section 7430 and Rule 231.1


     1
      Unless otherwise indicated, section references are to the
Internal Revenue Code as amended, and all Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
                                                   (continued...)
                                 -2-

     Respondent determined a deficiency of $1,042,674 in

petitioner’s Federal income tax for 2001.      The deficiency arose

from respondent’s dividend income adjustment of $2,605,126 under

sections 301 and 316.   Respondent subsequently conceded the

deficiency as it related to the net income adjustment.

     Petitioner seeks to recover costs totaling $122,402 incurred

from December 6, 2004, the date respondent confirmed that he

would issue petitioner a 30-day letter, through February 11,

2008, the date of filing of this motion.

     The issues for decision are:      (1) Whether petitioner is

entitled to an award of reasonable administrative and litigation

costs; and (2) if the answer on the first issue is “yes”, the

amount of the awardable costs.

                            Background

     When the petition was filed, petitioner resided in

California.

     Petitioner and John Larik were each 50-percent owners of

Arrow Capital Associates, Inc. (Arrow).      Between March 2001

and the beginning of August 2001 petitioner and Mr. Larik created

several drafts of stock purchase agreements for Arrow to purchase

Mr. Larik’s 50-percent interest in Arrow.




     1
      (...continued)
rounded to the nearest dollar.
                                  -3-

     Arrow lent Mr. Larik $100,000 on March 1, 2001, and $600,000

on June 1, 2001.    Arrow lent petitioner $1,895,126 on August 13,

2001.    The three loans were evidenced by promissory notes signed

on or near the dates of the respective loans.

     On August 15, 2001, petitioner and Mr. Larik entered into a

stock purchase agreement which provided that petitioner was to

purchase Mr. Larik’s shares for $2,605,126.2    In relevant part,

the stock purchase agreement states:

        B. Prior to the Effective Date [March 31, 2001], the
        parties agreed that, on the Effective Date,
        Trollope [Petitioner] would purchase the Shares from
        Shareholder [Mr. Larik], and Shareholder would sell
        the Shares to Trollope, on the terms and conditions,
        which are set forth hereinafter.

        C. At all times since the Effective Date, although
        Shareholder remains the record owner of the
        Shares as of the date of this Agreement, the parties
        have considered the Shares to have been acquired by
        Trollope. The purpose of this Agreement is to provide
        for the necessary documentation to give effect to that
        understanding.

Section 9 of the stock purchase agreement further states:

     a. This Agreement cancels and supersedes all
     other previous or contemporaneous agreements, between
     the parties, with the exception of the Separation
     Agreement,3 whether oral or written, relating to the
     subject matter hereof. This Agreement may be amended

     2
      Specifically, petitioner was to pay $709,905 to Arrow to
cover the $700,000 Arrow lent to Mr. Larik plus interest and the
balance of $1,895,126 to Mr. Larik for the purchase of 1,500
shares constituting a 50-percent ownership stake in Arrow.
     3
      On Aug. 15, 2001, Mr. Larik and Arrow entered into a
separation agreement indicating that Mr. Larik agreed to
terminate his employment with Arrow.
                                -4-

     only pursuant to a written document signed by all
     parties and not by oral statements or course of
     conduct.

     b. This Agreement shall be binding on and inure
     to the benefit of the parties and their successors and
     assigns.
               *    *    *    *    *    *    *

     g. In the event of Shareholder [Mr. Larik]’s death or
     any incapacity, Trollope [petitioner] shall not have
     the right to terminate this Agreement and agrees, if
     any monies are still outstanding and payable to
     Shareholder under this Agreement, to pay such monies to
     Shareholder or his estate (emphasis added).

The stock purchase agreement further provides for Arrow’s

transfer to Mr. Larik of corporate assets consisting of an

automobile and a golf membership.

     Immediately following the signing of the stock purchase

agreement, petitioner paid Mr. Larik $1,895,126 and Mr. Larik

transferred 1,500 Arrow shares to petitioner.   Petitioner assumed

Mr. Larik’s $700,000 in shareholder loans and $9,905 of interest

secured by Mr. Larik’s 1,500 shares.4   Arrow transferred

corporate assets consisting of a golf course membership and a car

to Mr. Larik.   As a result of these transactions, petitioner

became the sole shareholder of Arrow.

     On August 16, 2001, petitioner offered to sell Arrow 1,500

shares of common stock in exchange for the cancellation of the

$1,895,126 loan.   Arrow accepted the offer and purchased


     4
      The loan was not repaid by petitioner to Arrow, but rather
was “assumed” by petitioner through debits and credits to Arrow’s
general ledger.
                                -5-

petitioner’s 1,500 shares and canceled both petitioner’s

$1,895,126 loan and the $709,905 of debt and interest petitioner

had assumed from Mr. Larik.

     After the transaction of August 16, 2001, but before June

21, 2004, respondent audited Arrow’s 2001 return.   An effort to

obtain a statement from Mr. Larik describing the stock purchase

transaction failed because the business relationship between

petitioner and Mr. Larik had soured.

     On or about June 21, 2004, respondent commenced an

examination of petitioner’s 2001 Form 1040, U.S. Individual

Income Tax Return.   Sometime in December 2004, respondent issued

petitioner a 30-day letter indicating that respondent intended to

treat Arrow’s purchase of the shares petitioner received from Mr.

Larik as a constructive dividend.

     On August 17, 2006, petitioner’s representatives held a

conference with Internal Revenue Service Appeals Officer Barbara

Byrnes.   At this conference petitioner’s representatives informed

Ms. Byrnes that petitioner had not received a constructive

dividend from Arrow, but rather had stepped in to facilitate a

stock redemption as Arrow’s agent.

     On September 26, 2006, respondent issued a notice of

deficiency to petitioner.   Petitioner filed a timely petition

with this Court, and on February 6, 2007, respondent filed his

answer.   At the time respondent filed his answer respondent had
                                 -6-

received a final draft and preliminary drafts of the stock

purchase agreement, petitioner’s own statements regarding the

intention of the parties involved in the transaction, and certain

informal correspondence.

         Petitioner submitted materials to respondent during the

formal discovery process in December 2007 which caused respondent

to concede the case.    On January 28, 2008, the parties filed a

stipulation of settled issues in which respondent conceded the

dividend income adjustment of $2,605,126 and the itemized

deductions adjustment of $64,497.      Petitioner’s motion for an

award of reasonable litigation and administrative costs was filed

on February 11, 2008.

                             Discussion

     Taxpayers are eligible for awards of reasonable fees and

costs incurred in certain administrative and court proceedings if

they meet the requirements of section 7430.      To qualify under

section 7430, taxpayers must establish that they:      (1) Were the

prevailing party within the meaning of section 7430(c)(4); (2)

exhausted the applicable administrative remedies;5 (3) did not

unreasonably protract the proceedings; and (4) have claimed costs

that are reasonable.



     5
      This factor is relevant only for the award of reasonable
litigation costs.
                                -7-

     Respondent concedes that petitioner exhausted all

administrative remedies and did not unreasonably protract the

proceedings.   Respondent contends:   (1) Petitioner was not a

prevailing party because respondent’s position “was substantially

justified” under section 7430(c)(4)(B)(i); (2) petitioner was not

a prevailing party because he failed to meet the net worth

requirements of section 7430(c)(4)(A)(ii); and (3) the amount of

costs petitioner claims is not reasonable under section

7430(a)(2) and (c)(1).   Because we find respondent’s position to

have been substantially justified, we need not consider the

latter two arguments.

     “Substantially justified” is defined as “justified to a

degree that could satisfy a reasonable person” and having a

“reasonable basis both in law and fact”.    Pierce v. Underwood,

487 U.S. 552, 565 (1988) (quotation marks omitted);6 Huffman v.

Commissioner, 978 F.2d 1139, 1147 n.8 (9th Cir. 1992), affg. in

part, revg. in part and remanding T.C. Memo. 1991-144.    It is

respondent’s burden to prove that his position was substantially

justified.   See sec. 7430(c)(4)(B)(i).   Respondent’s position may

be incorrect and yet be substantially justified “if a reasonable


     6
      Although the dispute in Pierce v. Underwood, 487 U.S. 552
(1988), arose under the provisions of the Equal Access to Justice
Act (EAJA), 28 U.S.C. sec. 2412(d), the relevant provisions of
the EAJA are almost identical to sec. 7430. Cozean v.
Commissioner, 109 T.C. 227, 232 n.9 (1997). Accordingly, we
consider the holding in Pierce v. Underwood, supra, to be
applicable to the case before us.
                                  -8-

person could think it correct”.    See Pierce v. Underwood, supra

at 566 n.2.   Whether respondent acted reasonably ultimately turns

on the available information which formed the basis for

respondent’s position as well as on the relevant law.       See

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

688-690 (1990).   The fact that the Commissioner eventually loses

or concedes a case does not by itself establish that the

Commissioner’s position is unreasonable.       Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 443 (1997).       However, it is a factor

that may be considered.   Id.

     The Court of Appeals for the Ninth Circuit, to which an

appeal in this case would lie, has held that the reasonableness

of the Commissioner’s position is analyzed separately for the

administrative and judicial proceedings.       Huffman v.

Commissioner, supra at 1143.    Respondent’s position was

consistent throughout the administrative and litigation process.

The Appeals officer took the position, on the basis of

petitioner’s stock purchase agreement, that petitioner received a

constructive dividend from Arrow.       Respondent took the identical

position before this Court in his answer.7




     7
      The position of the Commissioner in the proceeding in this
Court is the position set forth in the answer. Huffman v.
Commissioner, 978 F.2d 1139, 1147-1148 (9th Cir. 1992), affg. in
part and revg. in part and remanding T.C. Memo. 1991-144; Maggie
Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997).
                                -9-

     Petitioner argues that respondent is not substantially

justified because he (1) failed to investigate the facts to

justify the position in the 30-day letter and his answer and (2)

applied an unreasonable legal position to the facts.   We

disagree.

I.   Investigation of Facts

     A significant factor in determining whether the Commissioner

acted reasonably as of a given date is whether, on or before that

date, the taxpayer presented all relevant information under the

taxpayer’s control.   Corson v. Commissioner, 123 T.C. 202, 206-

207 (2004); sec. 301.7430-5(c)(1), Proced. & Admin. Regs.     Thus,

whether the Commissioner acted reasonably may turn upon the

available facts which formed the basis for the Commissioner’s

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

Nalle v. Commissioner, 55 F.3d 189, 191-192 (5th Cir. 1995),

affg. T.C. Memo. 1994-182.

     Respondent has shown that the only evidence he had access to

during the administrative appeal process and at the time of his

answer was the stock purchase agreement and various documents

petitioner prepared for the administrative appeal process and

litigation.   Petitioner maintains, relying on Powers v.

Commissioner, 100 T.C. 457 (1993), revd. in part on other grounds

43 F.3d 172 (5th Cir. 1995), that it was respondent’s duty to

audit petitioner’s return and to uncover more information before
                                -10-

issuing a notice of deficiency.    In Powers, the Commissioner made

no effort to contact the taxpayer before issuing the notice of

deficiency.   By contrast, respondent engaged in a multiyear

dialogue with petitioner and Arrow before issuing the notice of

deficiency and gave petitioner ample time during the

administrative appeal process to submit materials supporting

petitioner’s position.   See Flynn v. Commissioner, T.C. Memo.

2005-8.

      Petitioner submitted materials to respondent during the

formal discovery process in December 2007 which caused respondent

to concede the case.   Petitioner has not alleged that these

materials were unavailable to him earlier in the dispute.

Accordingly, we find that petitioner did not furnish respondent

with all of the relevant information under his control.   See

Corson v. Commissioner, supra at 206-207.

II.   Reasonableness of Legal Position

      Respondent contends that his position to apply dividend

treatment was substantially justified during the administrative

appeal process and at the time of his answer.   Petitioner’s stock

purchase agreement specifies that petitioner had the primary

obligation to acquire Mr. Larik’s stock, even in the event of Mr.

Larik’s death.   The agreement does not indicate that the stock

purchase was part of an integrated transaction intended to redeem

Mr. Larik’s shares.    The record indicates that the stock purchase
                              -11-

agreement was the only primary source document regarding the

transactions that respondent possessed during the administrative

appeal process and at the time of his answer.8   Respondent argues

that this agreement, coupled with petitioner’s subsequent

transfer of 1,500 shares of Arrow stock to Arrow, could lead a

reasonable person to conclude that petitioner received a

constructive distribution from Arrow.

     The substantive issue in controversy was whether the sale of

Mr. Larik’s shares to petitioner and the subsequent purchase of

the shares by Arrow should be treated as a single integrated

transaction resulting in exchange treatment under section 302(a)

or as a series of independent transactions resulting in a

dividend to petitioner under sections 301(a) and 302(b)(1).

Whether a distribution in connection with a cancellation or

redemption of stock is essentially equivalent to the distribution

of a taxable dividend under sections 301(a) and 302(b)(1) depends

upon the facts and circumstances of each case.   See Zenz v.

Quinlivan, 213 F.2d 914 (6th Cir. 1954).

     We have applied dividend treatment where a shareholder has

the primary obligation to acquire stock, but a corporation


     8
      Petitioner also sent respondent letters during the
administrative appeal process outlining his and Mr. Larik’s
intent to integrate the transactions. Because of the partisan
nature of these documents, we do not give them as much weight as
the stock purchase agreement, which was ostensibly prepared for
no other purpose than to effect the intent of petitioner and Mr.
Larik.
                                -12-

instead redeems and relieves the shareholder of his obligation.

See, e.g., Schroeder v. Commissioner, 831 F.2d 856 (9th Cir.

1987), affg. Skyline Memorial Gardens, Inc., T.C. Memo. 1985-334;

Sullivan v. United States, 363 F.2d 724 (8th Cir. 1966); Wall v.

United States, 164 F.2d 462 (4th Cir. 1947); see also Rev. Rul.

69-608, 1969-2 C.B. 42.    Petitioner argues that respondent

unreasonably applied the law to the facts because petitioner had

no preexisting contract to buy Mr. Larik’s shares and received no

financial gain from the subsequent transfer of those shares to

Arrow.

     For a position to be substantially justified, “substantial

evidence” must exist to support it.     Pierce v. Underwood, 487

U.S. at 564.    “That phrase does not mean a large or considerable

amount of evidence, but rather ‘such relevant evidence as a

reasonable mind might accept as adequate to support a

conclusion.’”    Id. at 564-565 (quoting Consol. Edison Co. v.

NLRB, 305 U.S. 197, 229 (1938)).    The Commissioner’s position may

be incorrect but substantially justified “if a reasonable person

could think it correct”.    Id. at 566 n.2.

     We find that the stock purchase agreement, standing by

itself, constituted evidence adequate to support respondent’s

legal conclusion.    See id. at 564.   Petitioner, as president and

chief executive officer of Arrow, could have stated in the

corporate minutes, the loan documents, the stock purchase
                                   -13-

agreement, or the separation agreement that it was the intention

of petitioner and Mr. Larik to treat the individual transactions

as part of an overall integrated transaction, but he did not do

so.9    On the basis of the evidence available to respondent, as

well as the facts and circumstances, we hold that respondent’s

legal position was substantially justified in both the

administrative and judicial proceedings.

III. Conclusion

       Because we conclude that petitioner was not the prevailing

party with respect to any of the issues, he is precluded from

recovering administrative and litigation costs, and we need not

address whether petitioner has satisfied the other elements of

section 7430.

       To reflect the foregoing,


                                          An appropriate order and

                                   decision will be entered.




       9
      The record indicates that respondent had no access to any
primary source documents other than the stock purchase agreement
before the initiation of formal discovery. However, the
aforementioned documents were readily available to petitioner.
