                        T.C. Memo. 2001-180



                      UNITED STATES TAX COURT



                   GARY GEALER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8232-99.                        Filed July 20, 2001.


     Lon B. Isaacson, for petitioner.

     Irene Scott Carroll and Gary M. Slavett, for respondent.



                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge John J. Pajak pursuant to the provisions of section

7443A(b)(5) in effect when this case commenced, and Rules 180,

181, and 183.   All section references are to the Internal Revenue

Code, as amended, and all Rule references are to the Tax Court

Rules of Practice and Procedure.   The Court agrees with and
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adopts the opinion of the Special Trial Judge which is set forth

below.

               OPINION OF THE SPECIAL TRIAL JUDGE

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

pursuant to petitioner's motion for administrative and litigation

costs under section 7430 and Rules 230 through 232.

     Petitioner seeks to recover administrative and litigation

costs of $237,618.15, allegedly incurred in contesting

respondent's determination of an income tax deficiency of $36,565

and a penalty of $7,313 for the taxable year 1995.

     Petitioner filed his motion for administrative and

litigation costs on March 2, 2000.     Respondent filed an objection

to petitioner's motion, petitioner filed a reply to respondent's

objection, and respondent filed a response to petitioner's reply.

     In accordance with Rule 232(a), we will dispose of the

motion before us without a hearing.    Accordingly, we rule on

petitioner's motion on the basis of the parties' submissions and

the record in this case.   The underlying issues raised in the

petition were settled by a stipulation of settlement.

                            Background

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

resided in Los Angeles, California.

     Much of the $237,618.15 of administrative and litigation

costs petitioner seeks and much of the voluminous record do not
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relate to the matter to be decided by this Court but instead

relate to work done by petitioner's attorneys with regard to

petitioner's attempts to participate in the audit of The Fourth

Dreamer, Inc., related litigation in the District Court, and an

appeal arising out of the District Court litigation.

     We set forth the facts which are relevant to the decision of

this Court.   From 1994 until December 1995, petitioner was a 50-

percent shareholder of The Fourth Dreamer, a C corporation

engaged in the sale of golf clubs and sportswear.   The other 50-

percent shareholder was Michael Weiner (Weiner).

     In February 1997, respondent began an audit of The Fourth

Dreamer for the fiscal year ending May 31, 1995.    Weiner informed

petitioner about the audit.   A dispute arose as to who could

properly represent The Fourth Dreamer in audit.    Respondent took

the position that return information of The Fourth Dreamer could

not be disclosed to petitioner under section 6103(a) because

petitioner did not have a material interest under section

6103(e)(1)(D)(iii).

     Petitioner asked Weiner if he could examine and copy all the

records of The Fourth Dreamer and promised to return them within

a few days.   Weiner allowed petitioner to take the records, but

petitioner failed to return them to him, notwithstanding numerous

requests to have them returned.

     On June 17, 1997, the Internal Revenue Service (IRS) was
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notified that petitioner, after being told of the corporate

audit, had taken the records relating to the audit.    The IRS

requested the records from petitioner.    The records were not

given to the IRS or Weiner.   On June 23, 1997, the IRS issued a

summons to petitioner for the records of The Fourth Dreamer.     On

July 3, 1997, petitioner filed a motion to quash the summons in

the District Court.   On February 26, 1998, the District Court

dismissed petitioner's motion to quash.

     On March 19, 1998, a second summons filed by respondent

requested the books and records of The Fourth Dreamer for the

fiscal years ending May 31, 1995 and 1996.    Petitioner filed a

new motion to quash the summons on March 31, 1998.    The District

Court dismissed the motion with prejudice on July 1, 1998.

     In July 1998, respondent began to audit petitioner’s 1995

income tax return.    On August 12, 1998, respondent requested that

petitioner appear on August 31, 1998, to give testimony and

produce the records of The Fourth Dreamer requested in the

summons.   Petitioner declined because he was involved in an

appeal arising out of the District Court litigation.

     Respondent offered petitioner a conference with respect to

his audit on or before November 17, 1998.    That date was set

because the period of limitations was running.    A letter from the

IRS suggested that someone representing petitioner meet with the

IRS by November 17, 1998, or, in the alternative, that petitioner
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sign an extension of the limitations period.

     On November 4, 1998, on the basis of the IRS's understanding

that there would be no meeting before November 17, 1998, the

audit file was forwarded to the review section because the period

of limitations was running.   The notice of deficiency for

petitioner's 1995 tax year was issued on February 2, 1999.

     Respondent determined a deficiency of $36,565 in

petitioner's 1995 Federal income tax and a section 6662(a)

penalty of $7,313.   The adjustments contained in the notice of

deficiency resulted primarily from respondent's determination

that $104,582 of expenses paid by The Fourth Dreamer were

personal and benefited petitioner and thereby constituted

constructive dividend income to him.    The notice stated that

petitioner did not provide any information to substantiate

whether the expenses deducted on the corporate return were

personal or business related and that no books or records for the

corporation were provided.    Adjustments were made to petitioner's

personal exemption and itemized and standard deductions.

     On April 16, 1999, the District Court ordered petitioner to

provide the information requested in the second summons.

Petitioner finally began to do so on or about April 29, 1999.

     Petitioner claimed in his petition to this Court that the

business deductions claimed by The Fourth Dreamer were legitimate

business deductions.   He further claimed that he was denied an
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opportunity to explain and provide documentation establishing the

legitimacy and deductibility of the expenses.

     On August 20, 1999, this Court set the case on a January 24,

2000, trial calendar at Los Angeles.

     On October 14, 1999, respondent sent a “Branerton” letter,

see Branerton v. Commissioner, 64 T.C. 191 (1975), to

petitioner's representative requesting that additional

information necessary for respondent to analyze the constructive

dividend issue be sent by November 3, 1999.     No response was

received by November 3, 1999.

     Around December 3, 1999, petitioner's counsel served formal

discovery requests on respondent.   Respondent objected to

petitioner's use of formal discovery without using informal

discovery first, but responded to two of the three requests.

     On December 10, 1999, respondent requested that the parties

meet.   The meeting was set for January 2000.    On December 13,

1999, respondent received the additional information from

petitioner that had been requested on October 14, 1999.     On

January 14, 2000, petitioner's representative and respondent met.

On January 19, 2000, respondent agreed to concede the case.

     The Court entered an agreed decision document in this case

on January 31, 2000.   On March 2, 2000, the Court received

petitioner’s motion for litigation and administrative costs.

Consequently, the Court sua sponte vacated the agreed decision,
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filed the decision as a stipulation of settled issues, and filed

petitioner’s motion.

                            Discussion

     Under section 7430, a taxpayer may be awarded a judgment for

reasonable administrative and litigation costs if the taxpayer

establishes that he was the prevailing party, unless the

Commissioner establishes that the Commissioner’s position was

substantially justified.   Sec. 7430(c)(4)(A) and (B).

     We review the Commissioner’s position as of the earlier of

the date of the receipt by the taxpayer of the notice of decision

by the Office of Appeals or the date of the notice of deficiency

to determine whether the Commissioner was substantially justified

with respect to the recovery of administrative costs.    Sec.

7430(c)(7)(B).   In deciding the merits of a motion for litigation

costs, we consider the reasonableness of the Commissioner’s

position from the date the answer to the petition was filed.

Sec. 7430(c)(7)(A); Bertolino v. Commissioner, 930 F.2d 759, 761

(9th Cir. 1991).   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.

     Whether the Commissioner’s position was substantially

justified turns on a finding of reasonableness, based upon all

the facts and circumstances, as well as the legal precedents
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relating to the case.   Pierce v. Underwood, 487 U.S. 552, 565

(1988); Swanson v. Commissioner, 106 T.C. 76, 86 (1996).       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.   The Court must "consider the basis for

respondent's legal position and the manner in which the position

was maintained."   Wasie v. Commissioner, 86 T.C. 962, 969 (1986).

Deciding whether the Commissioner’s position and conduct were

reasonable necessarily requires considering the facts available

to the Commissioner at that time.      Coastal Petroleum Refiners,

Inc. v. Commissioner, 94 T.C. 685, 689 (1990); 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.     Sokol v. Commissioner, 92

T.C. 760, 767 (1989).

     Respondent's position in the notice of deficiency and in the

answer was that The Fourth Dreamer had unsubstantiated

expenditures which, because they were not proven to be ordinary

and necessary business expenses, inured to the benefit of the two

shareholders of record in 1995, one of whom was petitioner.

Petitioner claims that, to have been substantially justified in

his position, respondent must have been able to prove that

petitioner actually received benefits which were constructive

dividends from The Fourth Dreamer.
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     Under section 61(a)(7), gross income includes the receipt of

any dividend.    A dividend is defined in section 316(a) as "any

distribution of property made by a corporation to its

shareholders".    There is no requirement that the dividend be

formally declared or even intended by the corporation.      Loftin &

Woodward, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir.

1978).   It is well settled that expenditures made by a

corporation for the personal benefit of a shareholder are

constructive distributions to the shareholder in amounts equal to

the fair value of the benefits involved.      Roy v. Commissioner,

T.C. Memo. 1997-562, affd. without published opinion 182 F.3d 927

(9th Cir. 1999); Halpern v. Commissioner, T.C. Memo. 1982-31.

The test for constructive dividends is twofold:     The expenses

must be nondeductible to the corporation, and they must represent

some economic gain, benefit, or income to the taxpayer.      Meridian

Wood Prods. Co. v. United States, 725 F.2d 1183, 1191 (9th Cir.

1984).   The mere fact that expenses have been disallowed as

deductions to the corporation does not necessarily make the

payments constructive dividend income to the shareholder under

section 61(a)(7).    Erickson v. Commissioner, 598 F.2d 525, 531

(9th Cir. 1979), affg. in part and revg. in part T.C. Memo. 1976-

147; Ashby v. Commissioner, 50 T.C. 409, 418 (1968); Donnelly v.

Commissioner, T.C. Memo. 1974-226.      However, if this Court found

that it was impossible to determine whether the disallowed
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expenses were ordinary business expenses or constructive

dividends because of the inadequacy of the record, we could find

that the expenses were for the benefit of the taxpayer.     Halpern

v. Commissioner, supra; Donnelly v. Commissioner, supra.

     It is well established that taxpayers must keep permanent

records sufficient to establish gross income, deductions, or

other matters required to be shown on the return.    Sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.     In this case petitioner took

the records of The Fourth Dreamer and would not give them to

respondent, even after respondent made requests and filed two

summonses.   While petitioner contends that he offered to give the

records to respondent, the offers to provide the records were

contingent on petitioner’s receiving information that respondent

believed petitioner was not allowed to receive under section

6103(a).

     Because The Fourth Dreamer could not substantiate the

expenses as ordinary and necessary business expenses, respondent

was justified in contending that the expenses were not made for

business purposes.   Donnelly v. Commissioner, supra.    It was not

unreasonable for respondent to determine that if the expenditures

were not for business purposes, then the expenditures probably

inured to the benefit of the two shareholders equally.

Respondent based that determination on the general principle that

a taxpayer who fails to produce evidence within his possession
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has evidence which is not favorable to him.    Recklitis v.

Commissioner, 91 T.C. 874, 890 (1988); Wichita Terminal Elevator

Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513

(10th Cir. 1947).   We find that respondent's position was

substantially justified during the time petitioner failed to

produce evidence to substantiate the expenditures of The Fourth

Dreamer.   Mills v. Commissioner, T.C. Memo. 1999-60; Cooper v.

Commissioner, T.C. Memo. 1999-6.

     With regard to the administrative costs, we examine the

period beginning at the time respondent issued the notice of

deficiency to petitioner on February 2, 1999, the relevant date

in this case.   At that time respondent had not received any

records from petitioner that would substantiate the business

expenses of The Fourth Dreamer and corroborate that petitioner

had no constructive dividends.   Petitioner had repeatedly refused

to provide respondent with the records of The Fourth Dreamer

since June 1997.    On April 29, 1999, petitioner began to provide

the requested information.   We find that respondent's position

throughout that period was substantially justified.

     With respect to the litigation costs, respondent filed his

answer on July 1, 1999.   Respondent agreed to concede the case on

January 19, 2000.   Petitioner contends that respondent had all

the information upon which to base a concession by April 29,
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1999, and respondent's position was therefore not substantially

justified.

     Whenever there is a factual determination, the Commissioner

is not obliged to concede a case until the Commissioner receives

the necessary documentation which proves the taxpayer's

contentions.   Brice v. Commissioner, T.C. Memo. 1990-355, affd.

without published opinion 940 F.2d 667 (9th Cir. 1991); Currie v.

Commissioner, T.C. Memo. 1989-23.   Moreover, after the

documentation is received, the Commissioner is provided a

reasonable period of time in which to analyze it and modify his

position accordingly.   Sokol v. Commissioner, 92 T.C. at 765-766.

     Here respondent first had to analyze the documentation with

regard to the pending trial for The Fourth Dreamer.   Respondent

had the information in his possession for 2 months and was in the

process of reviewing the material with regard to the corporate

return when the answer was filed in this case.   At that time the

records were associated with The Fourth Dreamer audit.    Moreover,

respondent requested further information relating to the

constructive dividend issue in October 1999 and did not receive

that information until December 1999, only a month before

respondent conceded the constructive dividend issue and related

issues.   Respondent was entitled to a reasonable amount of time

to review the documents and other information.   Under the

circumstances we find that the period of review was reasonable
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and that respondent's position was substantially justified during

that time.   Harrison v. Commissioner, 854 F.2d 263 (7th Cir.

1988) (concession about 6 months after the answer was filed,

after the Government had an opportunity to verify information,

held reasonable), affg. T.C. Memo. 1987-52; Ashburn v. United

States, 740 F.2d 843 (11th Cir. 1984) (11-month delay in

conceding case not unreasonable).

     Because respondent's position was substantially justified

throughout these proceedings, it is not necessary to address the

remaining issues under section 7430.   Therefore, we shall deny

petitioner's motion for administrative and litigation costs.

     To the extent that we have not addressed all of petitioner's

arguments in this voluminous record, we have considered them and

conclude they are without merit.    We note that if petitioner had

given respondent the corporate books and records when he was

initially asked for them, even though he believed he should not

have been excluded from the audit of The Fourth Dreamer, he would

have had fewer legal fees and no deficiency would have been

determined against him.

     To reflect the foregoing,



                                          An appropriate order and

                                     decision will be entered.
