                       T.C. Memo. 2000-47



                     UNITED STATES TAX COURT



    ABC RENTALS OF SAN ANTONIO, INC., ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 20689-91, 20690-91,     Filed February 10, 2000.
                 20691-91.



     John R. Gerdes, for petitioners.

     Edith F. Moates, for respondent.



                       MEMORANDUM OPINION


          HAMBLEN, Judge:   This matter is before the Court on

petitioners’ motion for award of litigation and administrative


     1
      Cases of the following petitioners are consolidated
herewith: David R. Peters and Diana L. Peters, docket No. 20690-
91; and John P. Parsons and Melba R. Parsons, docket No. 20691-
91.
                                - 2 -

costs pursuant to section 74302 and Rule 231.    Unless otherwise

indicated, all section references are to the Internal Revenue

Code, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     Neither party requested a hearing, and we see no reason for

an evidentiary hearing on this matter.    Accordingly, we rule on

petitioners’ motion on the basis of the parties’ submissions and

the existing record.   See Rule 232(a).

                             Background

     The respective petitions in the underlying case were filed

on September 13, 1991.    The cases were then consolidated and were

submitted fully stipulated pursuant to Rule 122.3    Petitioners


     2
      References to sec. 7430 in this opinion are to that section
before it was amended by the Taxpayer Bill of Rights 2, Pub. L.
104-168, sec. 701, 110 Stat. 1452, 1463-1464 (1996), effective
with respect to proceedings commenced after July 30, 1996. The
amendments to that section shift to the Commissioner the burden
of proving that the position of the United States was
substantially justified. See sec. 7430(c)(4)(B).

     A judicial proceeding is commenced in this Court with the
filing of a petition. See Rule 20(a). Petitioners filed their
respective petitions on Sept. 13, 1991. Accordingly, the 1996
amendments to sec. 7430 are not applicable here. See Maggie
Management Co. v. Commissioner, 108 T.C. 430 (1997).
     3
      The following cases were consolidated for purposes of
trial, briefing, and opinion by this Court on Jan. 27, 1992:

            Petitioner                          Docket No.
     ABC Rentals of San Antonio, Inc.           20689-91
     David R. Peters and Diana L. Peters        20690-91
     John P. Parsons and Melba R. Parsons       20691-91
     El Charro TV Rental, Inc.,
     Diana L. Peters, Tax Matters Person        24840-91
                               - 3 -

operated commercial enterprises, which rented consumer durables

(appliances, furniture, televisions, stereos, and video cassette

recorders) under rent-to-own leases to individuals.

     In ABC Rentals, Inc. v. Commissioner, T.C. Memo. 1994-601

(ABC Rentals I), we determined that petitioners failed to

demonstrate that the consumer durables, leased in their rent-to-

own businesses, constitute property which is properly depreciable

under the income forecast method of depreciation.   That opinion

was appealed to both the Fifth Circuit and the Tenth Circuit.    El

Charro TV Rental, Inc., appealed to the Court of Appeals for the

Fifth Circuit.   The Court of Appeals for the Fifth Circuit

affirmed our decision without published opinion.    See ABC

Rentals, Inc. v. Commissioner, T.C. Memo. 1994-601, affd. without

published opinion sub nom. El Charro TV Rental, Inc. v.

Commissioner, 79 F.3d 1145 (5th Cir. 1996).

     Petitioners in the instant case4 appealed to the Tenth



     4
      During the taxable periods at issue in the underlying case,
Guaranteed Rental Systems, Inc. (Guaranteed), was an S
corporation and all of its adjustments flowed directly through to
the shareholders’ tax returns and were reflected in the
deficiencies shown in docket Nos. 20690-91 and 20691-91. For the
fiscal year ending May 31, 1987, ABC Rentals of San Antonio, Inc.
(ABC) was a C corporation, and the notice of deficiency in docket
No. 20689-91 related to deficiencies during that fiscal year
only. Thereafter, ABC applied for and was granted S corporation
status. For the tax period ending Dec. 31, 1987, and the tax
year ending Dec. 31, 1988, ABC was a non-TEFRA S corporation, and
all of ABC’s adjustments flowed through to its sole shareholder,
John P. Parsons, and were reflected in the deficiencies shown in
docket No. 20691-91.
                                - 4 -

Circuit.   The Court of Appeals for the Tenth Circuit concluded in

ABC Rentals, Inc. v. Commissioner, 142 F.3d 1200 (10th Cir.

1998), revg. and remanding T.C. Memo. 1994-601, that section

168(f)(1) does not preclude use of the income forecast method for

property like petitioners’ rent-to-own inventory.   Since we

determined that petitioners’ rental units could not be

depreciated using the income forecast method and did not reach

respondent’s other arguments, the Court of Appeals directed us to

determine on remand:

     whether taxpayers made a proper election under
     section 168(f) and, if so, whether they improperly
     applied the income forecast method because they
     did not accurately forecast the income expected
     over the life of the assets and did not make an
     adjustment for salvage value.

ABC Rentals, Inc. v. Commissioner, 142 F.3d at 1211.

     In ABC Rentals, Inc. v. Commissioner, T.C. Memo. 1999-14

(ABC Rentals II), we held that Guaranteed Rental Systems, Inc.

(Guaranteed), failed to make a proper election of the income

forecast method for its taxable year ending December 31, 1987,

and that ABC Rentals of San Antonio, Inc. (ABC), failed to make a

proper election for its taxable year ending May 31, 1987.    We

held further that ABC made a proper election for its short

taxable period ending December 31, 1987, since it substantially

complied with the election requirements for this short taxable

period.    For rental units placed in service during taxable years

ending in 1988, the parties had stipulated that both Guaranteed
                               - 5 -

and ABC properly elected out of MACRS under section 168(f)(1).

     Furthermore, in ABC Rentals II, since the parties stipulated

as to the estimate of income expected over the life of the rental

property, and this estimate was borne out by petitioners’

experience, and since they stipulated that 1991-92 data did not

vary materially from the years in question, we held that in this

situation petitioners did accurately forecast the income expected

over the life of the rental property.     In addition, since the

salvage value was inconsequential and since the parties

stipulated that 1991 and 1992 data did not vary materially from

1987 and 1988 data, we held that under those circumstances

petitioners did not have to make an adjustment to the rental

units’ costs for salvage value.

                             Discussion

I.   Section 7430 Overview

     Section 7430 provides for the award of reasonable

administrative and litigation costs to a taxpayer in an

administrative or court proceeding brought against the United

States involving the determination of any tax, interest, or

penalty pursuant to the Internal Revenue Code.     An award of

administrative or litigation costs may be made where the

taxpayer: (1) Is the “prevailing party”, (2) exhausted available
                               - 6 -

administrative remedies,5 (3) did not unreasonably protract the

administrative or judicial proceeding, and (4) claimed reasonable

administrative and litigation costs.   See sec. 7430(a), (b)(1),

(4), (c).   These requirements are conjunctive, and failure to

satisfy any one will preclude an award of costs to petitioners.

See Minahan v. Commissioner, 88 T.C. 492, 497 (1987).

     To be a “prevailing party”, a taxpayer must show that (1)

the position of the United States in the proceeding was not

substantially justified, (2) the taxpayer substantially prevailed

with respect to the amount in controversy or with respect to the

most significant issue(s) presented, and (3) the taxpayer

satisfied the net worth requirement.   See sec. 7430(c)(4).6

     After concessions,7 the issues for decision are: (1) Whether

the position of the United States in the proceeding was not

substantially justified; (2) whether petitioners substantially

prevailed with respect to the most significant issues presented;8



     5
      This requirement does not apply to an award for reasonable
administrative costs. See sec. 7430(b)(1).
     6
      See supra note 2.
     7
      Respondent has conceded that petitioners satisfied the net
worth requirement, that petitioners have exhausted available
administrative remedies, and that petitioners have not
unreasonably protracted the court or the administrative
proceedings.
     8
      Because petitioners do not assert that they have
substantially prevailed with respect to the amount in
controversy, we do not address this issue.
                                  - 7 -

and (3) whether the amounts of administrative and litigation

costs claimed by petitioners are reasonable.

      Because we hold that respondent’s position was substantially

justified, we need not consider respondent’s alternative

arguments that petitioners did not substantially prevail with

respect to the most significant issues presented and that the

administrative and litigation costs requested by petitioners are

not reasonable.

II.   Substantial Justification

      The “not substantially justified” standard under section

7430 is applied as of the separate dates respondent took

positions in the administrative and judicial proceedings.     See

sec. 7430(c)(7).   The term “position of the United States” for

purposes of administrative costs means the position taken in an

administrative proceeding as determined as of the earlier of the

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

the Internal Revenue Service (IRS) Office of Appeals or the date

of the notice of deficiency.   See sec. 7430(c)(7)(B).   In view of

the fact that there was no notice of decision from the IRS Office

of Appeals, we look to the date of the notice of deficiency.

      The “position of the United States” for purposes of

litigation costs refers to the position of the United States in a

judicial proceeding.   See sec. 7430(c)(7)(A).   A judicial

proceeding in this Court is commenced with the filing of a
                                  - 8 -

petition.   See Rule 20(a).    Generally, respondent initially takes

a position in the litigation on the date he files the answer in

response to the petition.     See Huffman v. Commissioner, 978 F.2d

1139, 1148 (9th Cir. 1992), affg. in part, revg. in part on other

grounds, and remanding T.C. Memo. 1991-144; Han v. Commissioner,

T.C. Memo. 1993-386.

     The Commissioner’s position is substantially justified if

that position could satisfy a reasonable person and if it has a

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

487 U.S. 552, 565 (1988); Sher v. Commissioner, 89 T.C. 79

(1987), affd. 861 F.2d 131 (5th Cir. 1988).       The determination of

reasonableness is based on all of the facts and circumstances

surrounding the proceeding and the legal precedents relating to

the case.   See Coastal Petroleum Refiners, Inc. v. Commissioner,

94 T.C. 685, 694-695 (1990).     A 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.       See Pierce v.

Underwood, supra at 565.      A position is substantially justified

in law if legal precedent substantially supports the

Commissioner’s position given the facts available to the

Commissioner.   See Coastal Petroleum Refiners, Inc. v.

Commissioner, supra at 688.      Determining the reasonableness of

the Commissioner’s position and conduct requires considering what

the Commissioner knew at the time.        See Rutana v. Commissioner,
                               - 9 -

88 T.C. 1329, 1334 (1987); DeVenney v. Commissioner, 85 T.C. 927,

930 (1985).

     The Commissioner’s position can be justified even if

ultimately rejected by the Court.    See Wilfong v. United States,

991 F.2d 359, 364 (7th Cir. 1993).     The fact that the

Commissioner eventually loses on the merits or concedes a case is

not determinative of whether a taxpayer is entitled to reasonable

litigation and administrative costs.     See Sokol v. Commissioner,

92 T.C. 760, 767 (1989).

     We now consider whether respondent’s position was

substantially justified.   We must look at all facts and

circumstances as well as the legal precedents relating to the

case, bearing in mind that petitioners bear the burden of proof.

See Coastal Petroleum Refiners, Inc. v. Commissioner, supra at

694-695.   The issues for decision in the underlying case

pertained to the use of the income forecast method of

depreciation for rental units utilized in rent-to-own businesses.

Respondent’s position in the notice of deficiency was that the

income forecast method of depreciation was not an approved method

for depreciating assets other than television films, taped shows

for reproduction of motion picture films, sound recordings, and

other property of similar character.     Respondent further contends

in the notice of deficiency that the rental units on which

petitioners have used the income forecast method of depreciation
                              - 10 -

do not meet the test for being similar in character to property

for which the income forecast method of depreciation has been

approved.   Additionally, respondent contends in the notice of

deficiency that in the event it is held that the assets on which

petitioners have claimed the income forecast method of

depreciation qualify for that method, a proper election has not

been made under section 2.10 of Rev. Proc. 87-57, 1987-2 C.B.

687, and the method is not allowed.

     Respondent took the position in the judicial proceeding

that: (1) The income forecast method of depreciation is not a

valid method of depreciation to depreciate tangible personal

property of the type utilized in petitioners’ rent-to-own

businesses (i.e., furniture, appliances, televisions, stereo

equipment, and video tape recorders); (2) petitioners failed to

file elections pursuant to section 168(f)(1) to change their

method of depreciation to the income forecast method for the

assets placed in service for taxable years ending in 1987; (3)

petitioners improperly applied the income forecast method when

calculating depreciation deductions because petitioners failed to

forecast the income to be received from the assets being

depreciated and failed to make a reasonable adjustment for

salvage value of the assets being depreciated.   Thus, in the

present case we need not consider two separate positions because

there is no indication that respondent’s position changed or that
                              - 11 -

respondent became aware of any additional facts that rendered his

position any more or less justified between the issuances of the

notices of deficiency and the filing of the answer to the

petitions.

     Respondent contended that only property whose economic

usefulness cannot be adequately measured by its physical

condition or the passage of time and that may produce an uneven

stream of income is properly depreciated under the income

forecast method.   Respondent’s position was based on the

reasoning of Rev. Rul. 60-358, 1960-2 C.B. 68.   In that ruling,

the Commissioner determined that the usefulness of a television

film was more adequately measured by reference to the income it

produced than by the passage of time alone.   The ruling

explicitly stated that the income forecast method was “limited in

its application to television films, taped shows for

reproduction, and other property of similar character.”     Rev.

Rul. 60-358, 1960-2 C.B. at 70 (emphasis added).   In later

revenue rulings, the Commissioner amplified Rev. Rul. 60-358,

1960-2 C.B. by authorizing the use of the income forecast method

to depreciate motion picture films, see Rev. Rul. 64-273, 1964-2

C.B. 62, book manuscripts, patents, and master recordings, see

Rev. Rul. 79-285, 1979-2 C.B. 91.   These rulings were based on

section 167, which was, at the time the rulings were issued, the

only provision governing depreciation.   In the late 1980's, after
                                - 12 -

the enactment of section 168, the IRS continued to follow its

initial revenue ruling and extended the income forecast method to

videocassettes.   See Rev. Rul. 89-62, 1989-1 C.B. 78.   The

revenue rulings were based on the theory that these assets were

similar in character to television films.

     Respondent’s position was also based upon this Court’s

decision in Carland, Inc. v. Commissioner, 90 T.C. 505 (1988),

affd. 909 F.2d 1101 (8th Cir. 1990).     In Carland, Inc., we ruled

that the income forecast method could not be used to depreciate

physical assets whose economic usefulness could adequately be

measured by physical condition and the passage of time.    On

appeal, the Court of Appeals for the Eighth Circuit affirmed our

holding that a taxpayer’s use of the income forecast method of

depreciation for certain leased equipment was improper as it

resulted in an unreasonable acceleration of depreciation.      See

Carland, Inc. v. Commissioner, 909 F.2d 1101 (8th Cir. 1990),

affg. 90 T.C. 505 (1988).   The Court of Appeals expressly

declined to address whether the income forecast method can ever

be appropriate for depreciating assets whose usefulness declines

over time through normal wear and tear.    See id. at 1104.     When

respondent took his position in the present case, it was

consistent with the published revenue rulings and with our

decision in the Carland case.    Consequently, respondent’s

position was soundly grounded in law and fact and was accordingly
                                - 13 -

substantially justified.

     This Court ruled that the rent-to-own property involved in

these cases was not the kind of property which could be

depreciated using the income forecast method of depreciation.

See ABC Rentals I.     That opinion was appealed to the Courts of

Appeals for both the Fifth Circuit and the Tenth Circuit.       While

the Tenth Circuit reversed and remanded, the Fifth Circuit

affirmed without published opinion.      See ABC Rentals, Inc. v.

Commissioner, T.C. Memo. 1994-601, affd. without published

opinion sub nom. El Charro TV Rental, Inc. v. Commissioner, 79

F.3d 1145 (5th Cir. 1996).

III. Conclusion

     In view of the foregoing, we find and determine that the

position of the United States was not unreasonable and was

substantially justified.     Accordingly, we hold that petitioners

are not entitled to administrative and litigation costs under

section 7430.     Based on this holding, we need not consider

respondent’s alternative arguments that petitioners did not

prevail on the most substantial issue or set of issues presented

and that the administrative and litigation costs requested by

petitioners are not reasonable.     Petitioners’ motion will

therefore be denied.

                                      An appropriate order will be

                                 issued.
