                        T.C. Memo. 2005-80



                      UNITED STATES TAX COURT



                   PAUL MCGOWAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13587-01.             Filed April 11, 2005.


     Daniel L. Britt, Jr., for petitioner.

     Travis T. Vance III, for respondent.



                        MEMORANDUM OPINION


     FOLEY, Judge:   This matter is before the Court on

petitioner’s motion for recovery of reasonable administrative and

litigation costs pursuant to section 7430 and Rule 231.1   This



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at relevant times, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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Court ruled in favor of petitioner in McGowan v. Commissioner,

T.C. Memo. 2004-146, and we incorporate herein the facts set

forth in that opinion.

                            Background

     In 1998, petitioner was convicted, pursuant to section

7206(1), of filing false tax returns and, pursuant to section

7206(2), of aiding or assisting the filing of false tax returns

relating to 1991, 1992, and 1993.   The convictions were

subsequently affirmed on appeal and became final.

     On October 15, 1999, respondent issued a 30-day letter to

petitioner proposing income tax deficiencies and fraud penalties

relating to 1991, 1992, and 1993.   Respondent’s 30-day letter

also advised petitioner of his opportunity for review by the

Office of Appeals.   Respondent received a letter from petitioner,

by mail postmarked November 26, 1999, requesting an additional 30

days to respond.   Respondent granted the extension, but

petitioner did not respond within the extended period and did not

file a protest to the 30-day letter.     By notice of deficiency

dated September 6, 2001, respondent determined deficiencies of

$103,299, $36,968, and $67,180 and fraud penalties, pursuant to

section 6663, of $77,474, $27,726, and $50,385 relating to 1991,

1992, and 1993, respectively.   On December 4, 2001, petitioner

filed his petition with this Court.

     In January of 2002, respondent called petitioner and
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requested an extension to file respondent’s answer and offered

petitioner an opportunity to meet with the Office of Appeals.

After respondent filed his answer on January 29, 2002,

petitioner, for the first time, requested administrative review.

At the request of the Office of Appeals, the appellate conference

was delayed for several months.    On May 20, 2002, petitioner

notified respondent and requested that the conference be delayed.

On June 6, 2002, petitioner informed respondent that petitioner

wanted to reschedule the conference for July 2, 2002.    Prior to

June 30, 2002, petitioner was notified several times about

rescheduling the conference, but it was canceled indefinitely

because the case was reassigned.    Also, during June 2003,

petitioner proposed an offer titled “Settlement Issues and Offer

of Settlement”, but it was rejected by respondent.    On September

8, 2003, the trial was held in Atlanta, Georgia.

     On June 21, 2004, in McGowan v. Commissioner, supra, we held

that respondent failed to establish that petitioner intended to

evade tax.

     On July 26, 2004, petitioner filed petitioner’s motion for

recovery of reasonable administrative and litigation costs.      On

August 30, 2004, respondent filed an objection to petitioner’s

motion for recovery of reasonable administrative and litigation

costs.
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                            Discussion

     A party may recover administrative or litigation costs in a

Tax Court proceeding when such party has substantially prevailed

or is treated as the prevailing party.    Sec. 7430(a); Rule 231.

Petitioner, however, will not be treated as the prevailing party

if respondent establishes that respondent’s position was

substantially justified (i.e., had a reasonable basis in law and

fact).   Sec. 7430(c)(4)(B); see Pierce v. Underwood, 487 U.S.

552, 565 (1988).   Respondent’s position on the date he issued the

notice of deficiency and after filing his answer with this Court

is relevant in determining whether respondent was substantially

justified.   Grant v. Commissioner, 103 F.3d 948, 952 (11th Cir.

1996), affg. T.C. Memo. 1995-374.   In cases where respondent is

substantially justified, the taxpayer may still be treated as the

prevailing party if he makes, pursuant to section 7430(g), a

qualified offer.   Sec. 7430(c)(4)(E); Haas & Associates

Accountancy Corp. v. Commissioner, 117 T.C. 48 (2001), affd. 55

Fed. Appx. 476 (9th Cir. 2003).   Except as provided in section

7430(c)(4)(B), petitioner bears the burden of proving that he

meets the requirements of section 7430.    Rule 232(e).   The fact

that respondent loses an issue is not determinative of the

reasonableness of respondent’s position.    Wasie v. Commissioner,

86 T.C. 962, 969 (1986).

     Petitioner contends that he exhausted all administrative
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remedies, that he made a qualified offer, and that respondent’s

position was not substantially justified.   Respondent contends

that his position was substantially justified, that petitioner

failed to exhaust all administrative remedies, and that

petitioner did not make a qualified offer, pursuant to section

7430(g).   We agree with respondent.

     On the date respondent issued the notice of deficiency and

after filing his answer, respondent based his position on the

following:   (1) Petitioner was convicted, pursuant to section

7206(1) and (2), of filing, aiding or assisting the filing of

false tax returns; (2) petitioner substantially underreported his

income for the years in issue; (3) petitioner commingled business

funds with personal funds; and (4) petitioner kept inadequate

books and records.   See Webb v. Commissioner, 394 F.2d 366, 378

(5th Cir. 1968)(stating indicia of fraud includes the failure to

report income over an extended period of time), affg. T.C. Memo.

1966-81; Wright v. Commissioner, 84 T.C. 636, 643-644

(1985)(stating taxpayer’s conviction, pursuant to section

7206(1), is a factor to be considered in determining fraud).

Although respondent had a reasonable basis for his position, he

simply did not establish that petitioner had the requisite intent

to evade tax.   Thus, notwithstanding the shortcomings of

respondent’s case at trial, respondent’s position was

substantially justified.
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     Even though respondent’s position was substantially

justified, petitioner may still be treated as the prevailing

party if he makes a qualified offer.     Sec. 7430(c)(4)(E).   To

qualify, the written offer must “[designate] * * * it is * * * a

qualified offer for purposes of * * * section [7430(g)]”.      Sec.

7430(g)(1)(C).   The regulations further establish that “An offer

is not a qualified offer unless it is designated in writing at

the time it is made that it is a qualified offer for purposes of

section 7430(g).”   Sec. 301.7430-7T(c)(4), Temporary Income Tax

Regs., 68 Fed. Reg. 74852 (Dec. 29, 2003).     In addition, the

offer must specify the offered amount of the taxpayer’s

liability; be made during the qualified offer period (i.e.,

beginning on the date of the first proposed deficiency that

notifies taxpayers of their right to an Appeals conference and

ending on the date 30 days before the date the case is first set

for trial); and remain open from the date it is made until the

earliest of the date trial begins, 90 days after the offer is

made, or when it is rejected.   Sec. 7430(g); Johnston v.

Commissioner, 122 T.C. 124, 128 (2004).

     During the qualified offer period, petitioner made an offer

to respondent titled “Settlement Issues and Offer of Settlement”,

but it was rejected by respondent.      Petitioner’s offer, however,

failed to make any designation that sufficiently satisfies the

requirement that the offer was a qualified offer for purposes of
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section 7430(g).    Thus, petitioner’s offer is not a qualified

offer, because it fails to meet the requirements of section

7430(g)(1)(C).    Accordingly, petitioner is not entitled to

administrative or litigation costs.

     Assuming arguendo that petitioner’s offer was a qualified

offer, petitioner, the prevailing party, would still not be

entitled to recover any administrative and litigation costs.

With respect to administrative costs, taxpayers who make

qualified offers, pursuant to section 7430(g), may recover only

reasonable administrative costs that are “incurred on and after

the date of such offer.”    Sec. 7430(c)(4)(E)(iii)(II).   In

addition, all costs incurred after the filing of a petition are

considered litigation costs.    Sec. 301.7430-4(c)(3)(ii) and (4),

Example (2), Proced. & Admin. Regs.     Petitioner filed his

petition in December of 2001 and made his offer to respondent in

June of 2003.    Thus, even if petitioner had made a qualified

offer, he would not be awarded any reasonable administrative

costs, because it was made after he filed his petition with the

Court.

     In addition, petitioner would not be entitled to litigation

costs, because he failed to exhaust all administrative remedies.

Sec. 7430(b)(1).    Taxpayers cannot exhaust all administrative

remedies

     unless-- (i) The party, prior to filing a petition in
     the Tax Court * * * participates * * * in an Appeals
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     office conference; or (ii) If no Appeals office
     conference is granted, the party, prior to the issuance
     of a [notice of deficiency,] * * * Requests an Appeals
     office conference * * * and Files a written protest if
     a written protest is required to obtain an Appeals
     office conference.

Sec. 301.7430-1(b)(1) and (g), Example (11), Proced. & Admin.

Regs.   Respondent issued a 30-day letter, which notified

petitioner of his right to have a conference with the Office of

Appeals.   Petitioner, however, failed to contest the 30-day

letter, respond within 30 days or the 30-day extension, and did

not participate in an appellate conference prior to the filing of

his petition.   Petitioner did request an appellate conference,

but he requested it after respondent issued the notice of

deficiency.   Furthermore, petitioner does not satisfy, pursuant

to section 301.7430-1(f), Proced. & Admin. Regs., any exceptions

to the requirement that taxpayers must pursue administrative

remedies (e.g., respondent notifies taxpayer that pursuit of

administrative remedies is unnecessary).    Thus, petitioner failed

to exhaust all administrative remedies.    Accordingly, even if

petitioner had made a qualified offer, he would not be entitled

to an award of administrative or litigation costs.

     Contentions we have not addressed are irrelevant, moot, or

meritless.

     To reflect the foregoing,
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        An appropriate order will be

issued denying petitioner’s motion,

and decision will be entered for

petitioner.
