                        T.C. Memo. 2006-221



                      UNITED STATES TAX COURT



           GUSTAVO AND VERONICA ZERON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16462-05.               Filed October 23, 2006.



     Lowell E. Mann, for petitioners.

     David A. Breen, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   The instant matter is before the Court on

petitioners’ motion for reasonable administrative and litigation

costs1 pursuant to Rule 2312 and section 7430.   The issue we must


     1
      Although petitioners titled the instant motion “MOTION FOR
AWARD OF REASONABLE ADMINISTRATIVE COSTS”, the attached list of
costs sought includes both administrative and litigation costs.
                                                   (continued...)
                              - 2 -

decide is whether petitioners were the prevailing party.    For the

reasons stated below, we deny petitioners’ motion for reasonable

costs.

                           Background

     At the time of filing the petition in the instant case,

petitioners resided in West New York, New Jersey.    Vanya Tyrrell

(Mrs. Tyrrell) prepared petitioners’ 2003 Form 1040, U.S.

Individual Income Tax Return (tax return).3

     On April 29, 2005, respondent sent a letter to petitioners

requesting that they submit documentation to support certain

deductions claimed on their tax return.   Petitioners did not

respond with the requested documentation.     Instead, petitioners’

attorney, Lowell E. Mann (Mr. Mann), sent a letter on May 23,

2005, protesting respondent’s proposed adjustments and requesting

that the case be transferred to respondent’s Appeals Office.




     1
      (...continued)
We treat petitioners’ motion as a motion for both administrative
and litigation costs.
     2
      Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended.
     3
      Petitioners’ tax return was one of approximately 175 tax
returns that were prepared by Vanya Tyrrell and chosen for
examination by respondent’s Correspondence Examination Unit. All
such cases involve similar unsubstantiated deductions. Lowell E.
Mann represents the petitioners in all such cases and has filed
virtually identical petitions for each such case.
                               - 3 -

Because petitioners failed to submit the requested documentation

substantiating the disputed deductions, respondent determined a

deficiency of $2,877 and sent petitioners a notice of deficiency

on June 6, 2005.

     Respondent advised petitioners by letter dated June 22,

2005, that their case would be transferred to respondent’s

Appeals Office, and on June 27, 2005, respondent transferred the

case to the Appeals Office.   Mr. Mann sent a letter to respondent

on August 4, 2005, requesting that respondent rescind the notice

of deficiency.   That letter was not accompanied by documentation

to support petitioners’ claimed deductions.

     Petitioners timely filed their petition in this Court on

September 6, 2005.   Respondent filed his answer on October 25,

2005.   By notice dated November 10, 2005, the instant case was

placed on the April 3, 2006, calendar in Philadelphia,

Pennsylvania.

     On March 27, 2006, Ms. Tyrrell sent documentation to support

the deductions in question to Mr. Mann.   Ms. Tyrrell faxed the

documentation to respondent’s counsel the same day.   On April 3,

2006, the parties filed a stipulation of settled issues at the

call of the instant case from the Philadelphia trial session
                                - 4 -

calendar, which indicated respondent’s full concession.     In the

instant motion, petitioners now seek $3,092.50 in administrative

and litigation costs.

                             Discussion

     The prevailing party in a Tax Court proceeding may be

entitled to recover administrative and litigation costs.     See

sec. 7430(a); Rule 231.    However, a taxpayer will not be treated

as the prevailing party if the Commissioner’s position was

substantially justified.   Sec. 7430(c)(4)(B); see Pierce v.

Underwood, 487 U.S. 552, 565 (1988).      The fact that Commissioner

concedes is not determinative of the reasonableness of

Commissioner’s position.    Wasie v. Commissioner, 86 T.C. 962, 969

(1986).   The taxpayer bears the burden of proving the elements in

section 7430 required for an award of costs, except that the

taxpayer will not be treated as the prevailing party if the

Commissioner establishes that the position of the Commissioner

was substantially justified.4   See Rule 232(e).

     The Court determines the reasonableness of respondent’s

position as of the time respondent took respondent’s position.

Sec. 7430(c)(7).   In the administrative proceeding here,

respondent took his position as of the date of the notice of




     4
      The elements of sec. 7430 other than those in issue, supra
pp. 1-2, are not discussed.
                               - 5 -

deficiency.   Sec. 7430(c)(7)(B).   In the judicial proceeding,

respondent took a position when respondent filed respondent’s

answer.   Sec. 7430(c)(7)(A), Huffman v. Commissioner, 978 F.2d

1139, 1144-47 (9th Cir. 1992), affg. in part, revg. in part on

other grounds and remanding T.C. Memo. 1991-144.    Respondent’s

administrative and litigation positions are substantially

justified if they have a reasonable basis in both law and fact.

Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997).

     In the instant case, we conclude that respondent’s position

was both reasonable and substantially justified in both the

administrative and judicial proceedings.    Petitioners failed to

provide the requisite documentation until after respondent issued

the notice of deficiency and filed an answer.    Deductions are a

matter of legislative grace, and petitioners must prove they are

entitled to the deductions.   Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).    In the absence of any proof

of entitlement to the disputed deductions, respondent was

reasonable to maintain his position that the disputed deductions

were not allowed.   Prouty v. Commissioner, T.C. Memo. 2002-175.

It was not until March 27, 2006, that respondent received the
                                 - 6 -

documentation relating to the disputed deductions, at which

time respondent conceded the propriety of the deductions.5

Accordingly, we hold that petitioners are not entitled to

recover their administrative costs.

     We have considered all of petitioners’ contentions,6 and,

to the extent they are not addressed herein, they are irrelevant,

moot, or without merit.

     To reflect the foregoing,


                                              An appropriate order and

                                         decision will be entered.




     5
      Respondent also contends that petitioners protracted the
instant proceedings and are therefore ineligible for cost
recovery. Sec. 7430(b)(3). Although we do not address that
issue, since we have disposed of the instant motion on other
grounds, we note that petitioners did not provide the required
documentation to support their claimed deductions until 11 months
after respondent requested it. Once in possession of the
requested documentation, respondent presumably would have
conceded the deductions at any point in the administrative or
litigation process, as respondent ultimately did on the eve of
trial just 1 week after receiving the documentation.
Consequently, petitioners forced an administrative proceeding and
litigation, instead of a brief exchange of correspondence.
     6
      This includes both arguments made in petitioners’ motion
and subsequent memorandum of law.
