                              T.C. Memo. 2012-83



                       UNITED STATES TAX COURT



       MARC A. TRZECIAK AND MIRIAM TRZECIAK, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6370-10.                          Filed March 22, 2012.



     Vincent J. Nardone and M. Pilar Puerto, for petitioners.

     Terry Serena, for respondent.



                         MEMORANDUM OPINION


     CHIECHI, Judge: This matter is before us on petitioners’ motion that

petitioners entitled “MOTION FOR AWARD OF REASONABLE LITIGATION
                                          -2-

AND ADMINISTRATIVE COSTS” and that we have recharacterized as petition-

ers’ motion for an award under section 7430 of reasonable litigation costs (petition-

ers’ motion). We shall deny petitioners’ motion.

                                      Background

      The record establishes and/or the parties do not dispute the following.

      At all relevant times, petitioners resided in Centerville, Ohio (Centerville).

      During at least 2005 and 2006, the years at issue, petitioner Miriam Trzeciak

(Ms. Trzeciak) owned, managed, and rented 14 single-family residences (rental

properties). During those years, 13 of those rental properties were in or in the

vicinity of Columbus, Ohio (Columbus). As part of her management responsibili-

ties, Ms. Trzeciak, inter alia, performed administrative and bookkeeping tasks with

respect to the rental properties, showed the rental properties to prospective tenants,

handled tenant complaints, and dealt with contractors regarding repairs (Ms.

Trzeciak’s real estate activities). In order to carry out certain of those responsibili-

ties, Ms. Trzeciak periodically traveled to the rental properties from petitioners’

home in Centerville (petitioners’ residence).

      Petitioners timely filed Form 1040, U.S. Individual Income Tax Return

(return), for each of their taxable years 2005 (2005 return) and 2006 (2006 return).

Barnaby G. Reagan (Mr. Reagan), a certified public accountant, prepared those
                                          -3-

returns. Petitioners attached to each of their 2005 return and 2006 return Schedule

E, Supplemental Income and Loss (Schedule E).

      In Schedule E that petitioners attached to their 2005 return (2005 Schedule

E), petitioners reported a total rental real estate loss of $126,376 attributable to Ms.

Trzeciak’s real estate activities. Petitioners attached to their 2005 Schedule E

statements entitled “OTHER EXPENSES” regarding Ms. Trzeciak’s respective

rental properties with respect to which petitioners claimed that loss. Each of those

statements included a claimed expense of $819 for an item referred to as “COM-

MON OVERHEAD”.

      In Schedule E that petitioners attached to their 2006 return (2006 Schedule

E), petitioners reported a total rental real estate loss of $151,884 attributable to Ms.

Trzeciak’s real estate activities. Petitioners attached to their 2006 Schedule E

statements entitled “OTHER EXPENSES” regarding Ms. Trzeciak’s respective

rental properties with respect to which petitioners claimed that loss. Each of those

statements included a claimed expense of $517 for an item referred to as “COM-

MON OVERHEAD”.

      Around April 7, 2008, respondent assigned a revenue agent (respondent’s

revenue agent) to examine each of petitioners’ 2005 return and 2006 return (respon-
                                        -4-

dent’s examination). Petitioners retained Mr. Reagan to represent them in connec-

tion with respondent’s examination.

      During the course of respondent’s examination, petitioners presented certain

documents to respondent’s revenue agent which established (1) that Ms. Trzeciak

spent 915.6 hours and 806.8 hours during 2005 and 2006, respectively, with respect

to Ms. Trzeciak’s real estate activities and (2) that Ms. Trzeciak spent 217 hours

and 77 hours of those total hours during 2005 and 2006, respectively, traveling

between petitioners’ residence and her rental properties.

      Respondent’s revenue agent prepared a workpaper dated August 12, 2008

(revenue agent’s August 12, 2008 workpaper), in which he set forth the “final

determination of the RA [revenue agent]/government’s position”. That final

determination was: “The loss from the rental activities is limited per IRC 469.”

The revenue agent’s August 12, 2008 workpaper stated:

      The taxpayer [Ms. Trzeciak] does not employ anyone to handle the
      management of the properties, and handles bookkeeping, advertising *
      * *, paying bills, collecting and depositing rent, scheduling major
      maintenance, and performing minor maintenance, and tenant relations,
      mostly performed from her [petitioners’] residence. No mention was
      made of a space [in petitioners’ residence] that was used regularly and
      exclusively for the taxpayer’s rental activities. The taxpayer also
      checked her vacant properties for damage and soundness about once a
      month. In 2006, the taxpayer spent 77 hours making the trip from
                                        -5-

      Dayton [Centerville],[1] where her residence is, to Columbus, with each
      round trip taking a reported 3.5 hours. In 2005, the taxpayer spent
      over 217 hours traveling between her residence and Columbus. The
      taxpayer did not transport anything other than signs, paperwork, and
      herself. While in Columbus, the taxpayer would show properties to
      prospective tenants, visit vacant properties to ensure the properties
      were secure, and visit rented properties if the tenant had concerns. In
      2005, much of the travel time is in relation to searching for other
      properties and purchasing the properties.

                   *      *     *      *      *     *      *

      In T.C. Summary Opinion 2003-130 [Truskowsky v. Commissioner],
      the taxpayer’s travel from his home to his activity was considered a
      commute. The taxpayer argued that the travel between his home and
      his ranch constituted ‘work’. The court disagreed, while recognizing
      that some travel may constitute work (e.g., hauling equipment, trans-
      porting items integral to the operation), and asserted that travel is
      analogous to a personal commute, and therefore not ‘work’. As such,
      travel time claimed by the taxpayer should not be considered in the
      hourly tests under IRC 469(c)(7), and Reg. 1.469-5 and 5T.

                   *      *     *      *      *     *      *

      [Ms. Trzeciak’s] [t]ravel time is analogous to personal commute. It is
      well established the expenses for commuting from home to work are
      personal and not deductible under IRC 162. * * * Where one chooses
      to live is a matter of personal convenience. * * * Similarly, in comput-
      ing the hourly tests for participation (i.e. work) in an activity under
      section 469, travel time from a personal residence is inherently per-
      sonal hours that do not represent participation in a business.




      1
      We take judicial notice that Centerville is a suburb of Dayton, Ohio
(Dayton).
                                         -6-

      On August 18, 2008, Mr. Reagan sent respondent’s revenue agent a letter on

behalf of petitioners (petitioners’ August 18, 2008 letter) with respect to the revenue

agent’s August 12, 2008 workpaper. That letter stated:

      I am responding to your stated position that the travel time spent by the
      taxpayer [Ms. Trzeciak] does not constitute hours that count toward
      meeting the 750 hour test under IRC Sec. 469(c)(7)(B)(ii). My re-
      search indicates that the time is very clearly qualified to count toward
      the hours test.

      My reading of the three U.S. Tax Court cases you cite as support for
      your position does not convince me of their merit. The following is a
      summary of each case:

      Osama A. Mowafi v. Commissioner, TC Memo 2001-111: The pri-
      mary issue in this case is the credibility of the records of the taxpayer.
      This taxpayer claimed ridiculous hours of time spent working on his
      rentals activities. There is no substantive discussion of travel time per
      se in this case. The credibility of the hours claimed by Mrs. Trzeciak
      is not an issue, and therefore I see no case relevance.

      Robert P. Sweet, et ux. v. Commissioner, TC Summary Opinion 2004-
      125: The travel issue in this case is focused upon the exceptional
      distance from the taxpayer’s home to the rental property. The distance
      was 1,570 miles round-trip, and the travel time was 219 hours. This
      time and distance is many multiples of that claimed by Mrs. Trzeciak,
      and appears to fail the “ordinary and necessary” test of travel. The 30
      to 40 hours of travel claimed by Mrs. Trzeciak is not properly compa-
      rable to the facts of this case. I also believe the court errs when it
      makes reference to the “commuting” standard of most trade or business
      activities. I will expound on this point later.

      Thomas E. Truskowsky, et ux. V. Commissioner, TC Summary Opin-
      ion 2003-130: This case focuses on a cattle activity passive activity
                                         -7-

      analysis. The issue here is not that of a Real Estate Professional. For this
      reason, the discussion of travel is not on point, once again due to the unique
      nature of travel that is allowable in conjunction with managing rental real
      estate.

      Travel away from home is an integral element of owning and managing
      one’s rental real estate. In seeking authority for this issue, let’s start
      with the tax return forms. Schedule E of form 1040 recognizes this
      necessary deduction with a separate line for “Auto and Travel”.
      Because the deduction is specifically allowable, then it follows that the
      time associated with travel should count toward the 750 hour test. The
      Schedule E instructions for this line item say: “You can deduct ordi-
      nary and necessary auto and travel expenses related to your rental
      activities, including 50% of meal expenses incurred while traveling
      away from home.” The key element here is “while traveling away
      from home”. There is no mention of “commuting”, which is a very
      important issue in general “trade or business” activity travel expenses.
      The instructions do not offer any more specific direction regarding
      what constitutes qualified travel.

                   *      *      *     *       *     *      *

      * * * If the issue of commuting was relevant to management of rental
      real estate, there would be some mention of it in the IRS guidance.
      Absence of this implies that travel for rental property management is
      unique.

      On October 6, 2008, Mr. Reagan sent to respondent’s Appeals Office on

behalf of petitioners a “FORMAL PROTEST” (petitioners’ protest),2 in which




      2
        For convenience, when discussing petitioners’ August 18, 2008 letter and
petitioners’ protest, we shall sometimes refer to Mr. Reagan’s arguments made on
behalf of petitioners as Mr. Reagan’s arguments.
                                         -8-

petitioners protested the proposed determinations of the revenue agent. The protest

stated in pertinent part:

       The taxpayer [Ms. Trzeciak] is very clearly “directly involved in day-
       to-day management and operations” of the rental properties. Manage-
       ment of the rental real estate properties is where the majority of the
       taxpayer’s (Mrs. Trzeciak) time is spent. She has no other business
       involvement. * * * There is no management company utilization with
       the rental properties, and every action and decision related to the
       operation of the rental properties is done by the taxpayer. The entire
       investment is integrated as a business, which happens to be ownership
       and management of rental real estate. Do not overlook the fact that the
       ultimate sale of the properties is part of the ownership cycle, and
       keeping the properties in very good condition has a strong correlation
       with value realized at the time of sale. Accomplishing this requires the
       taxpayer to frequently be physically present at the properties, taking a
       “hands on” approach. The taxpayer (Miriam) has an advanced educa-
       tional background, and she manages the real estate activity with a high
       degree of sophistication. This fact precludes any argument that “ad-
       ministrative” hours spent by the taxpayer should not count. Time spent
       creating and reviewing financial statements, paying bills and manage-
       ment of finances are all hours spent directly managing the rental prop-
       erties that count toward the 750 hour test.

                     *      *    *     *       *     *     *

       The concept of “commuting” does not apply to managing rental real
       estate or being a Real Estate Professional. This point was made in my
       letter dated August 18, 2008. The IRS guidance on travel for rental
       properties recognizes that real estate is by nature not able to be prop-
       erly managed by staying at home. Travel expenses are allowed as soon
       as a taxpayer leaves their home, and the time must follow the allowable
       deduction. It is not a “commute”, such as travel by an employee to a
       job. The choice of an employee or business owner to live a certain
       distance from their place of work is a personal decision. The purchase
       and management of rental real estate is not done because of proximity
                                         -9-

      to the home. It is done because the property is in a suitable location for
      current rental income and future resale. Because the rental real estate
      location is based upon a business decision, and not a personal one,
      travel to and from the properties is inherently deductible as a business
      expense, and the time is not a “commute”.

                    *      *      *      *     *      *      *

      The case of Thomas E. Truskowski [sic], et ux. v. Commissioner, TC
      Summary Opinion 2003-130 is not on point. This case does not
      address the unique nature of rental property as previously discussed in
      this appeal. This case also dealt with a taxpayer who had a full-time
      job in addition to their cattle activity. The cattle activity was not their
      primary business activity, but was in fact an investment activity. This
      case also raises the issue of “commuting”, which has been previously
      discussed in the protest as not applicable to management of rental
      properties.

      By letter dated November 11, 2008, respondent’s Appeals Office acknowl-

edged receipt of petitioners’ protest.

      On July 31, 2009, an officer with respondent’s Appeals Office who was

assigned petitioners’ case (respondent’s Appeals officer) made the following

pertinent entries in his so-called Case Activity Record Print:

      Prepare for 9:00 conference. Researched commuting and rental real
      estate for case memo and to provide to taxpayer if I can prove that he
      is wrong (or perhaps rethink my analysis if the rep is right).

      Brief conference. The rep [Mr. Reagan] is completely unwilling to
      even think the [sic] he has any hazards on this case. He believes that
      he has a strong position that the tax home is in her home and that all
      travel to Columbus is deductible and qualifies as passive loss hours.
      He believes that the agent’s cases, which are the only thing we have,
                                       - 10 -

      are worthless cases because they did not involve rental real estate. The
      rep believes that real estate businesses are different for purposes of
      applying the commuting rules. I asked for authority of this position on
      this because it was a foreign concept to me. He didn’t give me any-
      thing except for the instructions to schedule E. We are at an impasse
      since this question is the question around which everything revolves.
      We agreed to disagree.

      On August 11, 2009, respondent’s Appeals officer made the following entry

in his Case Activity Record Print:

      Research on tax home. Nothing specifically on point. Since the
      taxpayer-wife’s [Ms. Trzeciak’s] only trade or business is in Columbus
      and since that is where the income is earned where she spends the
      majority of her time, Columbus would be her tax home for tax pur-
      poses.

      Respondent’s Appeals officer prepared a document entitled “Appeals

Transmittal and Case Memo” dated December 9, 2009. That memo stated in

pertinent part:

      Taxpayers’ Position:

      The taxpayers believe that taxpayer-wife is a real estate professional
      for the following reasons:

             C     Taxpayer participates in the activity in a regular, continu-
                   ous and substantial basis.
             C     Travel from Dayton [Centerville] to Columbus:
                   C     There is no authority, statutory or otherwise, that
                         specifically states that travel time doesn’t count
                         toward the 750 hour test.
                   C     The travel is an integral part of the taxpayer’s busi-
                         ness.
                                   - 11 -

             C      All travel time is directly related to the man-
                    agement of the properties.
             C      There is no “particular” reason not to consider the
                    travel time as work.
             C      Travel hours must count as hours worked because
                    the expenses associated with the travel are deduct-
                    ible under IRC 162.
             C      The concept of “commuting” does not apply to
                    managing rental real estate or being a real estate
                    professional.
             C      The purchase and management of rental real
                    estate is unrelated to proximity to home.

             *      *      *      *         *   *      *

Recommendation:

I recommend that we fully sustain the [revenue] agent’s position. The
entire case comes down to the question of whether * * * [Ms.
Tzreciak’s] travel from Dayton [Centerville] to Columbus qualifies as
hours worked. If such hours do not qualify, the hours worked are less
than the 750 hours necessary for the taxpayer to be a real estate profes-
sional. * * *

I agree with the [revenue] agent’s determination that travel between
Dayton [Centerville] and Columbus is not work associated with the
activity that qualifies for the 750 hours. It is clearly time spent travel-
ing from home to a work site, i.e., commuting. The [revenue] agent’s
determination is well supported by the case law cited by the agent and
by case law that I found in my research. * * *

             *      *      *      *         *   *      *

The taxpayers’ representative was not even willing to discuss the
possibility that any of the hours could be found to be non-working
hours by a court or that the commuting rules apply to the taxpayers’
                                       - 12 -

      travel. This made it impossible to even pursue a settlement with the
      taxpayers.

      Respondent’s Appeals officer also proposed the imposition of the accuracy-

related penalty under section 6662(a) for each of petitioners’ taxable years 2005 and

2006. With respect to that penalty, respondent’s Appeals officer stated:

                   SUMMARY AND RECOMMENDATION

      Does the accuracy penalty apply to the proposed passive activity
      loss adjustment * * *?

      Yes.

      The [revenue] agent proposes the assertion of the accuracy penalty for
      both 2005 and 2006 because:

             C     There is a substantial understatement.
             C     There was no disclosure on the return regarding the
                   hours that were spent or that a substantial portion of
                   the hours were questionable.
             C     There are no exceptions to the application of the
                   penalty. (The [revenue] agent is apparently un-
                   aware of the reasonable cause provisions of the
                   penalty).

      I believe that the government could have considerable hazards should
      the case be litigated. The representative/preparer [Mr. Reagan] defi-
      nitely seems to have strong ideas regarding the qualification of personal
      commuting and acquisition activities as participation. While I believe
      these ideas are not supportable, the fact remains that the taxpayer may
      be able to establish reliance on a tax professional.
                                         - 13 -

      On the other hand, the presence of so many questionable hours, and the
      materiality of the loss deductions, seems to give the government a
      reasonable chance of prevailing.

      Even though I would recommend a significant concession in the event
      of an agreed case, I believe that the penalty is strong enough that it
      should be included in the statutory notice.

      On December 9, 2009, respondent issued to petitioners a notice of deficiency

with respect to their taxable years 2005 and 2006 (notice). In that notice, respon-

dent determined, inter alia, to disallow under section 469 (section 469 determina-

tion) petitioners’ total rental real estate losses of $126,376 and $151,884 that they

claimed in their 2005 Schedule E and 2006 Schedule E, respectively. In support of

that determination, respondent determined in the notice:

      [T]he losses of $126,376.00 on 2005 and $151,844.00 on 2006
      claimed in connection with your rental activities are a passive activity.
      * * * You have not established that you met the requirements of Inter-
      nal Revenue Code section 469(c)(7). Therefore, your rental loss is
      determined to be passive. Passive losses can only be offset by passive
      income. Passive losses are also allowed to the extent they qualify for
      the special allowance for rental real estate activities. Since you have
      no passive income that your rental losses can be offset by, and do not
      qualify for the special allowance for rental real estate activities, your
      rental losses of $126,376.00 for 2005 and $151,884.00 for 2006 are
      not allowable.

      Respondent also determined in the notice that petitioners are liable for each of

their taxable years 2005 and 2006 for the accuracy-related penalty under section

6662(a) (section 6662(a) determination).
                                          - 14 -

        After petitioners received the notice, they retained as their attorneys the

Nardone Law Group, LLC (petitioners’ attorneys).3 Vincent J. Nardone (Mr.

Nardone) and M. Pilar Puerto (Ms. Puerto) of that law group were primarily

responsible for representing petitioners.

        On March 8, 2010, petitioners’ attorneys attempted unsuccessfully to speak

with respondent’s Appeals officer in order to discuss the determinations in the

notice and had to leave a voicemail message. Thereafter, on the same date, Mr.

Nardone sent by facsimile to respondent’s Appeals officer a memorandum in which

he memorialized that voicemail message and to which he attached Form 2848,

Power of Attorney and Declaration of Representative, authorizing Mr. Nardone and

Ms. Puerto to represent petitioners with respect to their taxable years 2005 and

2006.

        On March 9, 2010, petitioners’ attorneys mailed to the Court the petition that

they had prepared on behalf of petitioners, in which they contested the determina-

tions in the notice. The Court received and filed that petition on March 15, 2010.




        3
       Petitioners’ motion seeks costs relating to their representation by petitioners’
attorneys, not by Mr. Reagan.
                                         - 15 -

      On March 10, 2010, petitioners’ attorneys had a telephonic discussion with

respondent’s Appeals officer (March 10, 2010 discussion). On March 13, 2010,

Mr. Nardone sent by facsimile to respondent’s Appeals officer a memorandum

(March 13, 2010 memorandum) in which he memorialized the March 10, 2010

discussion. That memorandum requested “an additional meeting and appeals

conference on their [petitioners’] 2007 and 2008 tax periods.”4 Respondent’s

Appeals Office denied that request.

      In the petition, petitioners alleged in pertinent part:

             5.     The facts upon which the Petitioners rely, as the basis of
      their case, are as follows:

                    a.     In 2005 and 2006: (i) the Petitioners owned real
      estate properties (the “Properties”) and conducted rental operations on
      the Properties; (ii) Miriam Trzeciak (“Mrs. Trzeciak”) was not em-
      ployed and did not work as an independent contractor in 2005 or 2006;
      (iii) Mrs. Trzeciak materially participated in the rental operations of the
      Properties--as that phrase is used in I.R.C. § 469--including conducting
      the day-to-day management and operations of the Properties, showing
      the Properties to prospective tenants, placing tenants in and out of the
      Properties, tending to tenant complaints, collecting and enforcing rent,
      following up with contractors for repairs of the Properties, handling the
      administrative and record keeping matters for the Properties, and
      traveling to the Properties to fulfill all of these duties (the “Rental Real
      Estate Activities”); (iv) Mrs. Trzeciak’s Rental Real Estate Activities


      4
      Mr. Nardone evidently made a typographical error in drafting the March 13,
2010 memorandum in identifying the taxable years at issue in the notice as 2007 and
2008. The years at issue in the notice are 2005 and 2006.
                                          - 16 -

       were regular, continuous, and substantial--as that phrase is used in
       I.R.C. § 469; (v) more than half of Mrs. Trzeciak’s personal services
       performed in all trade or businesses were in the Rental Real Estate
       Activities; (vi) Mrs. Trzeciak spent more than 750 hours in the Rental
       Real Estate Activities; (vii) Mrs. Trzeciak was a real estate profes-
       sional as that term is understood under I.R.C. § 469; and (vii) [sic] in
       connection with the Rental Real Estate Activities, the Petitioners
       incurred losses of $126,376.00 in 2005 and $151,844.00 in 2006.

                     *      *      *      *        *    *      *

                     e.     In 2005 and 2006, (i) there was not a substantial
       understatement of income tax on the Petitioners’ 2005 and 2006
       Returns; (ii) there was no valuation misstatement on the Petitioners’
       2005 and 2006 Returns; (iii) the Petitioners were not negligent and did
       not disregard the rules or regulations; and (iv) to the extent the Court
       would find that a deficiency or liability exists, the Petitioners had
       reasonable cause for such deficiency or liability, including but not
       limited to the fact that the Petitioners made good faith efforts and took
       reasonable care in preparing the Petitioners’ 2005 and 2006 Returns;
       and properly relied on the Petitioners’ tax professional’s advice after
       providing such professionals with all the necessary facts.

       Petitioners did not allege in the petition that Ms. Trzeciak maintained an area

or an office in petitioners’ residence where she did work relating to her real estate

activities, let alone an area or an office in that residence that qualified as her

“principal place of business” under section 280A5 (section 280A principal place of




       5
        All section references are to the Internal Revenue Code (Code) in effect at
all relevant times. All Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         - 17 -

business),6 and thus a home office for Federal income tax (tax) purposes (tax home

office), with respect to Ms. Trzeciak’s real estate activities.

      On May 7, 2010, respondent filed an answer in the instant case. In the

answer, respondent denied that respondent erred with respect to the determinations

in the notice and denied each of the allegations set forth in the petition quoted

above, except the allegation in paragraph 5.a.(i). In the answer, respondent re-

quested “that the relief sought in the petition be denied and that respondent’s

determination, as set forth in the notice of deficiency, be in all respects approved.”

      On June 24, 2010, Mr. Nardone sent respondent’s counsel a letter on behalf

of petitioners (petitioners’ June 24, 2010 letter), in which he asserted: “This offer

constitutes a ‘qualified offer’ pursuant to I.R.C. §7430(c)(4)(E) and how that

term is defined in §7430(g)(1).” Respondent did not respond to petitioners’ June

24, 2010 letter within the time prescribed by section 7430(g)(1)(D).




      6
        Sec. 280A provides in pertinent part that “in the case of a taxpayer who is an
individual or an S corporation, no deduction otherwise allowable under this chapter
shall be allowed with respect to the use of a dwelling unit which is used by the
taxpayer during the taxable year as a residence.” Sec. 280A(a). Sec.
280A(c)(1)(A) provides the following exception for certain business or rental use:
“Subsection (a) shall not apply to any item to the extent such item is allocable to a
portion of the dwelling unit which is exclusively used on a regular basis * * * as the
principal place of business for any trade or business of the taxpayer”.
                                         - 18 -

      On September 14, 2010, the Court served on the parties (1) a notice setting

case for trial at the Court’s trial session in Columbus that was to begin on February

14, 2011, and (2) the Court’s standing pretrial order.

      On December 17, 2010, Ms. Puerto sent an email to respondent’s counsel, in

which she set forth petitioners’ position with respect to the determinations in the

notice. In that email, Ms. Puerto stated: “The main issue is whether Mrs.

Trzeciak’s time spent traveling from her home office to the rental properties and

back counts for purposes of satisfying the requirements under §469(c)(7).”

      On January 3, 2011, Ms. Puerto, at the request of respondent’s counsel, sent

another email to respondent’s counsel (January 3, 2011 email), in which she

maintained that “The Home Office qualifies as * * * [Ms. Trzeciak’s] principal

place of business for the 2005 and 2006 tax years” for Ms. Trzeciak’s real estate

activities. In that email, Ms. Puerto discussed the facts and the law that petitioners’

attorneys believed established (1) that during the years at issue Ms. Trzeciak

maintained a “Home Office” in petitioners’ residence and (2) that that so-called

home office qualified as the section 280A principal place of business of Ms.

Trzeciak. Included in the discussion of the facts asserted in the January 3, 2011

email were that Ms. Trzeciak “designated a room as the office for” Ms. Trzeciak’s

real estate activities and that Ms. Trzeciak “was the only individual that used” that
                                        - 19 -

office in petitioners’ residence. Included in the discussion of the law in the January

3, 2011 email was the following:

              The term principal place of business includes a place of business
      used by the taxpayer to perform administrative or management activi-
      ties related to the taxpayer’s trade or business if there is no other fixed
      location of the taxpayers’ trade or business where substantial adminis-
      trative or management activities are undertaken. See Code § 280A(c).

      On January 15, 2011, petitioners’ attorneys had a telephonic discussion with

respondent’s counsel during which they described Ms. Trzeciak’s so-called home

office as a “fully functional workplace”. Respondent’s counsel asked petitioners’

attorneys to provide him with substantiation establishing that Ms. Trzeciak’s so-

called home office qualified as her section 280A principal place of business and thus

her tax home office.

      On January 20, 2011, Ms. Puerto sent an email to respondent’s counsel

(January 20, 2011 email), in which she provided the substantiation that he had

requested.

      On the same day on which respondent’s counsel received the January 20,

2011 email, he prepared a so-called counsel settlement memorandum (settlement

memorandum). The settlement memorandum indicated that “petitioner [Ms.

Trzeciak] maintained a fully functional office within her home [petitioners’ resi-
                                          - 20 -

dence] for the sole purpose of managing the [rental] properties.” The settlement

memorandum also stated:

              Because the petitioner’s [Ms. Trzeciak’s] maintenance of an
       office [in petitioners’ residence] was not previously developed, this
       case was initially viewed by our office as involving the issue of
       whether the petitioner’s trips between Dayton [Centerville] and Colum-
       bus were a form of commuting. * * *

       * * * the fact that the petitioner maintained a legitimate business office
       in Dayton [Centerville] had not been clearly advanced much less
       established at the time of our earlier analysis. Once it became clear
       that this was the case, and that the travel time was not “commuting”
       but was travel between business locations, we concluded based on
       established authority that the travel hours could be included for the
       purposes of determining the petitioner’s “material participation” in the
       activity.

      The parties did not file pretrial memoranda on January 31, 2011, because the

Court’s standing pretrial order did not require them to do so if they had reached a

basis of settlement, which they had. On February 11, 2011, the parties filed a

stipulation of settlement (stipulation of settlement) .7 That stipulation provided in

pertinent part:

              The parties, pursuant to T.C. Rule 231(c) and in resolution of all
      issues in this case except those relating to the petitioners’ claim for
      litigation and administrative costs under I.R.C. § 7430, hereby submit
      and stipulate to the following:


       7
        Because the parties filed a stipulation of settlement, they did not execute a
stipulation of facts for trial.
                                         - 21 -

             1. The petitioners are not liable for any deficiencies in income
      tax, and are not due any overpayments of income tax, for taxable years
      2005 and 2006.

             2. The petitioners are not liable for penalties under the provisions
      of I.R.C. § 6662(a) for taxable years 2005 and 2006.

      On February 11, 2011, petitioners filed petitioners’ motion. Respondent filed

a response to petitioners’ motion (respondent’s response), and petitioners filed a

reply to respondent’s response (petitioners’ reply). (We shall refer collectively to

petitioners’ motion and petitioners’ reply as petitioners’ filings.) Petitioners attached

as exhibits to petitioners’ reply, inter alia, (1) an affidavit of Mr. Reagan (Mr.

Reagan’s affidavit) and (2) an affidavit of Ms. Trzeciak (Ms. Trzeciak’s affidavit).

      Mr. Reagan’s affidavit stated in pertinent part:

      6.     During the examination, Petitioner Miriam Trzeciak (“Miriam”)
             provided the revenue agent a detailed log of the work relating to
             the rental properties that Miriam performed during the 2005 and
             2006 tax years.

      7.     I [Mr. Reagan] informed the revenue agent that--as reflected in
             Miriam’s 2005 and 2006 logs--Miriam spent a substantial amount
             of hours performing administrative duties for the rental properties
             out of an office located in her home. Further, I informed the
             revenue agent that Petitioners incurred certain expenses in operat-
             ing this office out of their home, and Petitioners reported and
             deducted these expenses on their Returns.
                                 - 22 -

8.    Petitioners provided the revenue agent a copy of Petitioners’
      2005 and 2006 rental property expense report * * * (“Expense
      Spreadsheets”). The first column of the Expense Spreadsheets
      lists the common overhead expenses for Petitioners’ rental prop-
      erties during the 2005 and 2006 tax years.

9.    During the examination, the revenue agent briefly asked me what
      was included under the common overhead expenses listed on the
      Expense Spreadsheets. I informed the revenue agent that the
      common overhead expenses included--among other things--the
      expenses relating to Petitioners’ home office that were incurred
      during the 2005 and 2006 tax years. I directed the revenue agent
      to the areas on Petitioners’ Returns where Petitioners reported
      and deducted their home office expenses. The revenue agent did
      not ask me any further questions regarding the common overhead
      expenses or home office expenses, or any details regarding Peti-
      tioners’ home office.

10.   The revenue agent spent very little time on and did not question
      the expenses that Petitioners’ reported on their Returns. The
      revenue agent’s main focus during the examination was in finding
      out how many hours Miriam spent performing work relating to
      the rental properties.

11.   Petitioners provided the revenue agent all of the information that
      Respondent requested. Respondent never asked for any informa-
      tion regarding Petitioners’ home office or related expenses.

12.   Petitioners disagreed with the revenue agent’s position that Mir-
      iam’s travel to and from her residence and the rental properties
      should not count towards Petitioners satisfying the hourly re-
      quirements under I.R.C. §469(c)(7) because Miriam’s travel was
      commuting.

                   *     *      *         *   *    *      *
                                  - 23 -

14.   During the initial appeals conference, I argued, on behalf of
      Petitioners, that Miriam’s travel to and from the rental properties
      and Petitioners’ residence should count towards Petitioners’
      satisfying the hourly requirements of I.R.C. §469(c)(7). Further,
      I argued that Miriam’s travel was not a form of commuting.

15.   I informed Appeals that Miriam performed all of the administra-
      tive functions relating to the rental properties from Petitioners’
      home office and Petitioners reported the expenses relating to their
      home office on Petitioners’ Returns. Like the revenue agent, the
      appeals officer focused on the commuting argument and never
      challenged or questioned the home office expenses.

Ms. Trzeciak’s affidavit stated in pertinent part:

3.    During the 2005 and 2006 tax years, I [Ms. Trzeciak] had an
      office in my home that was designated for my rental property
      business. In that office, I performed all of the management and
      administrative matters for the rental properties.

4.    During the IRS’s examination of Petitioners’ Form 1040 U.S.
      Individual Tax Return for tax years 2005 and 2006 (the “2005
      and 2006 Returns”), the revenue agent interviewed me regarding
      my activities in connection with my rental properties. * * * I told
      the revenue agent that I was the only person that managed the
      rental properties, and I performed most of the management and
      administrative work at my home office.

5.    The revenue agent never asked me during the interview whether
      my home office was used regularly and exclusively for the rental
      property business or any other questions about the home office.

6.    During the interview, the revenue agent’s questions were focused
      primarily on the reasons, dates, and length of the travel from my
                                         - 24 -

              home office to the rental properties. The revenue agent did not inquire
             about my home office.

      7.     During the 2005 and 2006 tax years, I kept a journal of all of the
             work that I performed for my rental properties. I had various
             entries regarding the management and administrative work that I
             performed at my home office. I went over one month’s worth of
             journal entries with the revenue agent that included entries for
             work performed at the home office.

      Respondent filed a reply to petitioners’ reply (respondent’s reply). Thereafter,

the Court had a telephonic conference (Court’s telephonic conference) with respec-

tive counsel for the parties (collectively, counsel). During that conference, the Court

advised counsel that the Court read Mr. Reagan’s affidavit to be in conflict in at least

one material respect with certain of the documents (petitioners’ documents) that

petitioners had attached to certain of petitioners’ filings regarding what petitioners

had argued during the administrative proceedings before the Internal Revenue

Service (administrative proceedings). As a result, the Court informed counsel that

the Court was unwilling to rely on that affidavit to establish certain alleged facts

therein. During the Court’s telephonic conference, the Court asked counsel whether

they believed it appropriate for the Court to hold an evidentiary hearing in order to

resolve the conflict that the Court believed existed in at least one material respect

between Mr. Reagan’s affidavit and certain of petitioners’ documents and directed
                                         - 25 -

counsel to file respective supplements to their respective replies in which they set

forth their respective views as to the relevancy and/or materiality of that

apparent conflict in deciding whether to grant petitioners’motion.

      Respondent filed a supplement to respondent’s reply. In that supplement,

respondent stated: “The respondent submits that whether or not petitioners’ POA

[Mr. Reagan] mentioned petitioners’ home office during the examination of their

2005 and 2006 returns is neither material nor relevant for the Court’s present consid-

erations.”8




       8
        According to respondent, the record in the instant proceeding does not
establish that Mr. Reagan argued to respondent’s representatives during the admin-
istrative proceedings that a work area or an office in petitioners’ residence where
Ms. Trzeciak did work relating to her real estate activities qualified as a sec. 280A
principal place of business and thus a tax home. Respondent also points out that
petitioners did not even allege in the petition that Ms. Trzeciak did work relating to
Ms. Trzeciak’s real estate activities in petitioners’ residence, let alone that she had a
tax home office in that residence. Consequently, respondent contends that, as a
result of reviewing the record established during the administrative proceedings and
the petition that petitioners filed commencing this case, respondent could not have
been, and was not, aware before or when respondent filed the answer of any
arguments that petitioners might have made during those administrative proceedings
that a work area or an office in petitioners’ residence where Ms. Trzeciak did work
relating to her real estate activities was a sec. 280A principal place of business and
thus a tax home. Therefore, according to respondent, whether Mr. Reagan made
any such argument to respondent’s representatives during the administrative
proceedings is not relevant and/or material to the Court’s consideration of petition-
ers’ motion.
                                           - 26 -

       Petitioners filed a supplement to petitioners’ reply (petitioners’ supplement).

(We shall sometimes refer collectively to petitioners’ motion, petitioners’ reply, and

petitioners’ supplement as petitioners’ complete filings.) In that supplement,

petitioners stated:

              While Mr. Reagan’s statements in his affidavit are relevant to this
       case, by supporting the fact that Petitioner communicated to Respon-
       dent early on in the examination phase that the Petitioners had a home
       office, the determination of whether these statements actually occurred
       is not material. There is sufficient evidence on the record and objec-
       tively not in disagreement showing that Respondent has not met its
       burden of proving that its position was substantially justified.

       In none of the respective filings that the parties made with respect to petition-

ers’ motion did they ask for a hearing (evidentiary or nonevidentiary) with respect to

that motion. We conclude that a hearing is not necessary. See Rule 232(a)(2).

                                        Discussion

       We explain initially why we recharacterized the motion that petitioners filed

entitled “MOTION FOR AWARD OF REASONABLE LITIGATION AND

ADMINISTRATIVE COSTS”. The costs that petitioners are claiming, which are

shown in certain of petitioners’ complete filings, are expenses or costs relating to the

preparation of the petition, the filing of the petition, and certain activities that petition-
                                         - 27 -

ers’ attorneys conducted thereafter.9 See supra note 4. As a result, we

recharacterized the motion that petitioners filed as a motion for an award of reason-

able litigation costs.

       Section 7430(a) authorizes an award to the prevailing party of reasonable

litigation costs incurred in connection with a case brought in the Court against the

Commissioner of Internal Revenue (Commissioner) involving the determination of

any tax, interest, or penalty under the Code, provided that certain requirements are

satisfied. We consider here only whether petitioners qualify as the “prevailing party”

for purposes of section 7430(a). In considering that question, we shall address only

(1) whether respondent’s position in the instant case was substantially justified, see

sec. 7430(c)(4)(B)(i), and (2) whether the so-called qualified offer rule applies, see

section 7430(c)(4)(E). That is because resolution of those questions resolves the

issue of whether petitioners are entitled to an award under section 7430(a).



        9
        On Mar. 8, 2010, the day before petitioners’ attorneys mailed to the Court
the petition that they had prepared on behalf of petitioners, petitioners’ attorneys
attempted to contact respondent’s Appeals officer by telephone and facsimile, and
on Mar. 10, 2010, the day after petitioners’ attorneys mailed the petition to the
Court, petitioners’ attorneys had a telephonic discussion with respondent’s Appeals
officer. In addition, on Mar. 13, 2010, Mr. Nardone sent by facsimile to respon-
dent’s Appeals officer a memorandum. The record does not establish how much
time petitioners’ attorneys spent on those days in attempting to contact or in
contacting respondent’s Appeals officer.
                                          - 28 -

      The term “prevailing party” generally means any party who (1) has substan-

tially prevailed with respect to (a) the amount in controversy, sec.

7430(c)(4)(A)(i)(I), or (b) the most significant issue or set of issues presented, sec.

7430(c)(4)(A)(i)(II), and (2) meets the net worth requirements of 28 U.S.C. sec.

2412(d)(2)(B), sec. 7430(c)(4)(A)(ii).10 In order to qualify for an award under

section 7430(a), the prevailing party must (1) have exhausted the available adminis-

trative remedies, sec. 7430(b)(1), and (2) not have unreasonably protracted the court

proceeding, sec. 7430(b)(3).11 The party seeking an award under section 7430(a)

has the burden of establishing that all of the foregoing criteria have been satisfied and

that the costs claimed are reasonable litigation costs incurred in connection with the

court proceeding, as defined in 7430(c)(1).12 Rule 232(e); see also Corson v.

Commissioner, 123 T.C. 202, 205-206 (2004).

      Section 7430(c)(4)(B)(i) provides an exception to the definition of the term

“prevailing party” in section 7430(c)(4)(A). Section 7430(c)(4)(B)(i) provides: “A


       10
       Respondent acknowledges that petitioners have complied with (1) sec.
7430(c)(4)(A)(i)(II) and (2) sec. 7430(c)(4)(A)(ii).
       11
         Respondent acknowledges that petitioners have complied with sec.
7430(b)(1). Respondent maintains, however, that petitioners have not established
that they complied with sec. 7430(b)(3).
       12
       Respondent maintains that petitioners have not established that they
complied with sec. 7430(c)(1) and Rule 231(d).
                                           - 29 -

party shall not be treated as the prevailing party in a proceeding * * * if the United

States establishes that the position of the United States in the proceeding was

substantially justified.”

       Respondent argues that respondent’s position in this proceeding (respondent’s

litigating position) was substantially justified, see sec. 7430(c)(4)(B)(i), and that

therefore petitioners are not the “prevailing party”, as defined in section

7430(c)(4)(A). Respondent has the burden in the instant proceeding of establishing

that respondent’s litigating position was substantially justified. See sec.

7430(c)(4)(B)(i).

       The position of the United States is substantially justified if it “is one that is

‘justified to a degree that could satisfy a reasonable person’ or that has a ‘reasonable

basis both in law and fact.’” Swanson v. Commissioner, 106 T.C. 76, 86 (1996)

(quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988)). “A position has a

reasonable basis in fact if there is relevant evidence that a reasonable mind might

accept as adequate to support a conclusion.” Corkrey v. Commissioner, 115 T.C.

366, 373 (2000) (citing Pierce, 487 U.S. at 564-565). In determining whether the

position of the Commissioner was substantially justified, we must “consider the basis

for * * * [the Commissioner’s] legal position and the manner in which the position

was maintained.” Wasie v. Commissioner, 86 T.C. 962, 969 (1986). Whether the
                                          - 30 -

Commissioner acted reasonably will turn “upon those available facts which formed

the basis for the position taken * * * during the litigation, as well as upon any legal

precedents related to the case.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430,

443 (1997). The Commissioner’s position “may be incorrect but substantially

justified ‘if a reasonable person could think it correct’.” Id. (quoting Pierce, 487

U.S. at 566 n.2).

      A significant factor in determining whether the Commissioner’s position is

substantially justified as of a given date is whether, on or before that date, the

taxpayer has presented all relevant information under the taxpayer’s control and

relevant legal arguments supporting the taxpayer’s position. Corson v. Commis-

sioner, 123 T.C. at 206-207; sec. 301.7430-5(c)(1), Proced. & Admin Regs.

      The Commissioner’s concession of an issue is not conclusive as to whether the

Commissioner’s position with respect to that issue was substantially justified. See

Corkrey v. Commissioner, 115 T.C. at 373; Sokol v. Commissioner, 92 T.C. 760,

767 (1989); Wasie v. Commissioner, 86 T.C. at 968-969.

      In order to determine whether the “position” of the United States is substan-

tially justified, courts “must identify the point at which the United States is first

considered to have taken a position, and then decide whether the position taken
                                        - 31 -

from that point forward was or was not substantially justified.” Maggie Mgmt. Co.

v. Commissioner, 108 T.C. at 442.

       For purposes of a court proceeding, the “position of the United States” means

“the position taken by the United States in a judicial proceeding to which subsection

(a) applies”. Sec. 7430(c)(7)(A). Respondent’s position in the instant proceeding is

that taken in the answer. See, e.g., Maggie Mgmt. Co. v. Commissioner, 108 T.C. at

442.

       The Court has held that “the Government’s litigating position is formed only

after the Government’s attorney becomes involved in the case”, i.e., after the

initiation of litigation. Elder v. Commissioner, T.C. Memo. 2007-281 (citing

Huffman v. Commissioner, 978 F.2d 1139 (9th Cir. 1992), aff’g in part, rev’g in part

on other grounds, and remanding T.C. Memo. 1991-144). However, the Court may

“review[] the government’s position in litigation against the backdrop of the adminis-

trative actions that have gone before. That backdrop is relevant to a determination

whether the government’s position in litigation is substantially justified”. Hanson v.

Commissioner, 975 F.2d 1150, 1152 n.2 (5th Cir. 1992).

       We now consider whether respondent’s litigating position was substantially

justified with respect to the section 469 determination. A brief summary of the
                                          - 32 -

pertinent provisions of section 469 will be helpful to our consideration of that

question.

      Section 469 generally disallows for the taxable year any “passive activity

loss”. Sec. 469(a). The term “passive activity loss” is defined as the excess of the

aggregate losses from all passive activities for the taxable year over the aggregate

income from all passive activities for that year. Sec. 469(d)(1). A passive activity is

any trade or business in which the taxpayer does not “materially participate”. Sec.

469(c)(1).

      Rental real estate activity is generally treated as a per se passive activity

regardless of whether the taxpayer materially participates in that activity. Sec.

469(c)(2), (4). Section 469(c)(7) provides an exception to that general rule for so-

called real estate professionals. Under that section, the rental activities of real estate

professionals are not treated as per se passive activities, if, inter alia, “such taxpayer

performs more than 750 hours of services during the taxable year in real property

trades or businesses in which the taxpayer materially participates” (750-hour

requirement). Sec. 469(c)(7)(B)(ii).

      Respondent’s position throughout the administrative proceedings and when

respondent filed the answer in the instant proceeding was (1) that Ms. Trzeciak’s

travel time between petitioners’ residence in Centerville and the rental properties in
                                         - 33 -

and around Columbus (Ms. Trzeciak’s travel time) constituted commuting, (2) that

therefore that time may not be included as hours spent in the conduct of Ms.

Trzeciak’s real estate activities for purposes of meeting the 750-hour requirement for

each of petitioners’ taxable years 2005 and 2006, and (3) consequently petitioners’

claimed respective real estate losses for their taxable years 2005 and 2006 consti-

tuted passive losses under section 469.13 It is respondent’s position in the instant

proceeding that respondent’s litigating position was substantially justified because,

as of May 7, 2010, the date on which respondent filed the answer, through at least

December 17, 2010, petitioners had not claimed, let alone established, that Ms.

Trzeciak’s travel to her rental properties was from her “business home to the sites of

her business’ assets.”

      As we understand it, petitioners’ position at its core is that respondent’s

litigating position was not substantially justified because (1) petitioners presented

information to respondent during the administrative proceedings that Ms. Trzeciak

did work relating to her rental properties in petitioners’ residence, (2) respondent

thus had an obligation during those administrative proceedings, which respondent

       13
         Petitioners do not dispute that if Ms. Trzeciak’s travel time were not
included for purposes of determining whether she met the 750-hour requirement for
each of petitioners’ taxable years 2005 and 2006, petitioners’ claimed respective
real estate losses for their taxable years 2005 and 2006 would constitute passive
losses under sec. 469.
                                         - 34 -

failed to satisfy, to ask petitioners to provide respondent with documentation or other

substantiation establishing that Ms. Trzeciak maintained a work area or an office in

petitioners’ residence that qualified as Ms. Trzeciak’s section 280A principal place

of business and thus her tax home office, and (3) therefore respondent had that same

obligation before respondent filed the answer in the instant proceeding, which

respondent failed to satisfy.

      Before addressing each of petitioners’ contentions in support of their position,

we shall set forth our evaluation of Mr. Reagan’s affidavit on which petitioners rely.

In reading that affidavit, we understood Mr. Reagan to be claiming that he argued

during the administrative proceedings that Ms. Trzeciak’s travel time was between

her tax home office14 and her rental properties. Mr. Reagan did not make any such

       14
         In neither of the two documents that Mr. Reagan submitted on petitioners’
behalf to respondent during the administrative proceedings, which are the only such
documents that are part of the record (i.e., petitioners’ August 18, 2008 letter and
petitioners’ protest), did Mr. Reagan indicate to respondent’s representatives that
Ms. Trzeciak maintained a home office or an office in her home, let alone a tax
home office. We thus are unwilling to rely on the allegations in paragraphs 7, 9, 11,
and 15 of Mr. Reagan’s affidavit that he informed respondent’s representatives
during the administrative proceedings that Ms. Trzeciak had a so-called home
office. For the same reasons, we are unwilling to rely on similar allegations in
paragraphs 4, 5, 6, and 7 of Ms. Trzeciak’s affidavit. Even if Mr. Reagan’s
affidavit and Ms. Trzeciak’s affidavit were correct in stating that they informed
respondent’s representatives during the administrative proceedings that Ms.
Trzeciak maintained a home office or an office in petitioners’ residence in which she
did work relating to her real estate activities, nothing in the record establishes that
                                                                            (continued...)
                                          - 35 -

argument to respondent’s representatives during the administrative proceedings, as

evidenced, for example, by certain others of petitioners’ documents, such as petition-

ers’ August 18, 2008 letter and petitioners’ protest. During the Court’s telephonic

conference with counsel, the Court (1) informed them that we were unwilling to rely

on that affidavit to establish certain alleged facts therein and (2) gave them the

opportunity to ask the Court to hold an evidentiary hearing, which each of them

declined to do.

      With respect to petitioners’ contention that they presented information to

respondent during the administrative proceedings that Ms. Trzeciak did work relating

to her rental properties in petitioners’ residence, we agree that that fact is established

by the record.

      With respect to petitioners’ contention that, because petitioners presented

information to respondent during the administrative proceedings that Ms. Trzeciak

did work relating to her rental properties in petitioners’ residence, respondent had an

obligation during those proceedings, which respondent failed to satisfy, to ask

petitioners to provide respondent with documentation or other substantiation




      14
        (...continued)
petitioners attempted to, or did, show those representatives that any such office
qualified as a sec. 280A principal place of business and thus a tax home office.
                                        - 36 -

establishing that Ms. Trzeciak maintained a work area or an office in petitioners’

residence that qualified as Ms. Trzeciak’s section 280A principal place of business

and thus her tax home office, we disagree. We do not believe that respondent’s

knowledge during the administrative proceedings that Ms. Trzeciak did work relating

to her rental properties in petitioners’ residence imposed an obligation on respondent

to ask petitioners to provide respondent with documentation or other substantiation

establishing that Ms. Trzeciak maintained a work area or an office in that residence

that qualified under section 280A as her principal place of business and thus her tax

home office.15 It was petitioners’ obligation, and not respondent’s obligation, to

provide documentation or other substantiation establishing that Ms. Trzeciak

maintained a work area or an office in that residence that qualified under section

280A as her principal place of business and thus her tax home office to respondent.

Respondent’s revenue agent even reminded petitioners about their obligation when


       15
         Petitioners rely on Pizza Indus., Inc. v. Commissioner, T.C. Memo. 1999-
108, for the proposition that the Commissioner’s position is not substantially
justified where the Commissioner fails to adequately examine the information
presented by a taxpayer. In Pizza Indus., Inc., the Court held that the Commis-
sioner’s position was not substantially justified where the Commissioner did not
accept the taxpayer’s position as to why income was not taxable. In so holding, the
Court found that the Commissioner had failed to interpret properly the taxpayer’s
rights and obligations under two agreements. We find that case to be materially
distinguishable from the instant case and petitioners’ reliance on that case to be
misplaced.
                                         - 37 -

he alerted them in the revenue agent’s August 12, 2008 workpaper that they had

made “[n]o mention * * * of a space [in petitioners’ residence] that was used

regularly and exclusively for the taxpayer’s rental activities.” In reminding petition-

ers that they had made no mention of a “space [in petitioners’ residence] that was

used regularly and exclusively for the taxpayer’s rental activities”, respondent’s

revenue agent paraphrased the requirements of section 280A that, in order for any

area in petitioners’ residence where Ms. Trzeciak did work relating to her rental

properties to qualify as her section 280A principal place of business and thus her tax

home, petitioners had to show that that area was used “exclusively * * * on a regular

basis * * * as the principal place of business for any trade or business of the tax-

payer”. See sec. 280A(a), (c)(1)(A); see also supra note 6.

      The reminder that respondent’s revenue agent gave to petitioners and Mr.

Reagan in the revenue agent’s August 12, 2008 workpaper apparently fell on deaf

ears. Petitioners and Mr. Reagan ignored it completely in petitioners’ August 18,

2008 letter and in petitioners’ protest. Instead, in petitioners’ August 18, 2008 letter

to respondent’s revenue agent, in which petitioners responded to the revenue agent’s

August 12, 2008 workpaper, Mr. Reagan argued: “If the issue of commuting was

relevant to management of rental real estate, there would be some mention of it in the

IRS guidance. Absence of this implies that travel for rental property management is
                                         - 38 -

unique.” Similarly, in petitioners’ protest to respondent’s Appeals office, in which

petitioners protested the proposed determinations of respondent’s revenue agent, Mr.

Reagan argued: “The concept of ‘commuting’ does not apply to managing rental real

estate or being a Real Estate Professional.”16

      On the record before us, we find that during the administrative proceedings

respondent did not have the obligation that petitioners would impose on respondent


       16
         Both respondent’s revenue agent and respondent’s Appeals officer dis-
agreed with petitioners’ contention that the concept of “commuting” in the tax law
was not “relevant” and did not apply to a real estate professional or to managing
rental property. According to respondent’s representatives during the administrative
proceedings, Ms. Trzeciak’s travel time constituted “commuting” in the tax law.
Implicit in that position of respondent’s representatives was that any expenses
associated with that travel (Ms. Trzeciak’s travel expenses) are not deductible under
sec. 162. See, e.g., Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946). In
fact, respondent’s revenue agent explicitly pointed that out in his August 12, 2008
workpaper. In that workpaper, he stated: “[Ms. Trzeciak’s] [t]ravel time is
analogous to personal commute. It is well established the expenses for commuting
from home to work are personal and not deductible under IRC 162.” During the
administrative proceedings, although respondent’s representatives considered
whether Ms. Trzeciak’s travel time constituted “commuting” in the tax law and thus
whether Ms. Trzeciak’s travel expenses are deductible under sec. 162, the record in
the instant proceeding does not establish that they specifically considered whether
the so-called common overhead expenses that petitioners claimed in their respective
2005 Schedule E and 2006 Schedule E are deductible under that section. If they did
not, we presume that was because respondent was focused on whether petitioners’
claimed respective real estate losses for their taxable years 2005 and 2006, which
were calculated by taking into account, inter alia, those claimed common overhead
expenses, were passive losses under sec. 469. If those claimed losses were passive
losses under sec. 469, they would be disallowed for petitioners’ taxable years 2005
and 2006.
                                           - 39 -

to ask petitioners to provide respondent with documentation or other substantiation

establishing that Ms. Trzeciak maintained a work area or an office in petitioners’

residence that qualified as Ms. Trzeciak’s section 280A principal place of business

and thus her tax home office. On that record, we further find that respondent did not

have an obligation to do so before respondent filed the answer in the instant proceed-

ing. At the time respondent filed the answer, respondent knew that petitioners’

position during the administrative proceedings had been that the concept of “commut-

ing” in the tax law was not “relevant” and did not apply to a real estate professional

or to managing rental property. Moreover, although respondent’s counsel was aware

at that time that Ms. Trzeciak did work relating to Ms. Trzeciak’s real estate

activities in petitioners’ residence, petitioners did not even allege that fact in the

petition, indicating to respondent, and demonstrating to us, that petitioners did not

believe that to be a material fact in support of their position in the petition that the

Court should not sustain the determinations in the notice.

       We find that, in the light of the facts available to respondent at the time the

answer was filed and existing legal precedent, respondent’s position in this case had

a reasonable basis in both fact and law. We further find that respondent has met

respondent’s burden under section 7430(c)(4)(B)(i) of establishing that respondent’s
                                          - 40 -

litigating position was substantially justified with respect to the section 469 determi-

nation.17

       Petitioners argue that even if we were to find, which we have, that respon-

dent’s litigating position was substantially justified, they should be treated as the

“prevailing party” for purposes of section 7430(a) because of the so-called qualified

offer rule of section 7430(c)(4)(E). A party is to be treated under that latter section

as the “prevailing party” for purposes of section 7430(a) if “the liability of the

taxpayer pursuant to the judgment in the proceeding (determined without regard to

interest) is equal to or less than the liability of the taxpayer which would have been

so determined if the United States had accepted a qualified offer of the party”. Sec.

7430(c)(4)(E)(i). The qualified offer provision of section 7430(c)(4)(E) applies

without regard to whether the Commissioner’s position in the matter is substantially

justified. See Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48,

59 (2001), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003).

       Respondent argues that petitioners are not the “prevailing party” for purposes

of section 7430(a) under the qualified offer rule of section 7430(c)(4)(E). In support


       17
         The record does not establish what, if any, litigation costs petitioners’
attorneys incurred with respect to the sec. 6662(a) determination in the notice. We
find that petitioners are not entitled to an award under sec. 7430(a) with respect to
that determination.
                                            - 41 -

of that argument, respondent relies on the fact that the parties resolved the issues in

this case by settling them in the stipulation of settlement that they filed with the

Court.

         Section 7430(c)(4)(E)(ii)(I) provides that the qualified offer rule shall not

apply to “any judgment issued pursuant to a settlement”. Respondent conceded all

the determinations in the notice immediately after receiving the January 20, 2011

email, and the parties filed a stipulation of settlement on February 11, 2011. Because

the parties filed a stipulation of settlement, the parties did not file pretrial memoranda

by the date required in the Court’s standing pretrial order and they did not execute a

stipulation of facts for trial. We find that respondent’s concessions in the stipulation

of settlement constitute a settlement for purposes of section 7430(c)(4)(E)(ii)(I).18

         We find that petitioners are not the “prevailing party” for purposes of section

7430(a). We further find that petitioners have failed to carry their burden of estab-




         18
         Petitioners rely on Estate of Lippitz v. Commissioner, T.C. Memo. 2007-
293, in support of their argument that respondent’s concessions in the stipulation of
settlement should not be treated as a settlement for purposes of sec.
7430(c)(4)(E)(ii). In Estate of Lippitz, the Court held that a concession by the
Commissioner did not constitute a settlement where the taxpayer had made “multi-
ple settlement offers” and was forced to “actively litigate” the case by filing a
motion for partial summary judgment. We find that case to be materially distin-
guishable from the instant case and petitioners’ reliance on that case to be mis-
placed. See Gladden v. Commissioner, 120 T.C. 446, 449-450 (2003).
                                         - 42 -

lishing that they are entitled to an award of reasonable litigation costs under that

section.

      We have considered all of the parties’ contentions and arguments that are not

discussed herein, and we find them to be without merit, irrelevant, and/or moot.

      To reflect the foregoing,


                                                        An order denying petitioners’

                                                  motion and decision for petitioners will

                                                  be entered.
