1 References to sec. 7430 are to that section as amended by

sec. 1551 of the Tax Reform Act of 1986, Pub. L. 99-514, 100

Stat. 2085, 2752 (effective for proceedings commenced after Dec.

31, 1985), and by sec. 6239(a) of the Technical and Miscellaneous

Revenue Act of 1988, Pub. L. 100-647, 102 Stat. 3342, 3743-3746

(continued...)

T.C. Memo. 1997-537

UNITED STATES TAX COURT

JOHN E. AND CONCETTA LOZON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22764-94. Filed December 4, 1997.

V. Jean Owens, for petitioners.

G. Michelle Ferreira, for respondent.

MEMORANDUM OPINION

VASQUEZ, Judge: This case is before the Court on

petitioners' motion for litigation costs pursuant to section 7430

and Rule 231.1 Neither party requested a hearing on the motion. 
- 2 -

1 (...continued)

(effective with respect to proceedings commenced after Nov. 10,

1988). The petition in this case was filed on Dec. 8, 1994;

therefore, the provisions of 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), are

not applicable here. See Maggie Management Co. v. Commissioner,

108 T.C. 430 (1997). Unless otherwise indicated, references to

other sections are to the Internal Revenue Code in effect for the

years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

2 Respondent concedes that petitioners exhausted their

administrative remedies, substantially prevailed, and met the net

worth requirements. 

Accordingly, we rule on petitioners' motion based on the parties'

submissions and the existing record. Rule 232(a)(1). The

portions of our opinion on the merits in the instant case, Lozon

v. Commissioner, T.C. Memo. 1997-250 (Lozon I), that are relevant

to our disposition of this motion are incorporated herein by this

reference.

After concessions,2 the issues for decision are: (1)

Whether petitioners are the prevailing party in the underlying

tax case; (2) whether petitioners unreasonably protracted the

Court's proceeding; and (3) whether the amounts of litigation

costs claimed by petitioners are reasonable.

Background

Petitioners were Neighborhood Office Agents (NOA's) of

Allstate Insurance Co. (Allstate). The substantive issues in

Lozon I were: (1) Whether petitioners performed services for

Allstate as employees or as independent contractors
- 3 -

3 We note that respondent raised the pension and the selfemployment tax issues in the answer.

(classification issue); (2) whether contributions made by

Allstate to its pension plan and the Sears Savings and Profit

Sharing Fund (the plans) on behalf of Mrs. Lozon were taxable to

her when vested (pension issue); and (3) whether petitioners

should be credited with payroll taxes withheld from their income

by Allstate and payroll taxes paid by Allstate (employer's

matching portion) in calculating petitioners' self-employment tax

liability (self-employment tax issue).3 We held that petitioners

were independent contractors, the contributions to the plans by

Allstate were not taxable, and petitioners could not offset their

self-employment tax liability by Allstate's matching portion of

the employment taxes but could for their portion of employment

tax payments to the extent allowed by section 6521.

Discussion

Section 7430 provides for the award of 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 administrative remedies, (3) did

not unreasonably protract the administrative or judicial

proceeding, and (4) claimed reasonable administrative and
- 4 -

litigation costs. Sec. 7430(a), (b)(1), (4), (c). 

Petitioners bear the burden of proving that each of the foregoing

requirements has been satisfied. Rule 232(e). These

requirements are conjunctive, and failure to satisfy any one will

preclude an award of costs to petitioners. Minahan v.

Commissioner, 88 T.C. 492, 497 (1987).

I. Prevailing Party

To be a "prevailing party", a taxpayer must establish that: 

(1) The position of the United States was not substantially

justified; (2) the taxpayer substantially prevailed with respect

to either the amount in controversy or the most significant issue

or set of issues presented; and (3) the taxpayer met the net

worth requirements of 28 U.S.C. sec. 2412(d)(2)(B) (1994) at the

time the petition in the case was filed. Sec. 7430(c)(4)(A). 

As we stated earlier, respondent concedes that petitioners

substantially prevailed and met the net worth requirements. 

Petitioners contend that respondent's position, that NOA's were

employees of Allstate, was not substantially justified because

respondent advanced this same position previously and lost on the

identical issue several times, citing Mosteirin v. Commissioner,

T.C. Memo. 1995-367 (Mosteirin I); Smithwick v. Commissioner,

T.C. Memo. 1993-582, affd. per curiam sub nom. Butts v.

Commissioner, 49 F.3d 713 (11th Cir. 1995); and Butts v.

Commissioner, T.C. Memo. 1993-478, affd. per curiam 49 F.3d 713

(11th Cir. 1995) (the prior Allstate cases). Respondent argues
- 5 -

that the Court has rejected this argument and has held that

respondent's position in the prior Allstate cases was

substantially justified, citing Mosteirin v. Commissioner, T.C.

Memo. 1995-419 (Mosteirin II). Respondent further contends that

the pension and self-employment tax issues were new issues which

were not litigated in the prior Allstate cases, that the pension

and self-employment tax issues are supported by a reasonable

basis in law and fact, and that it was necessary to try the

classification issue together with the pension and selfemployment tax issues.

Petitioners are not seeking an award of administrative

costs. Therefore, we need only examine the question of whether

respondent's litigation position was substantially justified. 

See Swanson v. Commissioner, 106 T.C. 76, 86 (1996).

A. Position of the United States

The position taken by the United States, for purposes of

litigation costs, is the position of the United States in a

judicial proceeding. Sec. 7430(c)(7)(A). Respondent took his

position in the judicial proceeding herein on the date

respondent's answer was filed--February 6, 1995. See Huffman v.

Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part

and revg. in part T.C. Memo. 1991-144.

B. Substantial Justification

The substantially justified standard is "essentially a

continuation of the prior law's reasonableness standard." 
- 6 -

4 Although the dispute in Pierce v. Underwood, 487 U.S. 552

(1988), arose under the provisions of the Equal Access to Justice

Act (EAJA), 28 U.S.C. sec. 2412(d) (1994), the relevant

provisions of the EAJA are almost identical to the language of

sec. 7430. Powers v. Commissioner, 43 F.3d 172, 183 (5th Cir.

1995), affg. in part and revg. in part T.C. Memo. 1993-125. We,

therefore, consider the holding in Pierce v. Underwood, supra, to

be applicable to the case before us. Cozean v. Commissioner, 109

T.C. ____ (1997).

Swanson v. Commissioner, supra at 86. A position is

substantially justified if it is justified to a degree that could

satisfy a reasonable person and has a reasonable basis in both

fact and law. Pierce v. Underwood, 487 U.S. 552, 565 (1988);4

Huffman v. Commissioner, supra at 1147; Swanson v. Commissioner,

supra at 86. A position that merely has enough merit to avoid

sanctions for frivolousness will not satisfy this standard. 

Pierce v. Underwood, supra at 566.

The determination of reasonableness is based on all of the

facts and circumstances surrounding the proceeding and the legal

precedents relating to the case. 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. 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
- 7 -

the Commissioner's position and conduct requires considering what

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

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

930 (1985).

The fact that the Commissioner loses on the merits or

concedes the case does not establish that a position was not

substantially justified; however, it is a factor to be

considered. Powers v. Commissioner, 100 T.C. 457, 471 (1993).

The Court has adopted an issue-by-issue approach to section

7430, apportioning the requested awards between those issues for

which the Commissioner was and those issues for which the

Commissioner was not substantially justified. See Powers v.

Commissioner, 51 F.3d 34, 35 (5th Cir. 1995); Swanson v.

Commissioner, supra at 102; see also sec. 301.7430-5(c)(2),

Proced. & Admin. Regs. We follow that approach here and

separately discuss whether respondent's position on the

classification issue, pension issue, and self-employment tax

issue was not substantially justified.

1. Classification Issue

This Court, in Mosteirin II, ruled that the Commissioner was

substantially justified in litigating the employee versus

independent contractor issue in a case involving NOA's of

Allstate even though the Commissioner had unsuccessfully taken

the identical position in this Court twice before. We noted that

the motion for costs presented a close case and that our opinion
- 8 -

in Butts v. Commissioner, supra, invited the presentation of

additional evidence--evidence the Commissioner put forward in

Mosteirin I. We concluded it was not unreasonable for the

Commissioner to try to sustain the position because these

additional facts were not before the Court in Butts and Smithwick

v. Commissioner, supra. Furthermore, Butts and Smithwick were on

appeal when the trial in Mosteirin I was held. In concluding

that the Commissioner was substantially justified, we cited Moore

v. Commissioner, T.C. Memo. 1989-306, which held that the

Government's position is not unreasonable when testimony is

needed to clarify a factual controversy. 

The Court further noted that since the trial in Mosteirin I

the U.S. Court of Appeals for the Eleventh Circuit affirmed our

decisions in Butts and Smithwick, we reaffirmed our view in

Mosteirin I, and these developments should have facilitated

resolution of the classification issue in other cases involving

NOA's of Allstate. The Court left "'for another day the decision

whether costs and fees should be available in a case in which

respondent continues to advocate a position * * * previously

judicially * * * disapproved'". Mosteirin v. Commissioner, T.C.

Memo. 1995-419 (quoting Mearkle v. Commissioner, 87 T.C. 527, 533

n.10 (1986), revd. on other grounds 838 F.2d 880 (6th Cir.

1988)). That day has come.

In Lozon I, we found that there were no essential facts

distinguishable from those presented in Butts and no legal
- 9 -

5 We do not find convincing respondent's bald assertion

that it was necessary.

6 Respondent also argues that the Government was

substantially justified in litigating the classification issue

because the Court correctly articulated the applicable legal

standard in Butts v. Commissioner, T.C. Memo. 1993-478, affd. per

curiam 49 F.3d 713 (11th Cir. 1995), and Smithwick v.

Commissioner, T.C. Memo 1993-582, affd. per curiam sub nom. Butts

v. Commissioner, 49 F.3d 713 (11th Cir. 1995), as one of the

right to control the insurance agency, but we did not correctly

apply the legal test to the NOA's in those two cases. 

Respondent's argument relies on our statement in Lozon I that

respondent was half right. Respondent understands this statement

to mean that the Court agreed that we misapplied the test. 

Respondent is mistaken. In stating that respondent was half

right, we meant that respondent was correct in noting that the

Court articulated the applicable legal standard, but was

incorrect in asserting that we misapplied the test. Thus,

(continued...)

arguments presented by respondent that were not addressed and

rejected in Butts and Mosteirin I. Additionally, no factual

controversy remained after Mosteirin I. Respondent knew, and

indeed agreed, that the facts were indistinguishable from the

prior Allstate cases. Given that these facts were available to

respondent, legal precedents did not substantially support

respondent's position.

Furthermore, we do not agree that it was necessary for

respondent to try the pension and self-employment tax issues

together with the classification issue.5 

It is time for respondent to suffer the consequences of

continually advocating a position previously judicially

disapproved. We conclude that respondent's position regarding

the classification issue was not substantially justified.6
- 10 -

6 (...continued)

respondent's argument is without merit.

7 Respondent did not argue that this case was an

appropriate vehicle for attempting to obtain a conflict among the

circuits that would be "meaningful" within the terms of Keasler

v. United States, 766 F.2d 1227, 1237 (8th Cir. 1985). See

Mosteirin v. Commissioner, T.C. Memo. 1995-419. Therefore, this

issue is not before the Court.

Therefore, petitioners are the prevailing party with regard to

the classification issue.7

2. Pension and Self-Employment Tax Issues

As we stated earlier, petitioners bear the burden of proving

that respondent's position was not substantially justified. Rule

232(e). Petitioners present no arguments on whether respondent's

positions regarding the pension and self-employment tax issues

were not substantially justified. Petitioners fail to meet their

burden. Therefore, petitioners are not the prevailing party with

regard to the pension and self-employment tax issues.

II. Unreasonably Protracting the Proceedings

Respondent argues that petitioners unreasonably protracted

the proceedings because petitioners conceded on brief that they

were liable for taxes on certain fringe benefits provided to them

by Allstate.

Respondent raised this issue in the answer. The trial in

the underlying case lasted only 1.5 hours, and virtually no trial

time was spent on the fringe benefits issue.
- 11 -

8 In any event, even assuming petitioners protracted the

proceeding in regard to this issue, sec. 7430(b)(4), because it

speaks in terms of a "portion" of a proceeding, would not bar

recovery for costs attributable to litigating the classification

issue.

On the basis of the parties' submissions and the record as a

whole, we conclude that petitioners did not unreasonably protract

the proceedings.8

III. Reasonable Litigation Costs

Petitioners submitted a statement from their attorney, V.

Jean Owens, which itemized 56.5 hours he worked on the case, 32

hours of paralegal time, and $1,227.22 in fees and costs incurred

from November 8, 1995, through June 9, 1997 (the itemized

statement). Mr. Owens billed his time at a rate of $175 per

hour, and the paralegal billed at a rate of $65 per hour. 

Petitioners' motion, however, requests the award of 71 attorney

hours at the rate of $110 per hour, 37 paralegal hours at the

rate of $65 per hour, and $1,247.22 in costs.

Section 7430(c)(1) defines reasonable litigation costs, in

part, as reasonable fees paid or incurred for the services of

attorneys in connection with the court proceeding. Section

7430(c)(1)(B)(iii) limits the hourly rate for attorney's fees to

$75, with allowances for a higher rate for increases in the cost

of living and other special factors (such as the limited

availability of qualified attorneys).
- 12 -

Petitioners argue that they are entitled to a higher than

statutory rate for the hours their attorney billed because their

attorney has practiced in the tax controversy arena for over 30

years and their case involved intricate tax matters. Respondent

counters that tax expertise does not qualify as a special factor

which would allow the Court to award fees at an increased rate. 

Respondent further argues that the travel costs incurred by

petitioners' attorney were unnecessary and that a rate of $65 per

hour for a paralegal is excessive because it is "substantially

close" to the statutory rate allowable for attorneys.

A. Special Factor

To preserve the intended effectiveness of the $75 cap, any

"special factor" should not be of broad and general application.

Pierce v. Underwood, 487 U.S. at 573; Powers v. Commissioner, 100

T.C. at 489.

In order for the "limited availability of qualified

attorneys" to constitute a special factor warranting departure

from the $75 cap, there must be a limited availability of

attorneys who possess distinctive knowledge or a specialized

skill needful to the particular litigation in question, as

opposed to an extraordinary level of general lawyerly knowledge

and ability useful in all litigation. Pierce v. Underwood, supra

at 572; Cozean v. Commissioner, 109 T.C. ___ (1997). Factors

such as the novelty and difficulty of the issues, the

undesirability of the case, the work and ability of counsel, the
- 13 -

results obtained, and the customary fees and awards in other

cases should not be considered for the purpose of determining

whether an increased award is warranted. Pierce v. Underwood,

supra at 573; Cozean v. Commissioner, supra; see also sec.

301.7430-4(b)(3)(iii)(B), Proced. & Admin. Regs. Likewise, it is

not a special factor if hourly rates for all lawyers in the

relevant city or area exceed $75. Pierce v. Underwood, supra at

571-572; Powers v. Commissioner, 100 T.C. at 489. 

General expertise in tax law in itself is not a special

factor warranting a fee award in excess of $75 per hour under

section 7430. Huffman v. Commissioner, 978 F.2d at 1150; Powers

v. Commissioner, 100 T.C. at 489. Depending on the facts and

circumstances of the case, however, we may find that a tax

attorney had a special skill and expertise needful for the

litigation in question. Powers v. Commissioner, 100 T.C. at 489.

Although the issues presented in Lozon I may have required

petitioner to secure the services of a competent tax attorney,

this finding, standing alone, does not demonstrate the presence

of a special factor which would justify an increased award under

section 7430. See Powers v. Commissioner, 43 F.3d 172, 183 (5th

Cir. 1995), affg. in part and revg. in part T.C. Memo. 1993-125;

Cozean v. Commissioner, supra. Petitioners have failed to

establish that Mr. Owens possessed any nonlegal or technical

abilities apart from his expertise in tax law. See Powers v.

Commissioner, 43 F.3d at 183; Cozean v. Commissioner, supra. 
- 14 -

Petitioners, therefore, have failed to establish that a special

factor existed which justifies an award in excess of the maximum

rate provided in section 7430(c)(1)(B)(iii).

B. Cost of Living Adjustment

We have held that 1981 is the appropriate base year for

calculating cost of living increases under section

7430(c)(1)(B)(iii). Bayer v. Commissioner, 98 T.C. 19, 23

(1992). This case, however, is appealable to the Court of

Appeals for the Ninth Circuit, and that court has held that 1986

is the appropriate base year for calculating cost of living

increases under section 7430. Huffman v. Commissioner, supra at

1151. We follow that holding here. Golsen v. Commissioner, 54

T.C. 742, 756-757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

We use the Consumer Price Index of All Urban Consumers (CPIU) published by the U.S. Department of Labor, Bureau of Labor

Statistics, to adjust the $75 hourly limit for increases in the

cost of living. Powers v. Commissioner, 100 T.C. at 491. We

award petitioners attorney's fees at an hourly rate not to exceed

$104.29 for 1995 and $107.37 for 1996. See Galedrige Constr.,

Inc. v. Commissioner, T.C. Memo. 1997-485.

C. Apportioning the Award

As was stated above, the Court has adopted an issue-by-issue

approach to section 7430, apportioning the requested award

between those issues for which the Commissioner was, and those

issues for which the Commissioner was not, substantially
- 15 -

9 Approximately 10 pages of the argument section and 4

pages of the findings of fact section were dedicated to the

classification issue whereas approximately 13 pages of the

argument section and 2 pages of the findings of fact section were

dedicated to the pension or self-employment tax issues. The rest

of the brief, which dealt with preliminary matters, background

matters, and other issues, is negligible in amount.

10 Approximately eight pages of the argument section and

(continued...)

justified. See Powers v. Commissioner, 51 F.3d at 35; Swanson v.

Commissioner, 106 T.C. at 102; see also sec. 301.7430-5(c)(2),

Proced. & Admin. Regs. In calculating the amount to award, we

look to the issues on which petitioners prevailed. Powers v.

Commissioner, 51 F.3d at 35. This case involved one primary

issue (the classification issue) and two alternate issues (the

pension and self-employment tax issues). Petitioners were the

prevailing party only on the classification issue; therefore, we

shall not award any fees or costs related to the pension or selfemployment tax issues.

We do not assign all issues equal weight because the time

and expense spent on each issue was not the same. This is

evidenced by the following: The primary issue in Lozon I was the

classification issue; virtually 100 percent of the trial was

dedicated to the classification issue; approximately 50 percent

of petitioners' original brief was dedicated to the

classification issue;9 and approximately 85 percent of

petitioners' reply brief was dedicated to the classification

issue.10 Therefore, based on a review of the entire record,
- 16 -

10 (...continued)

four pages of petitioners' response to respondent's requested

findings of fact section were dedicated to the classification

issue whereas approximately two pages of the argument section

were dedicated to the pension or self-employment tax issues. The

rest of the brief is negligible in amount.

where the itemized statement does not expressly state which issue

the fees or cost relates to, we shall allocate 80 percent to the

classification issue and 20 percent to the pension or selfemployment tax issues. See id.

D. The Fees and Costs Requested

1. Attorney's Fees: 1995

The itemized statement shows that petitioners' attorney

billed 20 hours between November 8 and December 31, 1995. Two of

these hours, billed on December 1, 1995, relate to the "benefits

issue". We shall not award fees for these hours. We find the

remaining 18 hours listed on the itemized statement to be

reasonable in amount; therefore, we award 80 percent of these

hours.

2. Attorney's Fees: 1996

The itemized statement shows that petitioners' attorney

billed 36.5 hours between January 1 and December 31, 1996. One

of these hours, billed on January 2, 1996, relates to the

classification issue. We award 100 percent of this time. Six of

these hours, billed on January 23, March 1, 7, 8, 18, 19, 28, 29,

and April 1 and 5 of 1996, relate to the pension issue. We shall

not award fees for these hours. We find the remaining 29.5 hours
- 17 -

11 Respondent argues that petitioners incurred additional

and unnecessary expenses for their attorney's travel to and from

the trial. The attorney lived and worked in Florida, and the

trial was held in California. We do not believe that it is

unreasonable for taxpayers to hire nonlocal tax counsel. This is

especially true in this case because petitioners' attorney was

the attorney of record in Butts v. Commissioner, T.C. Memo. 1993-

478, and Smithwick v. Commissioner, T.C. Memo. 1993-582.

12 Respondent's argument that the paralegal's rate is

substantially close to the statutory limit allowable for

attorneys is unpersuasive--this is especially true after

adjusting the statutory limit upwards for increases in the cost

of living.

listed on the itemized statement to be reasonable in amount. 

Therefore, we award 80 percent of these hours.11

3. Additional Attorney's Fees

Petitioners also requested an additional 14.5 hours of

attorney's fees which were not listed on the itemized statement. 

Petitioners presented no detailed explanation of the services

provided during these hours. We shall not award fees for these

hours. Rule 231(d); Powers v. Commissioner, 100 T.C. at 492.

4. Paralegal Fees

This Court has awarded fees for law clerks and paralegals. 

Powers v. Commissioner, 100 T.C. at 493. In our discretion, we

may decide the appropriate hourly rate for paralegal's and law

clerk's fees. See id. (applying a single hourly rate of $50). 

We believe that a rate of $65 per hour for paralegals is

reasonable and award petitioners paralegal's fees at that rate.12

Petitioners' paralegal billed 32.8 hours between November 8,

1995, and June 9, 1997. Four-tenths (0.4) of 1 hour, billed on
- 18 -

November 27, 1995, was for a "telephone conference with the

United States Court of Appeals re: rules and admission". The

record does not show why such a call was necessary, why

petitioners' attorney would need the rules of, or to be admitted

to, a Court of Appeals, or which Court of Appeals the paralegal

called. We shall not award fees for this time. Three-tenths

(0.3) of one hour, billed on March 19, 1996, relates to the

pension issue. We shall not award fees for this time. We find

the remaining 32.1 hours listed on the itemized statement to be

reasonable in amount; therefore, we award 80 percent of these

hours.

Petitioners also requested an additional 5 hours of

paralegal's fees which were not listed on the itemized statement. 

Petitioners presented no detailed explanation of the services

provided during these hours. We shall not award fees for these

hours. Rule 231(d); Powers v. Commissioner, 100 T.C. at 492.

5. Miscellaneous Litigation Costs

Petitioners request reimbursement for $24.20 in costs

related to "Federal Express". Petitioners have offered no reason

for their attorney's use of Federal Express instead of the U.S.

Postal Service. Petitioners have failed to prove the necessity

of such costs, and we shall not award any litigation costs for

these expenses. See Cassuto v. Commissioner, 93 T.C. 256, 275

(1989), affd. in part and revd. in part on other grounds 936 F.2d

736 (2d Cir. 1991).
- 19 -

13 While we may not usually award costs for hotel and

airplane ticket expenses, we find these costs to be reasonable

based upon all of the facts and circumstances present in this

case. See supra note 11.

Petitioners also requested an additional $20 which was not

listed as a cost in the itemized statement. Petitioners

presented no detailed explanation of what this cost related to. 

We shall not award this amount. Rule 231(d); Powers v.

Commissioner, 100 T.C. at 492.

The itemized statement shows $1,203.02 in costs for fax,

postage, parking and taxi, photocopying, hotel, transcript, and

airplane ticket expenses.13 We find these amounts to be

reasonable; therefore, we award 80 percent of these costs.

To reflect the foregoing,

 An appropriate order

will be issued.