1 Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code as amended, and Rule references

are to the Tax Court Rules of Practice and Procedure. 

T.C. Summary Opinion 2002-135

UNITED STATES TAX COURT

MICHAEL O’KEEFE SOWELL, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2307-01S. Filed October 17, 2002.

Michael O’Keefe Sowell, pro se.

Angelique M. Neal, for respondent.

COUVILLION, Special Trial Judge: This case was heard

pursuant to section 7463 of the Internal Revenue Code in effect

at the time the petition was filed.1 The decision to be entered

is not reviewable by any other court, and this opinion should not

be cited as authority. Petitioner filed a motion for claims for
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2 The Forms W-2G on which the deficiency is based have not

been offered into evidence. 

litigation and administrative costs pursuant to section 7430 and

Rule 231. Neither party has requested a hearing, and the Court

sees no need for an evidentiary hearing on this matter. Rule

232(a)(2). Accordingly, the Court considers petitioner’s motion

based on the parties’ submissions and the existing record. Rule

232(a)(1). Petitioner’s legal residence at the time the petition

was filed was Los Angeles, California. 

Respondent conceded the deficiency on the date the case was

called from the calendar for trial. The case arises from a

dispute over gambling winnings. In the notice of deficiency,

respondent determined a deficiency of $1,044 in Federal income

tax and a section 6651(a)(1) addition to tax of $29 for

petitioner’s 1998 tax year based on petitioner’s failure to

report gambling winnings in the amount of $5,642 for that year. 

The gambling winnings had been reported to respondent by a

third-party payor, Gulf Greyhound Park, of Lamarque, Texas, based

on Forms W-2G, Certain Gambling Winnings, issued to petitioner.

According to respondent, the Forms W-2G appeared to be signed by

petitioner.2 Petitioner did not include the payments in gross

income on his Federal income tax return for 1998. Respondent

sent petitioner notification of proposed changes to his 1998

income tax return to include the gambling winnings. The
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3 Respondent stated that petitioner’s refusal was based on the

(continued...)

notification gave the basis for the proposed changes and informed

petitioner of his appeal rights. Petitioner did not avail

himself of these available administrative remedies, nor did he

otherwise respond to the notification. A notice of deficiency

was issued on November 29, 2000. 

Thereafter, petitioner timely petitioned this Court, denying

he had ever gambled at Gulf Greyhound Park. Petitioner averred

that he was from California and had formerly been employed by

Gulf Greyhound Park. He left Texas in December 1997. After

receiving the notification from respondent, petitioner returned

to Texas to try to resolve the problem but claims he was harassed

by Gulf Greyhound Park security personnel and the Hitchcock

Police Department and then arrested. 

Following the petition to this Court, the case was referred

to respondent’s Appeals Office. The Appeals officer investigated

petitioner’s explanation by obtaining copies of Forms W-2G and

video surveillance footage of the individual who placed the bets

at issue from Gulf Greyhound Park. Respondent’s Appeals Office

then determined that the evidence was not sufficient to establish

that petitioner received the gambling winnings at issue. 

Respondent offered petitioner a complete concession of the

deficiency on July 25, 2001. Petitioner rejected the offer.3
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3(...continued)

fact that petitioner had a pending civil case against Gulf

Greyhound Park in Texas. Petitioner did not offer any

explanation to the Court as to why he declined respondent’s offer

of concession.

Respondent also offered to concede the case during the trial

preparation process. Petitioner refused to accept.

At the calendar call of this case, respondent conceded the

deficiency, and petitioner subsequently filed a motion for costs. 

In his motion, petitioner claimed $5,000. The motion listed the

following synopsis of events and summary of expenses claimed,

totaling $5,356:

Date Amount Description

11-29-00 N/A Letter of deficiency

12-8-00 $ 138 Bus from Los Angeles

12-9-00 350 3 weeks motel TX

12-12-00 20 Taxi to Gulf Greyhound Park

12-15-00 1,000 Collusion

12-15-00 1,000 Defamations

12-15-00 2,000 False imprisonment, two days

 $1,000 per day

12-16-00 251 Bond out of jail

12-16-00 300 Phone calls

1-2-01 60 Court and paper work

1-5-01 77 Bus to Los Angeles

 from LaMarque, TX

1-09-01 100 Petition

12-3-01 60 Went to Tax Court

A taxpayer who substantially prevails in an administrative

or court proceeding may be awarded a judgment for reasonable

costs incurred in such proceedings. Sec. 7430(a)(1) and (2). A
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4 This requirement does not apply to an award for reasonable

administrative costs. Sec. 7430(b)(1).

judgment may be awarded under section 7430 if a taxpayer (1) was

the “prevailing party”, (2) exhausted the administrative remedies

available to the taxpayer within the Internal Revenue Service,4

and (3) did not unreasonably protract the proceedings. Sec.

7430(a) and (b)(1), (3). Respondent’s position is that

petitioner is not a “prevailing party”, failed to exhaust his

administrative remedies, and unreasonably protracted the

proceedings.

For a taxpayer to qualify as the “prevailing party”, it must

be established that (1) the position of the United States in the

proceeding was not substantially justified, (2) the taxpayer has

substantially prevailed with respect to the amount in controversy

or with respect to the most significant issue or set of issues

presented, and (3) the taxpayer satisfied the applicable net

worth requirements. Sec. 7430(c)(4)(A). Respondent concedes the

second and third of these criteria. Respondent argues, however,

that the position taken by the United States against petitioner

was substantially justified. Rule 232(e); Dixson Intl. Service

Corp. v. Commissioner, 94 T.C. 708, 714-715 (1990); Gantner v.

Commissioner, 92 T.C. 192, 193 (1989), affd. 905 F.2d 241 (8th

Cir. 1990).
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Accordingly, the threshold issue is whether the position of

the United States in the proceeding was substantially justified. 

Sec. 7430(c)(4)(A) and (B). The parties agree that, under

section 7430, the burden of proof rests with respondent to

establish that respondent’s position was substantially justified.

To determine whether respondent has met this burden, the

Court must first identify the point in time at which the United

States is considered to have taken a position and then decide

whether the position taken from that point forward was

substantially justified. The “not substantially justified”

standard is applied as of the separate dates that respondent took

a position in the administrative proceeding as distinguished from

the proceeding in this Court. Sec. 7430(c)(7)(A) and (B); Han v.

Commissioner, T.C. Memo. 1993-386.

With respect to a claim for reasonable administrative costs,

the position of the United States means the position taken by the

United States in any administrative proceeding to which section

7430 applies as of the earlier of (1) the date of the receipt by

the taxpayer of the decision of the IRS Appeals Office, or (2)

the date of the notice of deficiency. Sec. 7430(c)(7)(B). In

this case, petitioner did not take an administrative appeal. No

notice of decision of the IRS Appeals Office was issued or

received by petitioner prior to the date of the notice of

deficiency. Therefore, for purposes of the administrative
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proceeding, respondent is considered to have taken a position on

the date the notice of deficiency was issued, November 29, 2000. 

Respondent’s position with regard to a request for

litigation costs is generally the position taken in the answer. 

Huffman v. Commissioner, 978 F.2d 1139, 1144-1147 (9th Cir.

1992). Here, because petitioner elected to have the case heard

under section 7463, no answer was required of respondent. Rule

175(b). Accordingly, respondent's position for the purpose of

the motion is the position maintained by respondent during the

pendency of this case. There is nothing in the record that

suggests that respondent's position changed from that taken in

the notice of deficiency so these positions are, in effect, the

same. Respondent’s position was that petitioner had $5,482 in

gambling income in 1998 that had not been reported. The Court,

therefore, simply considers whether such position was

substantially justified. Maggie Mgmt. Co. v. Commissioner, 108

T.C. 430, 442-443 (1997); Pittman v. Commissioner, T.C. Memo.

1999-389.

Whether the Commissioner's position was substantially

justified turns on a finding of reasonableness, based upon all

the facts and circumstances, as well as the legal precedents

relating to the case. Pierce v. Underwood, 487 U.S. 552, 565

(1988); Sher v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861
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F.2d 131 (5th Cir. 1988). A position is substantially justified

if the position is “justified to a degree that could satisfy a

reasonable person.” Pierce v. Underwood, supra at 565; Powers v.

Commissioner, 100 T.C. 457, 473 (1993), affd. in part and revd.

in part 43 F.3d 172 (5th Cir. 1995). A position that merely

possesses enough merit to avoid sanctions for frivolousness will

not satisfy this standard; rather, it must have a “reasonable

basis both in law and fact”. Pierce v. Underwood, supra at 565.

The Court must “consider the basis for respondent’s legal

position and the manner in which the position was maintained.” 

Wasie v. Commissioner, 86 T.C. 962, 969 (1986). The fact that

the Commissioner eventually loses or concedes the case does not

establish an unreasonable position. Sokol v. Commissioner, 92

T.C. 760, 767 (1989); Baker v. Commissioner, 83 T.C. 822, 828

(1984), vacated on other issues 787 F.2d 637 (D.C. Cir. 1986).

However, it remains a factor that may be considered. Estate of

Perry v. Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991);

Powers v. Commissioner, supra at 471. The reasonableness of the

Commissioner’s position and conduct necessarily requires

considering what the Commissioner knew at the time. Compare

Rutana v. Commissioner, 88 T.C. 1329, 1334 (1987), with DeVenney

v. Commissioner, 85 T.C. 927, 930 (1985).
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In his motion, petitioner does not distinguish between

reasonableness “as a matter of law” or “as a matter of fact”. 

The Court assumes that petitioner intended to dispute the

reasonableness of respondent’s position both in law and in fact. 

Consequently, the Court treats the two separate items in

conjunction with each other. See Kingston v. Commissioner, T.C.

Memo. 1998-119.

In determining the deficiency against petitioner, respondent 

acted upon third party information from a credible source, the

establishment where the alleged gambling took place. In

addition, the Forms W-2G appeared to bear petitioner’s signature. 

Respondent’s initial determination that petitioner had failed to

report gambling winnings was based on this information. This

reliance on apparently credible third party information was

reasonable, since at that time it had not been refuted by

petitioner. See, e.g., Uddo v. Commissioner, T.C. Memo. 1998-276

(IRS justified in relying on Form 1099-R issued by a third

party); Andrews v. Commissioner, T.C. Memo. 1998-316 (IRS could 

rely on Forms W-2 and 1099 to support deficiency where its action

was not arbitrary and where taxpayer failed to file tax returns);

Schaeffer v. Commissioner, T.C. Memo. 1994-206 (IRS’ disallowance

of deductions was not arbitrary where taxpayers failed to provide

information substantiating the items).
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Moreover, respondent investigated petitioner’s denial of

having gambled at Gulf Greyhound Park at the first available

opportunity, and the results of respondent’s investigation were

sufficient to convince respondent to concede the case. Twice,

respondent made an offer of full concession to petitioner. 

Twice, petitioner refused. The Court understands petitioner’s

frustration in having to endure the investigation and proceedings

and expend effort and resources to resolve it. However,

respondent did his part to clear up the matter. Although

respondent ultimately determined that the evidence was

insufficient to establish that petitioner received the gambling

income at issue, respondent is allowed reasonable time to

receive, analyze, and act upon documentation that proves

petitioner’s contentions before he is obligated to concede the

case. Gealer v. Commissioner, T.C. Memo. 2001-180. The Court

also notes that petitioner ignored the notification originally

sent to him by respondent prior to the issuance of the notice of

deficiency. Had petitioner responded earlier, the entire matter

could have been disposed of without the issuance of a notice of

deficiency and subsequent court proceeding. See Corkrey v.

Commissioner, 115 T.C. 366, 375 (2000).

Respondent’s actions in this case fall within the boundaries

of what is reasonable. Respondent has shown that his position
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5 Given these conclusions, the Court sees no need to address

whether petitioner unreasonably protracted the proceedings. 

was substantially justified. Therefore, petitioner is not a

“prevailing party” under section 7430. Petitioner is not

entitled to recover administrative and litigation costs.

Even if petitioner were the prevailing party, he could not

recover costs. Petitioner did not exhaust the administrative

remedies available to him within the Internal Revenue Service. 

He did not respond to the notification sent to him prior to the

issuance of the notice of deficiency. See sec. 301.7430-1(b)(1),

Proced. & Admin. Regs. He participated in the appeals process

only after his petition was filed at this Court and the matter

was referred to an Appeals officer. Petitioner is not entitled

to administrative or litigation costs, and his motion will be

denied.5

Reviewed and adopted as the report of the Small Tax Case

Division.

An appropriate order and

decision will be entered.