T.C. Memo. 1997-458

UNITED STATES TAX COURT

COLLIN L. DUGAN, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10582-94. Filed October 8, 1997.

Larry D. Crabtree and Patrick M. Thomas, for

petitioner.

William W. Kiessling and Robert Nader, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Lewis R. Carluzzo pursuant to section 7443A(b)(4) of the

Internal Revenue Code, as amended, and Rules 180, 181, and 183 of
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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

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

1988). Because the petition in this case was filed on June 20,

1994, the provisions of the Taxpayer Bill of Rights 2, Pub. L.

104-168, sec. 701, 110 Stat. 1452, 1463-1464 (1996), which

amended sec. 7430 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, as amended and in effect for the year

1991. Rule references are to the Tax Court Rules of Practice and

Procedure.

the Tax Court Rules of Practice and Procedure. The Court agrees

with and adopts the opinion of the Special Trial Judge, which is

set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

CARLUZZO, Special Trial Judge: This case is before the

Court on petitioner's motion for administrative and litigation

costs pursuant to section 7430 and Rule 231.1

In separate notices of deficiency respondent determined

deficiencies in petitioner's 1988 and 1991 Federal income taxes

in the amounts of $15,292 and $30,508, respectively. Prior to

trial the parties filed a stipulation of settled issues which

addressed all of the adjustments in the notices of deficiency. 

In conjunction with the filing of the stipulation of settled

issues, petitioner filed a motion for litigation costs. Because

petitioner's motion includes a claim for amounts expended for

legal fees and related expenses between the dates that the
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notices of deficiency were issued and the petition was filed, as

well as for costs incurred thereafter, we consider petitioner's

motion as a motion for administrative and litigation costs.

Background

Petitioner and Wanda M. Dugan are husband and wife who filed

joint Federal income tax returns for the years 1988 and 1991. 

They resided in Greenbrier, Tennessee, at the time the petition

was filed.

From 1986 until the fall of 1990, Mrs. Dugan owned and

operated Nanna's Treasures, a sole proprietorship through which

she designed, produced, and offered for sale ornate party and

pageant apparel and accessories for young women. On September 5,

1990, Mrs. Dugan incorporated Nanna's Treasures, Inc. (NTI) with

the assistance of Kelly Frey, an attorney. The corporation was

organized to continue the business of Nanna's Treasures. Mrs.

Dugan was NTI's sole shareholder. NTI did not conduct any

business until January 1, 1991. Sometime prior to March 15,

1991, a Form 2553, Election by a Small Business Corporation, was

prepared by Mr. Frey, and signed by Mrs. Dugan as the sole

shareholder and president of NTI. On the Form 2553 Pamela

Tidwell, a certified public accountant, was listed as the

corporate officer or legal representative to be "called for

information" in connection with the election. Ms. Tidwell was

the accountant for the Dugans and NTI during the relevant

periods, but she was not an officer of NTI, nor had she been
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given power of attorney on behalf of NTI at the time the Form

2553 was initially received by respondent.

On or about March 14, 1991, the Form 2553 was sent by

regular mail to respondent's Memphis Service Center (the Service

Center). It was received on March 18, 1991, as evidenced by a

date stamp placed on the document at the Service Center. NTI

intended the election to be effective beginning January 1, 1991; 

however, the designated area on the Form 2553 where the effective

date should have been filled in (box D) was left blank. Also

left blank was the designated area for NTI's employer

identification number (box A).

With respect to an incomplete Form 2553, in April 1991

section 3(13)2(34).(14) of the Internal Revenue Manual provided: 

(1) If the election is incomplete or eligibility

cannot be determined, correspond via Letter 312C. Allow 30

days for the taxpayer's response. Annotate all actions on

the case file, suspend the case.

(2) TIMELY RESPONSE--If the reply to complete the

election is received within the filing period or within 30

days, accept the election for the period requested.

(3) LATE RESPONSE--If the reply to complete the

election is received after the filing period and after the

30 day period, but before the 16th day of the third month of

the following year, accept the election for the following

year.

(4) NO REPLY--If a reply is not received at the end of

the suspense period, annotate the case file "No Reply". *

* *. Send the taxpayer a letter explaining why Form 2553

was rejected.

(5) If the reply is received after the 16th day of the

third month of the following year, or the reply is

incomplete, reject the election. * * *. 
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Apparently, in accordance with the above manual provisions,

the original Form 2553 was returned to NTI with a Letter 312C

dated April 9, 1991, from Beverly J. Baker, Chief of the

Correspondence Section at the Service Center. In that letter Ms.

Baker: (1) Acknowledged receipt of the Form 2553; (2) advised

the corporation that the form could not be processed without the

"Beginning date of the tax year for which * * * the election [is

intended] to take effect"; (3) granted NTI 30 days from the date

of the letter to complete and return the form; and (4) indicated

that if a response was not received within that period, the

election "may be treated as made for the following taxable year."

 Respondent did not keep any permanent records that reflect

receipt of the Form 2553 on March 18, 1991, or that indicate the

April 9, 1991, letter had been sent to NTI returning the original

Form 2553. On behalf of NTI, Mrs. Dugan received the April 9,

1991, letter and NTI's Form 2553; however, she did not

immediately notify Mr. Frey or Ms. Tidwell of the situation, nor

did she immediately complete and return the Form 2553 or

otherwise respond to the letter. 

On June 8, 1992, Mrs. Dugan filed a 1991 S corporation

Federal income tax return, Form 1120S, for NTI. On June 16,

1992, the Dugans filed their 1991 joint Federal income tax return

on which they claimed a passthrough loss deduction of $177,522

from NTI. The passthrough loss deduction generated a net
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operating loss, which the Dugans carried back by amended return

to 1988.

In a letter addressed to NTI dated August 3, 1992, Della A.

Sanford, Chief of the Correspondence Section at the Service

Center: (1) Advised NTI that the 1991 Form 1120S could not be

processed because respondent had "no record of * * * [NTI's]

filing Form 2553 and electing to be treated as an S corporation";

(2) requested a copy of a Form 2553 if one had been filed; and

(3) advised that unless the requested information were received

within a specified period, the Form 1120S would be processed as a

"corporation income tax return (Form 1120)". Between receipt of

the April 9, 1991, and August 3, 1992, letters, no correspondence

or communication was exchanged between NTI, or anyone on its

behalf, and respondent regarding the Form 2553 which had been

submitted in March 1991. 

In May 1992 Mrs. Dugan hired Alice McMurray to perform

secretarial and bookkeeping work for NTI. Mrs. Dugan requested

that Ms. McMurray respond to respondent's August 3, 1992, letter. 

After examining and discussing respondent's August 3, 1992,

letter with Ms. Tidwell, Ms. McMurray located the signed Form

2553 dated March 14, 1991, and respondent's April 9, 1991, letter

in NTI's files. At some point, either Ms. Tidwell or Ms.

McMurray contacted Mr. Frey about the intended effective date of

NTI's S corporation election, and he indicated that the election

was intended to have been effective as of January 1, 1991.
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On or about August 25, 1992, Ms. McMurray prepared a letter

to respondent stating that the Form 2553 had been returned to NTI

in 1991 "for a date that needed to be added", and representing

that "someone mistakenly filed the form rather than completing

and return[ing]" it. Ms. McMurray enclosed the Form 2553, which

showed the March 18, 1991, date stamp, with the letter. The Form

2553 had been completed by Ms. McMurray to include an employer

identification number and an effective date of "*12/91" (instead

of the intended date of January 1, 1991) in the appropriate

areas. The Form 2553 was received, for the second time, and

filed by the Service Center on September 16, 1992. 

Because of the date that it was received and filed, NTI was

notified by respondent in a notice dated October 12, 1992, that

its S corporation election would be effective beginning January

1, 1993. NTI did not respond to this notice. Between the August

25, 1992, letter and the October 12, 1992, notice, no

communication or correspondence was exchanged between NTI, or

anyone on its behalf, and respondent.

On September 20, 1993, Mrs. Dugan filed a 1992 Form 1120S

for NTI. The 1992 Form 1120S had been prepared by Ms. Tidwell

who at the time believed that the effective date of NTI's S

corporation election had been resolved by Ms. McMurray's August

25, 1992, letter to respondent.

At or about the time NTI's 1992 Form 1120S was prepared, Ms.

Tidwell discovered that NTI's S corporation election had been
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made effective as of January 1, 1993. Ms. Tidwell notified Mrs.

Dugan that the effective date of the election was contrary to the

date of the intended election and her understanding of NTI's

status when she prepared the Forms 1120S for NTI. Ms. Tidwell

also advised Mrs. Dugan that the disagreement with respondent

with respect to the effective date of NTI's S corporation

election needed to be resolved.

At some point after the August 25, 1992, letter was sent,

NTI's copies of respondent's April 9, 1991, letter and the date

stamped Form 2553 were apparently misfiled and could not be

located. On September 24, 1993, Ms. Tidwell sent a letter on

behalf of NTI to respondent requesting a copy of respondent's

April 9, 1991, letter. Neither Ms. Tidwell nor NTI received a

response to this letter.

On September 24, 1993, Mrs. Dugan filed a bankruptcy

petition in the U.S. Bankruptcy Court for the Middle District of

Tennessee. The Dugans filed their 1992 joint Federal income tax

return on October 18, 1993, on which they claimed a passthrough

loss deduction of $154,855 from NTI.

By letter dated November 1, 1993, Ms. Sanford notified NTI

that the 1992 Form 1120S could not be processed. The contents of

this letter were similar to the contents of her August 3, 1992,

letter to NTI regarding its 1991 Form 1120S. NTI did not respond

to respondent's November 1, 1993, letter. 
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On January 20, 1994, two separate letters (the 30-day

letters) with accompanying examination reports proposing changes

to their 1988 and 1991 joint Federal income tax returns were

mailed to the Dugans. The proposed changes resulted primarily

from the disallowance of the passthrough loss from NTI in 1991

upon the ground that a valid S corporation election had not been

filed by the corporation for that year. The 30-day letters

listed Toni Williams as the contact person and were signed by

Connie Hailey, Chief, Service Center Examination Branch. 

Responses to the 30-day letters were due on or before Tuesday,

February 22, 1994. 

At some point prior to February 18, 1994, Ms. Tidwell

referred the Dugans to Larry D. Crabtree, attorney, for

assistance in connection with the proposed adjustments made in

the 30-day letters. Mr. Crabtree responded to the 30-day letters

by letter dated February 22, 1994 (the protest letter), which was

sent by certified mail to the "District Director, Memphis Service

Center". In the protest letter, Mr. Crabtree requested an

Appeals conference to discuss the proposed adjustments set forth

in the 30-day letters. In addition, Mr. Crabtree contended that

the relevant Form 2553 had been timely mailed so that NTI's S

corporation election should have been effective for its 1991

taxable year. 

In a telephone conversation that took place on or about

March 17, 1994, Mr. Crabtree discussed the protest letter with
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Byron Stout, an employee at the processing division at the

Service Center. During this discussion Mr. Crabtree requested

that Mr. Stout forward the protest letter to respondent's Appeals

Office in Nashville, Tennessee. 

Because the protest letter was not received by respondent's

examination division within the designated period, preparation of

the notices of deficiency began on March 3, 1994. Notices of

deficiency for years 1988 and 1991 were mailed to the Dugans on

March 22, 1994. In the notice of deficiency for 1991, the

passthrough loss attributable to NTI was disallowed upon the

ground that NTI's S corporation election was not effective until

January 1, 1993. The notice of deficiency for 1988 disallowed

the net operating loss carryback that was generated in 1991 by

the passthrough loss. The deficiency notices indicated that if

the Dugans took the position that NTI had timely filed a Form

2553 effective for 1991 they could provide as acceptable

verification: (1) A certified mail receipt reflecting that the

form was timely mailed; (2) a Form 2553 with date stamp

acknowledging receipt; or (3) an IRS letter stating that Form

2553 had been accepted. Prior to the issuance of the notices of

deficiency, respondent's administrative file did not disclose the

receipt of a request for an Appeals conference made by or on

behalf of the Dugans.

On June 10, 1994, Mr. Crabtree mailed a letter to respondent

requesting that the notices of deficiency be rescinded. In
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support of his request, Mr. Crabtree argued that respondent erred

in denying NTI S corporation status for its 1991 taxable year

because a "completed", signed Form 2553 had been timely filed.

Mr. Crabtree presented factual support for NTI's claim that the

form had been filed within the period necessary to have made it

effective for 1991. He also argued that the omission of the

effective date was, in essence, of no consequence. Attached to

this letter was an unsigned Form 2553, and a Form SS-4,

Application for Employer Identification Number. This letter was

received by respondent on June 15, 1994. 

The petition in this case was filed on June 20, 1994, the

last day for doing so as prescribed by section 6213(a). 

Originally the Dugans were listed as petitioners, but the case

was dismissed for lack of jurisdiction with respect to Mrs. Dugan

due to the pendency of her bankruptcy proceeding at the time the

petition was filed. See 11 U.S.C. sec. 362(a)(8)(1994).

Relevant for our purposes, the petition assigns as error

respondent's determination that NTI's election to be treated as

an S corporation was not effective until 1993. In support of

this assignment of error, among other things, the petition

alleges that NTI filed a Form 2553 within the first 21⁄2 months of

1991 with the intent that the election was to be effective as of

January 1, 1991; and that the Form 2553 was substantially and

sufficiently complete such that a cursory review of the document

would indicate that the election was timely filed in order to be
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effective beginning January 1, 1991. The petition further

alleges that in April 1991 respondent sent a letter to NTI that

acknowledged receipt of the Form 2553 in March 1991 and requested

additional information with respect to it. 

On or about July 6, 1994, Mr. Crabtree telephoned Connie

Hailey to discuss his request that the notices of deficiency be

rescinded. Ms. Hailey advised Mr. Crabtree that the deficiency

notices could not be rescinded because the Dugans had filed a

petition in this Court in response to the deficiency notices. 

On August 12, 1994, respondent filed an answer to the

petition. In the answer, respondent, due to "lack of sufficient

knowledge or information", denied petitioner's allegations that a

Form 2553 had been filed by NTI in March 1991 electing S

corporation status effective January 1, 1991, and further denied

the existence of respondent's April 9, 1991, letter to NTI. 

At an Appeals conference held on August 25, 1994, Mr.

Crabtree submitted affidavits from Mrs. Dugan and Ms. McMurray

and other undescribed documents in an attempt to prove that the

Form 2553 was first mailed by NTI and received by respondent

during March 1991. By letter dated March 29, 1995, Appeals

Officer Sue Loy informed Mr. Crabtree that she had concluded that

"Mrs. Dugan does not have proof of mailing the election". 

However, after giving "consideration to the affidavits * * *

submitted", Ms. Loy proposed that the case be settled "with the

Government conceding that 50% of * * * [NTI's] loss for 1991 * *
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* [be treated as] an S corporation loss and 50% [as] a C

corporation loss". This proposal was apparently rejected by the

Dugans. By letter dated October 18, 1995, Ms. Loy notified Mr.

Crabtree that she was "not successful in securing a copy of the

original form 2553 from the Service Center" and that the case was

being forwarded to counsel for trial preparation.

At a conference held on February 12, 1996, Mr. Kiessling,

the District Counsel attorney to whom the case was assigned, 

informed Mr. Crabtree that he had been unable to obtain

verification that a Form 2553 had been filed by NTI prior to

September 1992. 

On February 13, 1996, Mr. Crabtree sent a letter (by mail

and facsimile) to Mr. Kiessling attaching a copy of NTI's Form

2553 which bore a date stamp indicating receipt on March 18,

1991, and a copy of respondent's April 9, 1991, letter to NTI

questioning the taxable year for which the election was

applicable. These documents were apparently discovered by Mr.

Crabtree while examining additional files forwarded to him by

petitioner or Mrs. Dugan. These documents had not previously

been provided by the Dugans or Mr. Crabtree to respondent during

any stage of the controversy. On February 15, 1996, Mr.

Kiessling advised Mr. Crabtree that respondent would concede the

case.

On March 11, 1996, the parties filed the above-described

stipulation of settled issues. Thereafter, petitioner and Mrs.
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Dugan filed the motion here under consideration seeking

attorney's fee and related expenses in the amounts of $22,145.50

and $588.39, respectively, plus additional attorney's fees and

administrative expenses incurred in the prosecution of the

motion. The demand for attorney's fees represented approximately

170 attorney hours billed at rates between $145 and $175 per

hour. Respondent filed an objection to the motion on June 10,

1996, to which petitioner filed a reply on August 9, 1996. A

hearing was conducted on the motion in Nashville, Tennessee, on

September 13, 1996. 

Discussion

Generally, section 7430 provides that to be entitled to an

award for reasonable administrative and litigation costs the

claimant must be a "prevailing party". Sec. 7430(a). To be

considered a prevailing party, the claimant must establish: (1)

The position of the United States in the proceeding was not

substantially justified; (2) the claimant prevailed with respect

to the amount in controversy or with respect to the most

significant issue presented; and (3) the claimant met the net

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

date the petition was filed. In addition, the claimant must

establish that all administrative remedies have been exhausted

insofar as litigation costs are concerned; that the claimant has

not unreasonably protracted the proceedings; and that the amount

of costs claimed is reasonable. Sec. 7430(b)(1), (4). The
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moving party bears the burden of proof with respect to each of

the above-listed elements. Rule 232(e).

Respondent objects to petitioner's motion on several

grounds. First, respondent argues that, although the case was

ultimately conceded, respondent was substantially justified in

taking the position that NTI's S corporation election was not

effective until 1993 and that the Dugans therefore could not take

into account a passthrough loss from NTI in 1991 and carry back a

portion of that loss to 1988. Second, respondent argues that

petitioner unreasonably protracted the proceedings by not

responding to numerous letters sent to NTI or providing certain

information until February 1996. Third, respondent argues that

petitioner did not exhaust his administrative remedies because he

did not timely file a request for an Appeals conference after the

issuance of the 30-day letters. Finally, respondent argues that

the amount of costs and attorney's fees are excessive to the

extent that the hourly attorney's fees exceed the amount allowed

by section 7430, and further that all fees attributable to

petitioner's request for rescission of the notices of deficiency

should be disallowed because the request was made only days

before the petition was filed.

Substantial Justification

1. S Corporation Elections In General. 

Section 1362(a)(1) allows a small business corporation, as

defined under section 1361, to elect S corporation status. An S
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corporation election can be made for any taxable year at any time

during the preceding taxable year or on or before the 15th day of

the third month of the current taxable year. Sec. 1362(b)(1). A

taxpayer who elects to take advantage of the benefits of being

treated as an S corporation must comply with the requirements for

making the election. Garrett & Garrett, Inc. v. Commissioner,

T.C. Memo. 1993-453. Congress imposed time limits for making an

S corporation election so that a corporation must make the

election before it can predict its profitability for the year

with any certainty. These time limits serve to prevent taxpayers

from using S corporation status solely as a tax avoidance

mechanism. McClelland Farm Equip. Co. v. United States, 601 F.2d

365, 367 (8th Cir. 1979); H. Rept. 95-1445, at 104 (1978), 1978-3

C.B. (Vol. 1) 181, 278.

In addition to being timely filed, to be effective for a

particular year, an S corporation election must be complete,

properly filed, and in compliance with statutory and regulatory

requirements. See Brutsche v. Commissioner, 585 F.2d 436, 439

(10th Cir. 1978), revg. on another issue and remanding 65 T.C.

1034 (1976); Garrett & Garrett v. Commissioner, supra. 

Section 1377(c) requires that any "election under this

subchapter * * * shall be made in such manner as the Secretary

shall by regulations prescribe." To make an election a small

business corporation is required to file a Form 2553 containing

all the information required by that form. Rockwell Inn, Ltd. v.
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Commissioner, T.C. Memo. 1993-158; see also sec. 18.1362-1(a),

Temporary Income Tax Regs., 48 Fed. Reg. 3591 (Jan. 26, 1983). 

Moreover, S corporation status must be firmly and clearly

elected. Smith v. Commissioner, T.C. Memo. 1988-18. This Court

has required compliance with the requirements of S corporation

elections. See Combs v. Commissioner, T.C. Memo. 1989-206, affd.

without published opinion 907 F.2d 151 (6th Cir. 1990). It is

essential to establish that an S corporation election has been

made and the effective date of the election so as to preclude the

use of the S corporation election as a tax avoidance mechanism

and to bind the corporation and its shareholders to the election. 

Garrett & Garrett v. Commissioner, supra; Rockwell Inn, Ltd. v.

Commissioner, supra.

2. NTI's S Corporation Election.

Set against this background, we consider whether

respondent's position is substantially justified, keeping in mind

that petitioner bears the burden of proving that it is not. Sec.

7430(c)(4)(A); Rule 232(e); Gantner v. Commissioner, 92 T.C. 192,

197 (1989), affd. 905 F.2d 241 (8th Cir. 1990).

Up until the point that respondent conceded the case,

respondent's position was that the Dugans could not compute their

1988 and 1991 Federal income tax liabilities taking into account

the passthrough loss from NTI in 1991 because NTI's S corporation

election was not effective until 1993. This determination was

based upon the Form 2553 received in the Service Center on
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September 16, 1992. Although initially disputed by respondent,

it is clear, and respondent now concedes that the document was

first received in the Service Center on March 18, 1991, at a time

when the election could have been effective for NTI's 1991 year. 

Secs. 1362, 7502. We view respondent's actions with respect to

the initial receipt of the Form 2553 on March 18, 1991, to be

relevant in determining whether respondent's position in the case

in both the administrative and judicial proceedings should be

considered substantially justified. 

Whether respondent's position is substantially justified

turns on a finding of reasonableness, based upon all of the

surrounding facts and circumstances, as well as legal precedents

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

(1988); Coastal Petroleum Refiners, Inc. v. Commissioner, 94 T.C.

685, 694-695 (1990). 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. We may

consider the reasonableness of respondent's position in the

administrative proceeding separately from respondent's position

in the judicial proceeding. Huffman v. Commissioner, 978 F.2d

1139, 1144-1147 (9th Cir. 1992), affg. in part, revg. in part,

and remanding on another issue T.C. Memo. 1991-144. In this

case, however, because the positions are the same, we consider

them in a single analysis.
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It is undisputed that the Form 2553 was incomplete when it

was received in the Service Center on March 18, 1991. The

individual who originally reviewed the form followed the

instructions provided in the Internal Revenue Manual with respect

to incomplete Forms 2553. The form was returned to NTI with a

letter dated April 9, 1991, that contained specific inquiries and

directions. The actions of the Service Center employee who

followed the instructions in the manual were reasonable under the

circumstances. NTI did not respond to respondent's April 9,

1991, letter until long after the designated period to do so had

expired. On September 16, 1992, when NTI's Form 2553, now with

an incorrect effective date filled in, was received for the

second time in the Service Center, respondent's action in

treating the election as effective for 1993 was also reasonable

given the date that the form was received, notwithstanding the

fact that on the face of the document a date stamp indicated that

it was first received in the Service Center on March 18, 1991. 

Sec. 1362.

Because we are not addressing the validity of the Form 2553

as submitted in March 1991 with the effective date missing, we

see little point in specifically addressing the cases relied upon

by petitioner in support of his claim that the omission of the

date was inconsequential. Suffice it to say that we disagree

with petitioner's argument that returning the Form 2553 pursuant

to the relevant Internal Revenue Manual provisions was contrary
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to Rev. Rul. 74-150, 1974-1 C.B. 241 (which concluded that

unnecessary, albeit erroneous, information contained on a Form

2553 did not adversely effect the validity of the election), and

also contrary to the line of cases addressing the effective dates

of S corporation elections in situations where the taxpayers

omitted essential information from Forms 2553. Returning the

Form 2553 was consistent with the instructions in the manual,

which instructions were consistent with the body of law

previously discussed, see supra pp. 15-17, and cannot be

considered unreasonable under the circumstances.

We have observed in numerous opinions that the

Commissioner's concession of an issue is not determinative of

whether the Commissioner's position in the proceeding was

substantially justified, Sokol v. Commissioner, 92 T.C. 760, 767

(1989); Wasie v. Commissioner, 86 T.C. 962, 968-969 (1986), but

merely a factor to be considered, Estate of Perry v.

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

After considering the surrounding circumstances, we find

that petitioner has failed to establish that respondent's

position disallowing the NTI passthrough loss claimed by

petitioner and Mrs. Dugan in 1991 (a portion of which was carried

back to 1988) because NTI's S corporation election was not

effective until 1993 was not substantially justified. 

Consequently, petitioner cannot be considered a prevailing party

within the meaning of section 7430(a).
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Respondent's Other Objections to Petitioners' Motion

Because the requirements of section 7430 are in the

conjunctive, Minahan v. Commissioner, 88 T.C. 492, 497 (1987),

our finding that petitioner has failed to prove that respondent's

position was not substantially justified, and therefore that

petitioner is not a prevailing party, operates in and of itself

to deny petitioner's motion. Consequently, we need not address

respondent's other objections to the motion.

To reflect the foregoing,

An appropriate order will be

issued denying petitioner's motion,

and a decision will be entered

herein.