1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

T.C. Memo. 2006-135

UNITED STATES TAX COURT

SCOTT AND SORAYA MALOWNEY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19262-03. Filed June 27, 2006. 

O. Christopher Meyers, for petitioners.

William F. Castor, for respondent.

MEMORANDUM OPINION

FOLEY, Judge: This matter is before the Court on

petitioners’ motion for litigation and administrative costs

pursuant to section 74301 and Rule 231. The Court held for
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petitioners in a bench opinion dated January 11, 2005. We

incorporate herein the facts set forth in that opinion. 

Background

 In 1996, Soraya Malowney decided to start a business

involving the rehabilitation and sale of real estate. Mrs.

Malowney had previous experience in the design and refurbishing

of several homes, some of which were her former personal

residences. After researching and evaluating several properties,

she purchased, for $110,000, property located at 215 Northwest

74th Street in Lawton, Oklahoma. After purchasing the property,

she discovered that it required an extensive amount of work. In

October 1996, she began the renovation process and substantially

completed the project by June 1997. 

In 1997, petitioners hired a real estate agent and listed

the property for $214,000. In 1999, after hiring another agent

and reducing the sales price, petitioners sold the property for

$162,667. On Schedule C, Profit or Loss From Business, of their

1999 Federal income tax return, petitioners claimed a $52,046

business loss (i.e., sales proceeds of $162,500 less purchase

price of $110,000, improvements of $95,736, commissions of

$7,625, and other expenses of $1,185).

On August 28, 2003, respondent issued petitioners a notice

of deficiency relating to 1999 and determined that petitioners

were not in a trade or business. On November 12, 2003,

petitioners, while residing in Abilene, Texas, filed their
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petition with the Court. After a brief trial on January 10,

2005, the Court determined that petitioners were engaged in a

trade or business. On March 14, 2005, the Court filed

petitioners’ motion for litigation and administrative costs. The

Court, on May 4, 2005, filed respondent’s response to

petitioners’ motion for litigation and administrative costs. 

Discussion

Petitioners contend that they meet the requirements of

section 7430 and, thus, are entitled to recover litigation and

administrative costs. Respondent, however, contends that

petitioners failed to meet the requirements of section

7430(c)(4)(B) because respondent’s position was substantially

justified and petitioners failed to delineate sufficiently the

nature and amount of each item of cost.

The prevailing party in a Tax Court proceeding may recover

administrative or litigation costs. See sec. 7430(a); Rule 231. 

Petitioners bear the burden of proving that they substantially

prevailed and meet each requirement of section 7430. Rule

232(e). Petitioners, however, will not be treated as the

prevailing party if respondent’s position was substantially

justified (i.e., had a reasonable basis in law and fact). Sec.

7430(c)(4)(B); see Pierce v. Underwood, 487 U.S. 552, 565 (1988). 

Substantial justification is based upon respondent’s position on

the date he issued the notice of deficiency and after filing his

answer with this Court. Maggie Mgmt. Co. v. Commissioner, 108
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T.C. 430, 442 (1997) (citing Huffman v. Commissioner, 978 F.2d

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

remanding T.C. Memo. 1991-144). 

On the date respondent issued the notice of deficiency and

after filing his answer, respondent maintained the position that

petitioners were not, in 1999, in the business of refurbishing or

selling real estate. As a result, respondent contends that

petitioners’ “house should have been treated as investment

property and the loss from the sale should have been treated as a

capital loss.” Indeed, in previous years, petitioners claimed,

but subsequently acquiesced to respondent’s disallowance of,

certain reported business expenses. Thus, respondent’s position

was substantially justified and reasonable based upon the

information available to him at the time he took a position in

the administrative and judicial proceedings. The fact that

petitioners established at trial that they were engaged in a

trade or business does not diminish the reasonableness of

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

969 (1986).

The second basis for respondent’s objection to petitioners’

motion to recover litigation costs is that petitioners failed to

provide a detailed affidavit setting forth the nature and amount

of each cost. A motion for award of costs must be accompanied by

a “detailed affidavit * * * which sets forth distinctly the

nature and amount of each item of costs for which an award is
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claimed.” Rule 231(d); see also Cassuto v. Commissioner, 93 T.C.

256, 271 (1989), affd. in part, revd. in part on other grounds

and remanded 936 F.2d 736 (2d Cir. 1991). Petitioners’ affidavit

does not describe the specific nature of the work performed by

their attorney, the number of hours their attorney worked on each

matter, or the date such work was performed. Accordingly,

petitioners are not entitled to recover administrative and

litigation costs. Rule 231(d).

Contentions we have not addressed are irrelevant, moot, or

meritless.

To reflect the foregoing,

An appropriate order and

decision will be entered.