TAX COURT OPINION

Case: Marc A. & Miriam Trzeciak
Docket Number: 6370-10
Judge: Chiechi
Opinion Type: memo
Filed: 03/22/2012
Pages: 42

(cid:16)040 T.C. Memo. 2012-83 UNITED STATES TAX COURT . MARC A. TRZECIAK AND MIRIAM TRZECIAK, Petitioners y. 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 SERVED MAR 2 2 2012 - 2 - AND ADMINISTRATIVE COSTS" and that wë 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 pårt of her management responsi- bilities, Ms. Trzeciak, inter alia, performed administrative and bookkeeping tasks with respect to the rentál properties, showed the rental proßertie(cid:0)541to prospective tenants, handled tenant complaints, and dealt with contractors i.egarding repairs (Ms. Trzeciak's real estate activities). In ordei to carry out1certain of those responsibilities, Ms. Trzeciak periodically traveled tò the rental properties from petitioners' home in Centerville (petitioners' residence). Petitioners timely filed Forni 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 tó. 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 $151,8.84 attributable to Ms. Trzeciak's real estate activities. .Petitioners attached to their 2006 Schedule E statements entitled "OTHER EXPENSES" regarding Ms. Trzeciák's respective. rental properties with respect to which petitioners claimed that loss. Each ofthose statements included a claimed expense of $517 for an item referred to as "COM- MON OVERHEAD". Around April 7, 2008, respóndent assigned a revenue agent (respondent's revenue agent) to examine each of petitioners' 2005 return and'2006 return - 4 - (respondent's examiñation). Petitioners retáined Mr. Reagan to represent them in connection 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 "finál 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 workpapèr 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'] residencè. No mention was made of a space [in petitioners' residence] that was used regularly and exclusively for,the taxpayer's rentál actiiities.. The taxpayer also checked her vacant properties for damáge and soundness about once a month. .In 2006, the taxpayer spent 77 hoürs - 5 - making the trip from Dayton [Centerville],W where her residence is, to Columbus, with each round trip taking a reported 3.5 hours. 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 öther properties and purchasing the properties. In In T.C. Summarý 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 workt(e.g., hauling equipment, transporting items.integral to the operation), and asserted that travel is analogous to a personàl 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 ST. * * * * * * . * [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 computing the hourly tests for participation (i.e. work) in an activitylunder section 469, travel time from a personal residence is inherently personal hours that do not represent participation in a business. We take judicial notice that Cénterville is a suburb of Dayton Ohio (Dayton). - 6 - On August 1.8, 2008, Mr. Reagan sent respohdent's rëvenue 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 stàted: I am responding to your stated position that the travel time spent by the taxpayer [Ms. Trzeciak] does not constitute hour(cid:0)541that count toward meeting the 750 hour test under IRC Sec. 469(c)(7)(B)(ii). My research 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 followin is a summary of each case: Osama A. Mowafi v. Commissioner, TC Mémo 2001-111: The primary 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 oftravel time.per se in this case. The credibility, of the hours claimed by Mrs. Trzeciak is not an issue, and therefoie I see no case relee vance. Robert P. Sweet, et ux. v. Commissioner, TC Summary Opinion 2004-125: The travel issue in this case is focused upòn 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 comparable 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 Opinion 2003-130: This case focuses on a öattle activity passive - 7 - activity 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 seekiiig 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 ordinary and necessary auto and travel expenses related to yoür rental activities, including 50% of meal expenses incurrèd 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 foi. rental property management is umque. On October 6, 2008; Mr. Reagan sent to respondent's Äppeals Office on behalf of petitioners a "FORMAL PROTEST" (petitioners' protest),2 in which 2For convenience, when d7scussmg 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 dayto-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. * *s* 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 educational background, and she manages the"real estate activity with a high degree of sophistication. This fact precludes any argument that "administrative" hours spent by the taxpayer should not count. Time spent creating and reviewing financial statements, paying bills and management of finances are allihours spent directly managing the rental properties that count toward the 750 hour test; * * * * * * * The concept of "commuting" does not applý 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 properly 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. employee to a job. The choice of an employee or business owner to live a certain distance from theitplace of wo'rld'is a personal decision The purchase and managenient of rental real estate is,not done be- It is not a "commute", such as travel by an cause of proximity to the home. It is done becausè thespropêrtyiis in a suitable location for currentarental income and futur6resále..Because the rental real estate locatioäis based upon a business decisioit,:and b not a personal one, travel to and from the propertiés is inhereritly deductible as a business expense and the timé i not a commut e The cáse of-Thomas E I ruskowski [sic]tet ux. v. Commissioner TC Summary Opinion 2003-130 is not oñ point. This case does not address the unique nature of rental pioperty as1previou(cid:0)541lydiscussed in this appeal. This case also dealt with a taxpayer whó had a fulltime jób in addition to iheir battle activity.bTlie cattle activity was not their primary business2ctivity, but viàs in fact an investment activity This óaseialso raises the issue of "corhmuting"$which has beeri previönsly disàussed in the prote(cid:0)541t of rental properties. as not applicable to malíagement By letter dated November 11, 2008 1espondent's Appeals Office acknowl- edged receipt of petitioners' prótest. On July 31, 2009, an officer with respondent's Appeals Office who was assigned petitioners' case (respondent's Åppeals officer)niãde the followin), pertinentienti.ies?in;his sò=cálled Case Activity Record Print: Prepare for 9:00 conference. Researched commuting and rental real estate for case memo and totrovide tostaxpayer if I can prove that he is wrong (or perhaps rethink.my analysis if the rep is right). Brief conferenbe. The rep [Mr. Reagan] is completely unwilling to even think the [sic]:he has any hazards oñ this case. He believes that he has a strong position that the tai heme: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, wlïiöh are thè only thing we have, -J0 - are wòrthless cases because they did not involve rentál real estate. The rep believes that real estate businessessare different for purposes of applying the commuting rules. I asked for authority of this position on this because it was a·foreign cbncept to me. He didn't give · me anything except for the instructions to,schedule E.i We are at an impässe 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 purposes. L . : . . - , Respondent's Appeals officer prepared:a document ehtitled "Appeals Transmittal and Case Memo" dated December 922009. That memò státed in pertinent part: Taxpayers' Position: The taxpayers believe that taxpayer-wife is a real estate professional for the following reasons: (cid:16)042 Taxpayer participates in the activity in a1regular, contin- uous and substantial basis. (cid:16)042 Travel from Dayton [Centerville] to Columbus: (cid:16)042. There is no authority, statutory orgotherwise,,that specifically states that travel time~doesn't count . . toward the 750 hour test. i , . . (cid:16)042 The travel is an integral part of thh taxpayer?s e , business. . · . - 11 All travel time is dire'etly related to the mai agement of.the properties. There is no ''partiòular" reason not to consider the travel time as work . (cid:16)042 Travel hours musf count as hours worked because the expenses associated \vith the travel are deductible under IRC 16(cid:0)576. The cóncept of "cummuting":does'not apply to managing rental réal estate or béing a real estate professional s (cid:16)042 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 questión of whether * * * [Ms. Tzreciak's] travel from,Dayton [Centerville],to Columbus qualifies as hours worked. If such hours do not qualifý, the hours worked are less than the 750 hòurs necessary for the taxpayer to be a real:estate professional. * * * i (cid:16)042- . a n . .. i o 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. traveling 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. * .* * It is clearly tinie spent 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' - F2 - travel. This made it impossible tò eventpúrsue a settlement with the taxpayers. Respondent's Appeals officer also proposed the imposition of the accuracy- related penalty under section 6662(a) for each ofpetitioners' taxable years 2005 and 2006. With respect to that penalty, respondent's Appeals officer stated: SUMMARY AND RECOMMENDATION Does the accuracyipenalty apply to the proposed passive activity loss adjustment * * *? Yes. The [revenue] agent proposes the assertion of the accúracy penalty for both2005 and 2006 because: .There is'a substántial understatement. There-was-no disclosure on the return regárding the hours that were,spent or that a substantial-portion of the hours were questionable. There are no exceptions to the application of the penalty. (The [revenue] agent is apparently un-i aware of the reasonable cause provisioni of the penalty). (cid:16)042 . - ' ' . . . 1 e 2 . I believe'that the+government could have considerable hazards should, the case be litigated. The representative/preparer [Mr. Reagan] definitely seems to have strong ideas regarding the qùalification 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. .. . a On Déceinber 9, 2009, respondent issued to petitionersta notice of defi- ciency with respect to their táxable years 2005 and 2006 (not ce). 2In that notice, respondent determined,. inter alia, to disallos under section 469 (section 469 deteiinination) petitioners' total rental real estate losses of $126,376 and $151,884 that they claimed in their 2005 Schedule E nd 2006 Schedule E, respectively. In support of that determination, respondent determined in the nøtice: [T]he losses of $126,376.00 on 2005 and $151,844.00 on 2006 claimed in connection with your rent 1 activities are a passive activity. * * * You have not established that you met the requirements of Internal Revenue Code section 469(c)(7). Therefore, your rental loss is determined to be passive. Passive losses can only be öffset by passive mcome. Passive losses are also allowed to the extent they ilualify for the special allowance for ental-rèal estate activities. Since you háve no passive income that your rental losses can be offset by, and do not qualifyffor the speciál 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 nòtice that petitioners are liable for each of their taxable years 2005 and 2006 for the accuracy-related penalty under section 6662(a) ((cid:0)541ection6662(a) determinatiorï). - 14 - After petitioners received;the notice, they retained as their attorneys the Nardone Law Group; LLC (petitioners' attorneys) Vincent·J. Nardone (Mr. Nardone) and M. Pilar Puerto (Ms. Puerto) of that law group were primaril responsible for representing petitioners On March:8, 2010, petitioner(cid:0)541'attorneys attempted unsuccessfully to speak witltrespondent's Appeals officer in brder to discuss the:determinatidns iri the notice and had to lesve a voicemail message. Thereafter, ori the same date, Mr Nardone sent by!fadsimilë to respondent's Appeals offiber a merhoranduìn in which he memoriali(cid:0)576eäthat übicemail message and to which he attached Form 2848, Povier of Attôtney änd Declaration of-Representative; authorizing Mr. Nardone and Mk Puertò to repréäént petitioners with respect to their taxable yea 2005 and 2006. On Mar'ch 9, 2010 petitioners' attorneys mailed to tl e Court the pétition that tl ey had prepafed on behalf of petitioners, in which thdy contested the determinations in the notice The Court received and filed thàt petition oñ Mardh 15 2010 Petitionefs' inotion seeks costs relating to their representation by petitiòn ers' attorneys, not by Mr. Reagan. - 15 - On March 10, 2010, petitioners'oattorneys had a telephönic 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 " n 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 Petitioñers rely, as the basis of their case, are as follows: n . a. In 2005 and 2006: (i) the Petitioners owned real estate properties.(the "Properties") ai d conducted rental operations on the Properties; (ii) Miriam Trzeciàk ("Mrs. Trzeciak") was not employed arid did not work as an independent contractor in 2005 or 2006; (iii) Mrs. Trzeciak materially p rticipated in the rental-operations of the Properties-as that phrase is used in I.R.C. § 469-includ- . ing conducting the dayuto-day managemèñt and operations of thè . Properties, showiñg the Prâperties to prospective tenants, placing tenants in and out ofthe Properties; tènding to tenant1cámplaints, collecting and enforcing rent, following up with contractors for repairs of the Properties, handling thè administrative arid record keeping matters for the Properties, ar d traveling to the Properties to fulfill all of these duties (the "Rental Real Estate Activities"); (iv) Mrs. Trzeciak's Rental Real Esta e Activities were regular, . 4Mr. Nardorie evidently mäde a typo aphical error in drafting the March 13, 2010 memorarídum in identifÿing the ta able years at issue in the notice as 2007 and 2008. The years at issue in the n tice áre 2005 and 2006. - 16 - coritinuous, and (cid:0)541ubstantialas that phrase is used in I R.C. § 469; (v) more than half of Mrs. Trzeciak's personal services performed in all S tradé or©businesses were in tlie Rental Real Estate Activities; (vi) Mrs. Trzeciak spent more than 750 hours in the Rental Real state Activities; (vii),Mrs.:Trzeciak wasna real estate professional s that term is understood under I.R.C. § 469; and (vii) [sic] in connectioitwith thè Rental Real Estate Aátivities, 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 Petitionerk were not negligêntdand 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 liabilitydncluding but not limited to the fact that the Petitioners made good faith efforts and took reásonable caré in þreparing the Petitioners' 2005 and 2006 Returns; ând properlÿ:relied on the Petitioners',tax professional's advice after prövi'dingiuch rofessionals with all the necessary facts Petitioner(cid:0)541did not allege in the petition that Ms. Trze'ciak rhalntained án area or an offiòe in petitioner(cid:0)541' residence where she did work relating to her real- estate activities, let alone an area or an office in that residence that qüalifiëd as her "principal place of business under section 280A*(section 280A principal place of All section references are to the Internal Revenue Code (Code) i ëffect at all rel vant times. All Rule references are to the Tax Court Rules of Practice and Procedure. business)i6 and thus a home office for Federal income tax (tai) purposes (tax home office)%vith respect to Ms.Trzeciak's real estate acti ities. On May 7, 2010, respondent filed an ai7swer in the-instant case. In the answer, respondent denied that respondent érred with respect to the determinations in the notióe and dénied eaöh of the allegatibns set forth in the petition quoted above, except the allëgation in paragraph 5.a.(i). Inèhe answer, respondent requested "ihat thé relief sought in the petition be denied and that respondent's determinatiënras set forth irí the noticeaf;deficiency be in all respects approved." On Jiir e 24, 2010, Mí?Nardone sent espondent's courisel a letter on behalf of petitionei·s (petitioners' June 24, 2010 letter), in which he asserted: "This offer constitutes a 'qualifled offer' pursuant to LR.C. § 7430(c)(4)(E) and how that term'is defined in § 7430(g)(1)t" Responde t did not respond to petitioners' June 24, 2010 lette within the time prescribed by section 7430(g)(1)(D). 6S ö 280A provides jn pertinent part that "in the case of a taxpayer who is an individual or an S corporation, no dedue ion otherwise allowable under this chapter shall be allowed with;respect to the use of a dwelhngiumt 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 exclgsjvely used on a regular:basis * * * as the principal place of business for any tradelor 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 Febru- ary 14;12011, and (2) the Court's standing pretrial order. On December:11, 2010/Ms.)Puerto sent an email to respondent's counsel in;which slae set forth petitioners' position with respect to the determinations in the notice In that email, Ms.1Puerto stated: "The main issue is whether Mrs. Trzeciákis time spent traveliný, from her home office to the rental;properties and back counts for purposes of satisfying the requirements under § 469(c)(7).''t n Ondanuary 3, 2011, Ms. Puerto, at the request of respondent's counsel, sent another eñiail to re(cid:0)541pondent'scounsel (January 3, 2011 email), in which she maintained that "Thë Home Office qualifies as * *.* [Ms. Ti.zeciak's] princinál place of business'for the 2005 and 2006 tax years" for Ms. Trzeciak's real estate activities? In thät,emails Ms: Puerto discussed the facts and the law that petition- ers' 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 qualifieMas the section 280A principal place o business of M . Trzeciåk. Include iñ the discussion of the facts asserted in the January 3 2011 eniail were that Ms. Tf ecial "desighated a room as the office for" Ms. Tr eciak s real estate âctivities arid that Ms. Trzeciak "was the only individual thåt u(cid:0)541èd" that - 19 office in petitioners residende. Included i the discussion of<the law in the January 3, 2011 email was the follöwing: Theeterm-priheipal place ofbu(cid:0)541ihessiincludeéa place of business usedty the taxpayer to perform(cid:16)041administrativeor management activitiés related tò the taxpayer:s;tiade or business if there is no other fixed locätion of the taxpaýers' tradejòr business wheré substantiál administrative or managemènt'activities are undertaken. See Code § 280A(c). On January 5; 2011, petitioner(cid:0)541'att rdey had a telephonic discussion with respondent's counsel during hich they descfibed Ms. Trzeciak's so-called home office as h "fully functional workþlace' R spondent's counsel asked petitioners' attorneys to provide him with substantiatioi establishing that Ms. Trzeciak's so- called home òffice quàlified as hèr section 280Asprincipal placetòf business and thus her tarhome office. Onhnuary 20 2011, Ms. Puerto serif a^n email to respohdent's cóunsel . (January (cid:0)5760y2011email), in which she provided the substantiation that he had requested. On the same day on v/hich responden s cöunsel received the January 20, 2011 eniail, he prepafed a so called counsel settlement memorandum (settlement memofandum). The-settlement memorandum indicated that "petitioner [Ms. Trzeciak] maintained a fully functional òffice within her home [petitioners' - 20 - residence] for the sole purpose of managing the [rental] properties." The settle- ment memorandum also stated: Bécause the petitioner's [Ms. Trzeciak's] maintenance of an office [in petitioners5residence] was not previously developed, this case was initially viewed by our office as involving the issue of whether the petitioner's trips between Dayton [Centefville] and Columbus were a form of commuting. * * * * * * the fact that the petitioner maintained a legitimate business office in Dayton;[Centerville] had not been clearly adyanced much less established at the time of our earlier analysis. Once it became clear that this was thè case, and that the.travel time was not "commuting" but was travel between business locations, we concluded based on established aùthority 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 eif 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 òase except those relating to the petitioners' claim for litigation and administrative costs under I.R.C. § 7430, hereby submit an stipulate to the following: 7Because the parties filed a stipulation of settlement, they did not execute a .. . I '. . stipulation of facts for trial. - 21 1. The petitioners are not liablè for any deficiencies in income tax, and are not'due any òverpaymenth of income tax, för taxable?years 2005 and 2006 2. The petitioners are not liabl for þènalties under the provi- sions of I.R.C. § 6662(a) for taxable years 2005 and 2006. On ebruary 11 2011, petitioners filed petitioners' motion. Respondent filed a responsé to petitioners' motion (resp ndent's résponse) and petitioners filed a reply to respondent's response (petitionérs replý). (We shall refer collectively to petitioners' motion arid petitioners eplý as petitióners' filings.) Petitioners attached as exhibits to petitiöners reply, inter alia; (1) an affidavit of Mr. Reagan (Mr. Reagan's affidavit) and (2) an affidavit of Ms. Trzeciak (Ms. Trzeciak's Mr. Rèagan s affidavit stated in pertir ent part: 6. 7. During the examination, Petitioner Miriam Trzecíak ("Miriam") provided the rekeiïue agent a detailed log of the work relating to the rental properties that Miriarñ performed durin!g the 2005 and 2006 tax years. I [Mr.. Reagan] informed the tevenue agent that--as reflected in Miriam's 2005 and 2006 logs--Miriam spentaa7substantial amount of;hours performing adìniniÀtrative düties for the rental properties out òf an office locatbd in her home. Further, I informed the revenue agent that Pletitióners:incurred certain expenses in.operating this office out of their home and Petitioners reported and deducted these exlsenses on their Returns. ' 8 9 10. 11. 12. - 22 - Petitiöners provided the revenue agent a copy ofiPetitioñers' 200$and 2006$ental property expense report * * * ("Expense Spreadsheets"). The first column of the Expense Spreadsheets lists the common overhead expenses for Petitioners' rental properties during the 2005 and 2006 tax years. 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 öommpn overhead expenses included--among other things the expenses relating to Petitioners' home office that were incui·red during the 2005 and 2006 tax years. I directed the revenue af,ent to the areas on Petitioners' Returiis where Petitioners reported and;deducted their home office pxpenses. The revenue agent did not ask me any further questions regarding the common overhead expenses or home office expenses, or any details regarding Petitioners' home office. 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 fimding out how many hours Miriam spent performing work relating to.the rental properties. Petitioners provided the revenue agent all of the information that Respondent requested. . Respondent never asked for any information regarding Petitioners' home office or related expenses. Pétitioners-disagreed with the revenue agent's position that Miriam's travel to and;from her residence and the rental properties should not count towards Petitioners satisfying the hourly requirements under LR.C. § 469(c)(7) because lVIiriam's travel was;commuting - 23 14 15. Dùring the ihitialiappeals conference, I argued, on behalf of Petitioners, that Miriam's travel to and from the rental properties and Petitíoners' residence should coùnt towards Petitioners' satisfying the hourly requiremeht(cid:0)541tof I.R C. § 469(c)(7). Further, I argued that Miriam s tra el wäs not a form of commutirig. I informedAppeals that Mirian performèd all of the administrative functions relating to thé rerîtal pï operties from Petitioners' home office and Petitioners repórted the expenses relating to their home office ori PétitionerskRéturns. Like the rêvenue . agent, the appeals officèr focuséd ón the commuting argument and never challenþ,ed:or quéstioned the home office expenses. Ms Trzeciak's affidávit stated in>pertinerit pàrt: n 3. 4. 5. 6 During the 2005:ahd 2006 tax yèars, I [Ms. Trzeciak] had an office in my home that was designated for my rental property business- In that office, I perfórmed all-of the management and administrative matters for the rèntal properties. Dûring the IRS's èxamination of Petitioners' Form 1040 U.S. Individual-Tax Return for tax years 2005 and 2006 (the "2005. ànd 2006 Returns"), the revenue agent interviewed me regarding iný activities in donnectionävith my rental pròperties. * * * I told the revenue agent that I was.the only person that managed the rental properties, and I përförmed most of thé management and administrative work at my 1 ome office. The revenue agent never sked fne during the interview whether my home office was used regulåHÿ and exclusively for the - rental property business or any òther questions about the home office During the interviev , the revenue agént!s questions were focused primarily on the reasoi1s, dates, and length of the travel - 24 - from my honie office to the rental properties. The revenue agerit did not inquire about my home office. 7. During the 2005 and 2006.tax years, I kept a journal of all of the ork that I performed for.my rental properties. I had various entries regarding the management and administrative work that I I went over one month's worth of performed at my home office. jourñal eñtrie(cid:0)541'withthe revenue agent that included entries for : work;pèrformed at the home office. .. , Respondent filed a reply to petitioners' reply (respondent's reply). Thereaf- ter, the Court had a telèphonic.conference (Court's telephonic conference) with respective counsel for the parties (collectively, counsel). During that conference, the Court adkised counsel that the Court read Mr. Reagan's affidavit to be in conflict incat least one material respect with certain of the documents (petitioners' documents) that petitioners had attached to certain of petitioñers' filings regarding what petitioñèrs had arizued during the administrative proceedings before the Internal Revenue Service (administrative proceedings). As a result, the Court informed counsel thatshe 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 eviden- tiary hearing in order to resolve the conflict that the Court believed existed in at least one matérial respect between Mr. Reagan's affidavit and certain of petition ers' documents and directed counsel to file respective supplements to their respec- - 25 tive-repliesiin which thèy 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 res ondent's reply. In that supplement, respondent stated: "The rèspoñdent submits that whether or not petitioners' POA [Mr. Reagañ] mentioned petitioners' home öffice,during the ekamination of their 2005 and 2006 returns is neither material nor relevant for the Court's present considerations." 8According to respondent, the record in the instant proceeding does not establish that Mr. Reagah argued to respondent's representatives during the administrative proceedings that a work;area or an office in petitioners' residence where Ms. Trzeciak did work relatir¼tà hei· real estate activities qualified as a sec. 280A principal placè of business and thus a tax home. Respondent also points out tl(cid:0)540atpetitioners did not even allegs in the ÑtitÊ1 thaf 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 recoi.d established during the administrative proceedings and the petition that petitioners filed commencing this case, respondent could not have been, and was not, aware before o when respondent filed the answer of any arguments thät petitioners might have made during those administrative proceedings that a work area or an office in petitioners' residence where Ms. T'rzeciak did work relating tö her real esfate 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 petitioners' motion. - 26 - Petitioners filed a supplement to petitioners' reply (petitioners' supplement). (We shall sometimes refer collectively to petitioners' motion petitioners' renlyp and petitioners' supplement as petitioners' complete filings.) In that supplement, petitionersstated: While Mr Reagan's statements in his affidavit are relevant to this case, by supporting the fact that Petitioner communicated to Respondent early ori.in the examination phase that the>Petitioners had a home office, the determination of whether these statements actually occui·red ii not material. There is sufficient evidence on the record and objectively 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 ùÏotimi. e c áciude that a hearing is not necessary. See Rule 232(a)(2). Discussion WA p in i iitial y whyùe recharacterized the motion that petitioners file entitÍed "lÝIOTIÖN FOR W RI) OF REASONABLE LITIGATION AND AD191ÌÑISTRATIVE COSTS". The costs that petitioners are claiming, nhiàh are shown in åeftain of petitionérs' complete filings, are expensès or costs reláting to the a tion df the etition,ithe filing of the petition, and certain activitiesihat . . . - 27 petitioners' attorneys condùcted thereafter.94, supra note 4. As a result, we recharacterized the motion that petitioners filed as a motion for an award of reasonable litigatiön costs. Sectioií 7430(a) authorizes an award to thèsprevailing, party of reasonable litigation costs incurred:in cónnecti n with càse brought in the Court against the Commissioner of Internál Revenue (Commi sioner) involving the determination of any tax, mterest, or penalty under thetode, providéd that certain requirements are satisfied. We consider here only shether petitioners qualify as the "prevailing party" for purpóses of section 7430(á). In cònsidering that question, we shall address only (1) whether respondent's positibndn the instant case was substantially justified s sec. 7430(c)(4)(B)(i), and (2) vèhether the:so-called qualified offer rule applies, s_ee section 7430(c)(4)(E). That is because resolution of those ques tions resolves the!issue ofùhether petitione(s are entitledéto an award under section 7430(a). 90n Mar. 8, 2010 the day before petitioners' attorneys mailed to the Court the petitiori thát they liád þrepared on*behålf of petitionérs, petitioners' attorneys attempted to contact respondent's Aþþdals öfficer bý telephoùe and facsimile, and on Mar. 10, 2010gthe day, after petißònei's' attorneys mailed the petition to the Court, petitioners' attdrneys had a telephonic discussion with respondent's Appeals officer. In addition, on Mar. 13, 2010, Mr. Nardone sent by facsimile to respondent'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 offiber. - 28 - The term3prevailing party" generally means any party who (1)has substan- tially prefailedavith 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)(H), and (2) rheets the net worth requirements of 28 U.S.C. sec. 2412(d)(2)(B), sec. 7430(c)(4)(A)(ii).i° In order to qualify for an award under sebtion 7430(a),vthe;prevailing party must (1) have exhaustedsthe available admin isträtive remedies; secr7430(b)(1%and (2) not have unreasonably protracted the court proceeding, seb 7430(b)(3) The party seeking an award under section 7430(à) 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 connettionswith the court proceeding, as defmed in 7430(c)(1)." Rule 232(e); see also(cid:16)254orsonv. Comrnissioner, 123 T.C. 202, 205-206 (2004). Section 7430(c)(4)(B)(i) provides an exception to the defimition of the term "prevailing party" in section 7430(c)(4)(A). Section 7430(c)(4)(B)(i) provides: "A R pm t acknÊwledges that petitioners have complied with (1) sec. 74 (ò)( ) )(i) I) ah (2) sec. 7430(c)(4)(A)(ii). Respofid nt ackñowledg'és that petitioners have complied with séc. 7430(b)(1). $es ondènt maintains, however, that petitioners have not established that they bornplied with seöF7430(b)(3). Réspondent maintains that petitioners have not established that they complied with sec. 7430(c)(1) and Rule 231(d). - 29 pärty shall not be treated as the prevailing pårty in a proceeding * * * if the United States'establishes that the position of the Ur ited States in the proceeding was. . substantially justified.' Respondent argues that respondent's position in this proceeding (respon- dent's litigating position) was sûbstantially jnstified, see sec. 7430(c)(4)(B)(i), and that therefore petitioners are not the "prevai{ing party", as defined in section 7430(c)(4)(A-). Respöndent has tlie burden i[n the instant.proceeding of establishing that respondent's litigating position was substantially justified. See sec. 7430(c)(4)(B)(i). e n The position of the United States is.sybstantially justified if it "is one that is 'justified to a degree that could satisfy a reasonable person' or that has a 'reason- able basis both in law and factA" Swanson % Commissioner, 106 T.C. 76, 86 (1996) (quoting Pierce ydJnderwood, 487 U SS 552, 565 (1988)). "A position has a reasonablè basis in fact-if there is televant e idence that a reasonable mind might accept as adequate to support a conclu(cid:0)541ion."Corkrey v. Commissioner, 115 T.C.o 366, 373 (2000) (citing Pierce, 487 U.S-at 564 565). In determining whether the position of the Commissioner was substantiálly 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). - 30 - Whether thÊ Corñmi(cid:0)541sioiïeracted 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. Commis sioner,*108TCn430 443 (1997). The Commissioner's position "may be incorrect but substaiùially jùstified.'if a reasonable person could think it correct'." Id. (quoting Piérce, 487 U.S. at 566 n.2). A significantifactor 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 le(cid:0)541alarguments supporting the taxpayer's position. Corson v. Commis- sioner, 123 T C. at 206=207; sec. 3Ol.7430-5(c)(1), Proced. & Admin Regs. The Cbmmissióner's concession of an issue is not conclusive as to whether the Commissioner's prosition with respect to that issue was substantially justified See Corlèrèß vuCommissioner, 115 T.C. at 373; Sokol v. Commissionef, 92 T.C. 760, 767 (1989.); Wasie v. Commissioner, 86 T.C. at 968-969. In;óider to determine whether the "position" of the Uriited States is substan tially jástifièdycourts "must identify the point at which the United States is first considered to have taken a position, and then decide whether the position taken - 313 from that point forward was or wasinót substantially justified." Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 442. For purposes of a court proc'eeding,tthe "position of the United States" means "the positiön-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 proceêding is that taken in the answér. See e.g., Maggie Mgmt. Co. v. Commis- sioner; 108 T.C. at 442. The Court has held that "the Governrnent'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.rCommissioner, T.C. Memo..2007-281 (citing Huffman viCommissioner, 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 mayf"review[] the government's position in11itigation against the backdrop of the administrative actions that have gone before -That backdrop is relevant to a deterinihation whether the government's position in litigationiis 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 pertinent;provisions of section 469 will be helpful to our consideration of that . - 32 - question. Section 469 generallÿ disallows for the taxable year any "passive activity loss".kSec. 469,(a) The term "passive activity loss" is defined as the excess of the aggregatejlosses 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 acti ity 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)J2), (4).4ection 469(c)(7) provides an exception to that general rule for só called real estate professionals. Under that section, the rental activities of real estate professiänals 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 reqbirement).1 Sec. 469(c)(7)(B)(ii). Respondent:s position throughout the administrative proceedings and when respondent filed the absiver in the instant proceeding was (1) that Ms. Trzeciak's travel time between petitioners' residence in Centerville and the rental properties in - 334 and around Golumbus (Ms. Trzeciak's travel time) constituted commuting, (2) that therefore that time may not bejincluded as hours spent in the conduct of:Ms. Trzeciak'sTeal estate aötivities,for purposes of meeting the 750-hour requirement for each of petitioners' táxable years>2005 and 2006, and (3) consequently petition- ers' claimed i·esþective real estate lôsses for their taxable years 2005 and 2006 constituted passive losses under section 469 It is respondent's position in the instant proceeding that respondent's litigating position was substantially justified because, as of May 7 2010, the datè orrwhiéhtrespondent filed the answer, through at least December 17, 2010, petitioners had ot claimed, let alone established, that Msdrzeciak!s,travel to her rentäl properties was from her "business home to the sites ofher business' assets. As we understand it, petitioners' position at its core is that respondent's litigating pôsition was not substantially justifièd because (1) petitioners presented inföñnation fo respbnde t dùring the ädrhir stràtive proceedirigs that Ms. Trzeciak did viofkielating to her rentál properties in titioners' resideñce, (2) respondent thus had ari obligatiô3 during tho a unini trative proceedings, which respondent Petitioners do not dispùte that if Ms. Trzeciak's travel time were not included for.pürposes of determining whetljer she met the 750-hour requirement for each of petitioners'3taxablegears 2005 ånd12006, petitioners' claimed respective real estate losses.for their tâxable years 2005 and 2006 would constitute passive losses under sec. 469. - 34 - failèd to satisfy, torask petitioners to provide respondent with documentation or other substantiation establishing that Ms. Trzeciak maintained a work area or an office.in petitioners' rê(cid:0)541idencethat qualified as Ms. Trzeciak's section 280A . principal place of:busines(cid:0)541and thus her tax home office, and (3) therefore respon- dent had that same óbligation before respondent filed the answer in the instant prdceeding, which respondent failed to satisfy. Before;addressing each of petitioners' contentions in support of their position3we shall set;forth our evaluation of Mr. Reagan's affidavit on which petitiönérs rely In reading that affidavit, we understood Mr. Reagan to be claim ing th t he argued dúring the administrative proceedings that Ms. Trzeciak's tra e time was between her tax home office" and her rental properties. Mr. Reagan did In neither of the two documents that Mr. Reagan submitted on petitioners behalf to respondent du ing the administrative proceedings, yvhich are the only such documents that are part of the record (i.e., petitioners' August 18, 2008 letter an petitiòners'nprotest), 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 homepffice. ;Wejhus are unwilling to rely on the allegations in paragraphs 7, 9, 11, and 15. of Mr. Reagan's affidavit that he informed respondent's represéntatives during theplministrative proceedings that Ms. Trzeciak had a so-called home office. For the same reasons, we are unwilling to rely on similar.allegations in paragr¶phs 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 infdrmed respondent's representätives during the administrative procëedings that Ms. Trzeciak maintained a home office or an office in petitioners' residence in whiel she didmork relatingito hér real estate activities, nothing intthe record establishes (continued ) -351 not make anyssuch argument to respondent's representatives during the administra- tive proceedings, astevidenced, for examplej by certain others:of petitioners' documents; such as petitioners' 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 eviden- tiary 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 irtpetitioners' residence, we agree that that fact is established by-the record. 3Vith respect torpetitioners' contention that, because petitioners presented information to respondent during the adrninistrative proceedings that Ms. Trzeciak did work relating to her rental properties in petitioners' residence, respondent had an oblij,ation during those probeedi1îgs, which*respóndent failed to satisfy, to ask petitioners tó 1 rbvide respondent with documentation or other substantiation (...continued) that 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.4Trzéciak maintained a work area or an office in petitioners' residerice that qiialified as'Ms. Trzeciak's section 280A principal place of business and thus hér ta^x home office,.we disagree. We do not believe that respondent's knowlèdge during thè admiriistrative proceedings that Ms. Trzeciak did work relating to her rental properties in petitioners' residence imposed an obligation on respoddent toiaskipetitioners to provide respondent with documentation or othèr substantiation establishing that Ms. Trzeciak maintained a work area or an office in that residerice that qualified under section 280A as her principal place of business and thus her tak home office.15 It was petitioners' obligation, and not respondent's obligation, to providë documentation or other substantiation establishing that Ms. Trzeciak maintained a work area or an office in that residence that qualified ùnder section 280A as her piincipál place of business and thus her tax home office to respondent. Respohdent's revenue agent even reminded petitioners about their Pètitigners rely on Pizza Indus., Inc. v. Commissioner, T.C. Memo. 1999- 108, for the proposition that the Commissioner's position is not substantially justified wherezthe Commissioner fails to adequately examine the information presented by a taxpayer. In Pizza Indus., Inc., the Court held that the Commissioner'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 öbligations 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 obligation whenthe alerted them in the revenue agent's August 12, 2008 workpaper that they had made "[n]o mention * *®of aispace [in petitioners' residence] that was used regularly and exclusively forithe taxpayer's rental activities." In remind- ing petitioners that they had made no mention of a "space [in petitioners' resi- dence] that was used regularly and exclusively for the taxpayer's rental activities", respondent's revenue agent paraphrásed 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 ås her section 280A principal place of business and thus her tax home, petitioners hád 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 taxpayer See sec. 28dA(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 Au¼,ust 12,, 2008 workpaper apparently fell on deaf ears. Petitioners and Mr. Reagaù igñored ît 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 v/orkpaper,1191r Reagan argued: "If'the issue of commut- ing was relèvant to management of rëñtàl réal estate, there would be some mention of it in the IRS guidance. Absenqe of this implies that travel for rental property - 38 - management is 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 rental3real estate or being a Real Estate Professional."i6 On:the record before us, we find that during the administrative proceedings respondent did not have the obligation that petitioners would impose on respondent Both respondent's revenue agent and respondent's Appeals officer, Implicit in that position of respondent's representatives was that any ex- In fact, respondent's revenue agent explicitly pointed that out in his In that workpaper, he stated: "[Ms. Trzeciak's] disagreed with petitioners' contention that the concept of "commuting" in the tax law was not "relevan( and did not apply to a real estate professional or to managing rental;property. According to respondent's representatives during the administrative próceedings, Ms. Trzeciak's travel time constituted "commuting" in the tax law. penses 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). August 12, 2008 workpaper. [t]ravelfime 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 representa-. tives 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 underithat 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 soybefore respondent filed the answer in the instant proceeding. At the time respondent filed the answer, respondent knew that petition- ers' position during the administrative proc¢edings had been that the concept of "commuting" in the tax;law was not "relevant'' and did not apply to a real estate professional or to managingtental property.! Moreover, although respondent's counsel was aware at that:time that Ms! Trzeciak did work relating to Ms. Trzeciakis real estate activities in petitioners' residence, petitioners did not even allege thaf 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 thé light of,the facts;available to respondent at the time the answer wasifiled 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 respóîident's burden under section 7430(c)(4)(B)(i) of establishing that respon- dent's litigàting position was substantially justified with respect to the section 469 - 40 - dete(cid:0)576mination. Petitioners argue thát even if we were to find, which we have, that respon- dent's litigating pösition wás substantially justified, they should be treated as the "prevailing party", for purposes of section 7430(a) because of the so-called qualifiedioffer 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 wouldhave beeneso determined if the United States had accepted a qualified offer of the.party". See:7430(c)(4)(E)(i). The qualified offer provision of section 7430(ó)(4)(E) applies without regard to whether the Commissioner's position in the matter is-substantially justified. See Haas & Assocs. Accountancy Corp v. Commì(cid:0)541sioner,'117 T:C 48, 59 (2001), aff'd, 55 Fed. Appx. 476 (9th Cir. 2003). Respondentfargues that petitioners are not the "prevailing party" for pur- poses of section 7430(a) under the qualified offer rule of section 7430(c)(4)(E). In . The record çloes not establish what, if any, litigation costs petitioners'. attorneys incùrred 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 support 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 Coùrt. Sectiont 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).i8 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 18Petitioners 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). Commissioner did not constitute a settlement where the taxpayer had made "multiple 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 distinguishable from the instant case and petitioners' reliance on that case to be misplaced. See Gladden v. Commissioner, 120 T.C. 446, 449-450 (2003). In Estate of Lippitz, the Court held that a concession by the establishirig that they are entitled to an award of reasonable litigation costs under - 42 - that section. We have considered all of the parties' contentions and arguments that are not discussediherein, 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.