UNITED STATES TAX COURT



       MAGGIE MANAGEMENT COMPANY, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8017-94.                       Filed June 11, 1997.



     P, a California corporation, filed a petition for
redetermination before the enactment of the Taxpayer
Bill of Rights 2 (TBR2), Pub. L. 104-168, 110 Stat.
1452 (1996). Among the amendments made to sec. 7430,
I.R.C., by TBR2 was a change regarding the burden of
proof. Prior to amendment, sec. 7430, I.R.C., required
the taxpayer to prove that the Commissioner's position
in the administrative and court proceedings was not
substantially justified. Sec. 7430, I.R.C., now
requires that the Commissioner establish that the
Commissioner's position in such proceedings was
substantially justified. This amendment is effective
in the case of proceedings commenced after July 30,
1996, the date of enactment of TBR2.

     P's case was consolidated for trial, briefing, and
opinion with that of Mr. and Mrs. O, with whom P had a
business relationship. The nature of this relationship
was litigated before a State court jury, which found in
                               - 2 -

     favor of P. P and Mr. and Mrs. O took positions in the
     State court litigation which were contrary to the
     positions each took in this case. To avoid whipsaw, R
     took inconsistent positions against P and Mr. and Mrs.
     O. When Mr. and Mrs. O conceded the principal issue in
     their case, R conceded the issue in P's case.
     Thereafter, P filed a motion to recover administrative
     and litigation costs pursuant to sec. 7430, I.R.C.

          1. Held: Because P commenced its case (by filing
     a petition for redetermination) before the enactment of
     TBR2, P bears the burden of proving that R's position
     was not substantially justified.

          2. Held, further, P failed to carry its burden of
     proof that R's administrative and litigation position
     was not substantially justified, and is therefore not
     entitled to an award of reasonable administrative and
     litigation costs.



     Alec Valk, Terrence J. Moore, and Joseph E. Mudd, for

     petitioner.

     Lisa N. Primavera, for respondent.



                              OPINION

     NIMS, Judge:   This matter is before the Court on

petitioner's Motion for an Award of Reasonable Litigation and

Administrative Costs (motion for costs) filed pursuant to Rule

231 and section 7430 on January 2, 1997.   Unless otherwise

indicated, all Rule references are to the Tax Court Rules of

Practice and Procedure.   All section references are to sections

of the Internal Revenue Code in effect at the time the petition

was filed.
                               - 3 -

     Respondent issued a statutory notice of deficiency on

February 14, 1994, in which deficiencies in income tax and

additions to tax were determined as follows:




Tax Year Ended              Deficiency        Additions to Tax
                                         Sec. 6653(a)   Sec. 6661
July 31, 1988 (TYE 1988)       $93,500   $4,675.00      $23,375
July 31, 1989 (TYE 1989)        73,651    3,682.55       20,883
     Total                     167,151    8,357.55       44,258

     The notice of deficiency also made adjustments to

petitioner's fiscal 1990 tax year, although no deficiency was

determined for that year.   A petition was filed on May 16, 1994.

At that time, petitioner (or MMC), a California corporation, had

its principal office at 6800 Bayshore Walk, Long Beach,

California.

     On June 20, 1994, respondent filed an answer to the

petition.   After the case was calendared for trial, but prior to

trial, the parties filed a Stipulation of Settled Issues.    A

stipulated Decision was entered by the Court on November 29,

1996, setting forth deficiencies of $6,249 and $5,245, and no

additions to tax, for TYE 1988 and TYE 1989, respectively.

Petitioner thereafter filed its motion for costs.   (Petitioner

did not submit a memorandum of points and authorities in support

of its motion for costs.)   In accordance with section 7430 and

Rule 232, and pursuant to the Court's Order, the stipulated

Decision was vacated and set aside, and filed as a Stipulation of
                               - 4 -

Settled Issues.   Respondent filed a response to petitioner's

motion for costs on March 3, 1997, pursuant to the Court's Order.

No hearing has been requested, and none is necessary.   Rule

232(a)(3).

     The issues for decision are whether petitioner qualifies as

a "prevailing party" for purposes of section 7430 and, if so,

whether the administrative and litigation costs petitioner seeks

are reasonable, and whether petitioner has unreasonably

protracted the administrative or court proceedings.

                            Background

     The following facts are based on the entire record,

including the affidavits and exhibits submitted by the parties

with respect to the motion for costs, the parties' pleadings,

their stipulated settlement, various other motions, and

supporting documents.

     Petitioner was incorporated in 1984 to assist in managing

the business activities and assets of John Ohanesian (Ohanesian)

that he had received upon the dissolution of a previous

partnership.   Margaret Gehan (Margaret) is the president, and

Glenn M. Gehan (Mike) is the vice president, of petitioner.

Margaret was MMC's sole shareholder during all relevant times.

     The relationship between petitioner and the Ohanesian family

was not defined by written agreements until 1987.   These

agreements provided that petitioner was to provide management or
                                - 5 -

consulting services to the Ohanesian Family Trust (the Trust) and

Seven Resorts, Inc. (SRI), a corporation controlled by the Trust

(collectively referred to herein as the related entities), in

exchange for an annual fee equal to 2 percent of the gross assets

owned by the Trust and 2 percent of the gross revenue realized by

SRI.    The written agreements contained no provision which

obligated or required petitioner to pay personal expenses of the

Ohanesian family or SRI.    Nevertheless, during the years in

issue, petitioner purchased and maintained several luxury

automobiles for members of the Ohanesian family.    Petitioner also

leased and furnished office space for SRI.

       During TYE 1988 and TYE 1989, petitioner received funds from

SRI and the Trust through John and Ethel Ohanesian (the

Ohanesians).    Petitioner reported the amount of funds received as

income on its Federal income tax returns for those years.     On its

returns for TYE 1988 and TYE 1989, petitioner claimed deductions

for various expenses, including the depreciation and upkeep of

the luxury vehicles for members of the Ohanesian family and

office space for SRI.    On their joint Federal individual income

tax returns for the years overlapping petitioner's taxable years

at issue, the Ohanesians deducted the amounts paid to petitioner

as investment expenses.

       At some point in 1989, Mike and Ohanesian had a "falling

out", which resulted in Ohanesian's terminating the agreements on

November 15, 1989, and withholding payment of the contract fees
                                - 6 -

to petitioner.    Although the stock of petitioner was nominally

owned by Margaret, Ohanesian claimed that petitioner was in fact

"his" corporation.    On this basis, Ohanesian demanded that Mike

and Margaret (the Gehans) surrender to him the stock of

petitioner, together with all assets "currently ow[n]ed" by

petitioner, including the automobiles, office furnishings, and

equipment.    (Although petitioner held title to the property

described above, the Ohanesian family and the related entities

had possession of those assets.)

       In response to the termination of the agreements, the Gehans

and petitioner sued the Trust, the Ohanesian family, and SRI in

Superior Court of the State of California for, among other

things, breach of contract, recovery of the luxury automobiles,

and for recovery of the office equipment and furnishings used by

SRI.    In its complaint, petitioner alleged the following facts to

be true:    (1) Petitioner was the owner of the luxury automobiles;

(2) the members of the Ohanesian family had converted the

automobiles to their personal use; (3) petitioner was the owner

of the office equipment and furnishings used by SRI; and (4) the

written agreements between the parties were valid and

enforceable.    In a sworn declaration accompanying the complaint,

Margaret, as president of petitioner, stated that petitioner was

at all times independent of the Trust and SRI.

       The Ohanesian family, the Trust, and SRI alleged in their

cross-complaint that the management agreements were "fictitious"
                               - 7 -

in that the fees to be paid to petitioner were actually earmarked

to pay the personal expenses of the Ohanesian family and SRI.

This arrangement, according to Ohanesian, was established by oral

agreement of the parties entered into prior to the date of the

written agreements.   Ohanesian maintained that petitioner was

actually his corporation, and that Margaret owned the stock in

name only so that it would appear that petitioner was an

independent entity.   Ohanesian later testified that MMC was

incorporated at his behest because he "needed a means of buying

vehicles, expensing items if * * * [he] was going on business

trips, [and] paying * * * [his] children, without it looking like

a gift."   The cross-complaint further alleged that the office

furniture, equipment, and luxury vehicles were the rightful

property of the Ohanesian family or SRI.

     At all times during the State court litigation, petitioner

maintained that it was an independent entity and that the terms

of the written agreements exclusively defined its relationship

with the Ohanesian family and related entities.   Petitioner

contended that parol evidence could not be considered to vary or

contradict the terms of such agreements or show that there was a

separate oral agreement that petitioner was to function as a

conduit or agent of Ohanesian and the related entities.

Petitioner asserted that it provided real and substantial

management services in exchange for the agreed-upon fees.   In his

State court deposition, Mike explained petitioner's purchase of
                               - 8 -

the luxury automobiles and the provision of the office space to

SRI as due to "the substantial business relationships with the

Ohanesian Family Trust, and John [Ohanesian] asked for it."

     The suit between petitioner and Ohanesian was decided by a

jury.   In pertinent part, the jury's special verdict found as

follows:   (1) Valid contracts existed between petitioner and the

related entities; (2) petitioner performed as required under the

contracts; and (3) members of the Ohanesian family and the Trust

converted personal property to their own use.

     As a result of the conflicting allegations and testimony in

the State court suit, and petitioner's and the Ohanesians'

failure to offer any other evidence to substantiate their claims,

respondent issued statutory notices of deficiency to both the

Ohanesians and petitioner.   In the notice of deficiency to the

Ohanesians, respondent determined that the amounts paid to

petitioner by the Ohanesians did not constitute investment

expenses and were, therefore, not deductible.    This determination

was supported by Ohanesian's testimony in State court that

petitioner was a conduit for payment of his personal expenses.

     In petitioner's notice of deficiency, respondent disallowed,

among other things, the following expenses (collectively referred

to herein as the Ohanesian-related items):

     Adjustments to Income     TYE 1988         TYE 1989

     Automobile depreciation   $17,280          $21,900
     Other automobile costs     20,475           39,568
     Ohanesian expenses         26,592           12,569
                               - 9 -

     SRI expenses              164,352        128,268

     In the Explanation of Adjustment attached to the notice of

deficiency, respondent explained that petitioner had not

established that the amounts claimed were paid or incurred during

those taxable years or that the expenses were ordinary and

necessary to petitioner's management and consulting business.

     In their respective Tax Court cases, petitioner and

Ohanesian adopted positions substantially at odds with each

other, as well as with the position each had taken in the State

court case.   Ohanesian maintained that his payments to petitioner

were for legitimate management expenses.   Ohanesian further

contended that the consulting agreements were valid and

enforceable as written.   Petitioner, on the other hand, posited

that it was an agent of Ohanesian and that the payments for the

automobiles and other expenses of the Ohanesian family and

related entities were on account of that relationship.    In this

regard, petitioner theorized that, since it had recognized income

on moneys received from its principal (Ohanesian) that were used

to pay expenses as directed by Ohanesian, it was entitled to

deduct those payments. (Remaining adjustments were unrelated to

the Ohanesian-related items.   It was generally understood by

petitioner and respondent that these items would be resolved

after the Ohanesian-related items were resolved, since the former

were so small as to be de minimis in comparison with the latter.)

In so arguing, petitioner relied on the existence and validity of
                              - 10 -

a purported oral agreement--the same oral agreement that

petitioner previously had denied the existence or validity of in

the State court action.   Further, petitioner disregarded the

jury's finding that the automobiles and office furnishings and

equipment were its personal property and not the property of the

Ohanesian family or related entities.   In the alternative,

petitioner contended that the expenses were deductible business

expenses because "the jury decision includes a determination that

the Petitioner was obligated to pay each and every one of the

expenses disallowed by the Notice of Deficiency, as a part of its

contractual obligation with the Ohanesian Entities."   Petitioner

asserted that its receipt of management fees was conditioned on

its payment of the disallowed expenses on behalf of Ohanesian and

the related entities.

     The Ohanesians and petitioner subsequently settled their

cases with respondent prior to trial.   The Ohanesians conceded

that they were not entitled to deductions for the portion of the

fees paid to petitioner which were ultimately used to pay for

nondeductible personal expenses.   The Ohanesians' concession in

turn enabled respondent to concede that the payments made by

petitioner to fund those same personal expenses were made in

petitioner's capacity as a conduit for the Ohanesians.   As such,

the payments were allowed to offset income which MMC had

recognized on the funds it had received from the Ohanesians.    The
                               - 11 -

Stipulation of Settled Issues resulted in "no-change" for

petitioner as to the Ohanesian-related items.

                             Discussion

     We must decide whether petitioner is entitled to reasonable

litigation and administrative costs pursuant to section 7430.

     Section 7430(a) provides that the prevailing party in any

administrative or court proceeding may be awarded a judgment for

(1) reasonable administrative costs incurred in connection with

such administrative proceeding within the IRS, and (2) reasonable

litigation costs incurred in connection with such court

proceeding.

     Congress has enacted and amended several versions of section

7430.   As originally enacted by the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 292(a),

96 Stat. 324, 572, section 7430 was applicable to "civil actions

or proceedings commenced after February 28, 1983."    TEFRA sec.

292(e)(1), 96 Stat. 574.

     In 1986 and 1988, Congress extensively amended section 7430.

The amendments enacted by the Tax Reform Act of 1986 (TRA 1986),

Pub. L. 99-514, sec. 1551, 100 Stat. 2085, 2752-2753, generally

apply to "civil actions or proceedings commenced after December

31, 1985."    TRA 1986 sec. 1551(h)(1), 100 Stat. 2753.   The

amendments enacted by the Technical and Miscellaneous Revenue Act

of 1988 (TAMRA), Pub. L. 100-647, sec. 6239(a), 102 Stat. 3342,

3743-3746, generally apply to "proceedings commencing after
                                 - 12 -

[November 10, 1988]".    TAMRA sec. 6239(d), 102 Stat. at 3746.

(Congress also amended section 7430 in the Deficit Reduction Act

of 1984 (DRA 1984), Pub. L. 98-369, sec. 714(c), 98 Stat. 494,

961.    This amendment is effective "as if included in * * *

[TEFRA]".    DRA 1984, sec. 715, 98 Stat. 966).

       Section 7430(c)(4)(A)(i), as amended by TAMRA, sec. 6239(a),

102 Stat. 3745, provided as follows:

       (4) Prevailing party.--

            (A) In general.--The term "prevailing party" means
       any party in any proceeding to which subsection (a)
       applies (other than the United States or any creditor
       of the taxpayer involved)--

                 (i) which establishes that the position
            of the United States in the proceeding was
            not substantially justified,

       Section 7430 was most recently amended by the Taxpayer Bill

of Rights 2 (TBR2), Pub. L. 104-168, secs. 701-704, 110 Stat.

1452, 1463-1464 (1996).    Among other things, the amendments

require that the Commissioner establish that the Commissioner's

position in such proceedings was substantially justified.      TBR2

sec. 701(a) and (b), 110 Stat. 1463.      As relevant to this case,

TBR2 sec. 701(b), 110 Stat. 1463, amended section 7430 by

striking clause (i) of section 7430(c)(4)(A) and by adding the

following subparagraph:

            (B) Exception if United States establishes that
       its position was substantially justified.--

                 (i) General Rule.--A party shall not be
            treated as the prevailing party in a proceeding to
            which subsection (a) applies if the United States
                              - 13 -

          establishes that the position of the United States
          in the proceeding was substantially justified.

The amendments are effective with respect to "proceedings

commenced after [July 30, 1996]".    TBR2, secs. 701(d), 702(b),

703(b), and 704(b), 110 Stat. 1464.

     We first consider whether TBR2 applies in this case.    The

petition was filed on May 16, 1994, and the motion for costs was

filed on January 2, 1997.   If the "proceeding" were commenced

with the filing of the petition, then section 7430 as amended by

TAMRA would apply and petitioner would be required to establish

that respondent's position was not substantially justified.

However, if the "proceeding" were commenced with the filing of

petitioner's motion for costs, then section 7430 as amended by

TBR2 would apply, and respondent must establish that respondent's

position was substantially justified.    As discussed below, we

conclude that for purposes of the effective date provisions of

TBR2, a court "proceeding" is commenced upon the filing of a

petition under section 6213 for redetermination of a deficiency.

See Schlicher v. Commissioner, T.C. Memo. 1997-163; Austin v.

Commissioner, T.C. Memo. 1997-157.     (We leave for another day the

issue of when administrative proceedings are commenced for

purposes of the effective date provisions of TBR2, as such

determination is unnecessary for the disposition of this matter.

Accordingly, unless otherwise indicated, the term "proceeding(s)"
                              - 14 -

used throughout this Opinion will refer solely to court

proceedings.)

     Following the enactment of section 7430, this Court held

that a "proceeding" was commenced with the filing of a petition

for redetermination of a deficiency.   Whitesell v. Commissioner,

(1988) (where the taxpayer's petition was filed

before February 28, 1983, but the motion for costs was filed

after such date, the case was commenced with the filing of the

petition, and the Court was therefore without authority to award

costs); see also Molsen v. Commissioner, 

, 511 (1985);

Roberts v. Commissioner, T.C. Memo. 1987-391 n.21 ("The petition

in this case was filed in 1980 * * * [and] section 7430 is

therefore inapplicable."), affd. 

(5th Cir. 1988).

     Similarly, this Court has consistently looked to the filing

date of the taxpayer's petition in applying the effective date

provisions of the amendments to section 7430 enacted by TRA 1986

and TAMRA.   See Estate of Satin v. Commissioner, T.C. Memo. 1994-

435; Buck v. Commissioner, T.C. Memo. 1993-16; Carey v.

Commissioner, T.C. Memo. 1992-338; Schaefer v. Commissioner, T.C.

Memo. 1991-426; Estate of Lenheim v. Commissioner, T.C. Memo.

1991-21; Lewis v. Commissioner, T.C. Memo. 1990-522; Fulkerson v.

Commissioner, T.C. Memo. 1990-276; Blanco Invs. & Land, Ltd. v.

Commissioner, T.C. Memo. 1988-175; see also Smith v.

Commissioner, T.C. Memo. 1990-430, and cases cited therein.     We

note that in these cases, our holding that a "proceeding" is
                             - 15 -

commenced with the filing of a petition is supported by Rule

20(a), which states that "A case is commenced in the Court by

filing a petition with the Court to redetermine a deficiency set

forth in a notice of deficiency issued by the Commissioner".

     In enacting and amending section 7430, Congress has

consistently made its legislation applicable to "proceedings

commenced" after a particular date.   As discussed above, in

applying those effective date provisions we have consistently

interpreted "proceedings commenced" to mean the date on which the

taxpayer's petition was filed.   We presume that if our

interpretation were not what Congress had intended, Congress

would have used different language in drafting the effective date

provisions in TBR2.

     Additional guidance for deciding when "proceedings" are

commenced under TBR2 comes from the meaning of the word

"proceeding" as it is used throughout section 7430.   In this

regard, it is reasonable to assume that Congress intended to give

such word the same meaning in the effective date provisions of

TBR2 as such word is given elsewhere in section 7430.     This

provides further support for our conclusion that a "proceeding"

is commenced upon the filing of a petition.

     For example, section 7430(a) provides:

          (a) IN GENERAL.--In any administrative or court
     proceeding which is brought by or against the United
     States in connection with the determination,
     collection, or refund of any tax, interest, or penalty
                              - 16 -

     under this title, the prevailing party may be awarded a
     judgment or a settlement for--

                (1) reasonable administrative costs incurred
           in connection with such administrative proceeding
           within the Internal Revenue Service, and

                (2) reasonable litigation costs incurred in
           connection with such court proceeding. [Emphasis
           added.]

It is readily apparent that the underscored phrase modifies the

word "proceeding" appearing immediately before such phrase.    In

this context, the word "proceeding" cannot refer to a motion for

administration and litigation costs because such a motion is not

filed in connection with the determination, collection or refund

of any tax, interest, or penalty.   Rather, the word "proceeding",

as modified by the underscored phrase, must refer to the

proceeding that is commenced by the filing of a petition for

redetermination.

     Likewise, section 7430(c)(1)(B)(iii) uses the word

"proceeding" in a context which cannot be limited to the filing

of a motion for costs.   That section provides in relevant part as

follows:   "The term 'reasonable litigation costs' includes * * *

reasonable fees paid or incurred for the services of attorneys in

connection with the court proceeding".   (The term "court

proceeding" is defined in section 7430(c)(6) to mean "any civil

action brought in a court of the United States".)   A motion for

litigation costs may seek an award for certain expenses connected

with the filing and prosecution of the motion, and also for
                               - 17 -

expenses that have been paid or incurred in connection with a

court proceeding before the filing of the motion.   Thus, the

"proceeding" referred to in section 7430(c)(1)(B)(iii)

necessarily commences before the motion for litigation costs is

filed; i.e., with the filing of the petition.

     Similarly, section 7430(c)(4)(A) defines the term

"prevailing party" to mean--

     any party in any proceeding * * *

               *    *    *     *    *    *      *

          (ii) which--

               (I) has substantially prevailed with respect
          to the amount in controversy, or

               (II) has substantially prevailed with respect
          to the most significant issue or set of issues
          presented, and

          (iii) which meets the * * * [applicable net worth
     requirements].

For a taxpayer to satisfy those conditions, the taxpayer must

necessarily look back to the part of the proceeding that occurred

before the filing of the motion for costs.   Thus, the

"proceeding" referred to in section 7430(c)(4)(A) necessarily

commences before the motion for costs is filed.

     Further, section 7430(c)(4)(B)(i) requires that the

Commissioner establish that the Commissioner's position was

substantially justified "in a proceeding".   The "proceeding"

referred to in such section must necessarily commence before the
                              - 18 -

motion for costs is filed because the substantial justification

standard applies to the Commissioner's position in respect of the

substantive issues in the case.

     Based on the foregoing discussion, we conclude that TBR2

does not apply to a case in this Court unless the taxpayer's

petition is filed after July 30, 1996.   See Schlicher v.

Commissioner, T.C. Memo. 1997-163; Austin v. Commissioner, T.C.

Memo. 1997-157.   Because petitioner filed its petition on May 16,

1994, before the effective date of TBR2, it follows that section

7430 as amended by TAMRA, and not section 7430 as amended by

TBR2, applies in deciding petitioner's motion for costs.

     Under section 7430(a) as amended by TAMRA, a taxpayer must

satisfy several conjunctive requirements to be deemed a

prevailing party.   Sec. 7430(c); Polyco, Inc. v. Commissioner, 

, 964 (1988); see Minahan v. Commissioner, 

,

497 (1987).   The taxpayer must:

     (1) Establish that the position of the United States in the

civil proceeding was not substantially justified, section

7430(c)(4)(A)(i);

     (2) substantially prevail in the litigation, section

7430(c)(4)(A)(ii); and

     (3) if the taxpayer is a corporation, meet the net worth and

number of employee requirements of 28 U.S.C. sec. 2412(d)(2)(B)

(1994), as in effect on the date of the enactment of TRA 1986,

sec. 1551(h)(3), 100 Stat. 2085, 2753 (sec. 7430(c)(4)(A)(iii)).
                                - 19 -

     Courts will not award litigation costs under section 7430(a)

unless a prevailing party has exhausted the administrative

remedies available to such party within the IRS.     Sec.

7430(b)(1).    Moreover, no award for reasonable administrative or

litigation costs may be made with respect to any portion of the

civil proceeding during which a prevailing party has

"unreasonably protracted" such proceeding.     Sec. 7430(b)(4).

     Respondent agrees that petitioner has:    (1) Substantially

prevailed with respect to the amount in controversy; (2)

exhausted the administrative remedies available to it; and (3)

shown that the net worth and number of employee requirements have

been met.    Respondent contends, however, that respondent's

position was substantially justified so that petitioner is not a

prevailing party for purposes of section 7430.     In the

alternative, respondent asserts that:     (1) Petitioner has

unreasonably protracted the Court and administrative proceedings;

and (2) the amount of administrative and litigation costs claimed

by petitioner is unreasonable.

     Petitioner bears the burden of proving that respondent's

position in the proceedings was not substantially justified or

was unreasonable.    Sec. 7430(c)(4)(A)(i); Rule 232(e); Polyco,

Inc. v. Commissioner, supra at 965; Minahan v. Commissioner,

supra at 498; DeVenney v. Commissioner, 

, 928-930

(1985).     The pre-1986 version of section 7430 used the term

"unreasonable."     TRA 1986 replaced "unreasonable" with "not
                               - 20 -

substantially justified".    Powers v. Commissioner, 

,

471 (1993).    This and other courts have concluded that the

substantial justification standard is essentially the prior law's

reasonableness standard couched in new language.    Huffman v.

Commissioner, 

, 1147 n.8 (9th Cir. 1992), affg. in

part, revg. in part, and remanding T.C. Memo. 1991-144; Powers v.

Commissioner, supra at 471; Rutana v. Commissioner, 

,

1333 (1987).

     We must identify the point at which the United States is

first considered to have taken a position, and then decide

whether the position taken from that point forward was or was not

substantially justified.    The "not substantially justified"

standard is applied as of the separate dates that respondent took

positions, first in the administrative proceedings and afterwards

in the proceedings in this Court.    Sec. 7430(c)(7)(A) and (B);

Han v. Commissioner, T.C. Memo. 1993-386.    For purposes of the

administrative proceedings in this case, respondent's position is

that which was articulated in the notice of deficiency, issued on

February 14, 1994.    Sec. 7430(c)(7)(B); see Huffman v.

Commissioner, supra at 1143-1147.

     For purposes of the court proceedings in this case,

respondent's position is that which is set forth in the answer to

the petition on June 20, 1994.    Sec. 7430(c)(7)(A); see Huffman

v. Commissioner, supra at 1147-1148.    Although ordinarily the

reasonableness of each of those positions is considered
                               - 21 -

separately to allow respondent to change a position previously

taken, Huffman v. Commissioner, supra at 1144-1147, it appears in

this case that respondent essentially asserted the same position

in both the notice of deficiency and the answer.

     More specifically, respondent's position was that petitioner

had not fully substantiated claimed expenditures, their

deductibility, or their business purpose.    Therefore, in the

answer respondent denied petitioner's allegations that it had

paid or incurred all the expenses in dispute as ordinary and

necessary business expenses.   In respondent's answer, it is

further stated that petitioner had provided insufficient

information to prove that it was an agent of Ohanesian and the

related entities.

     The administrative and litigation positions of respondent

are substantially justified if they have a reasonable basis in

both law and fact.   E.g., Anthony v. United States, 

,

674 (10th Cir. 1993); Norgaard v. Commissioner, 

, 881

(9th Cir. 1991), affg. in part and revg. in part T.C. Memo. 1989-

390; Powers v. Commissioner, supra at 472.    For a position to be

substantially justified, "substantial evidence" must exist to

support it.   Pierce v. Underwood, 

, 564 (1988).

"That phrase does not mean a large or considerable amount of

evidence, but rather 'such relevant evidence as a reasonable mind

might accept as adequate to support a conclusion.'"    

565 (quoting Consolidated Edison Co. v. NLRB, 

, 229
                                 - 22 -

(1938)).    Respondent's position may be incorrect but

substantially justified "if a reasonable person could think it

correct".     

n.2.   Thus, whether respondent acted

reasonably in the instant case ultimately turns upon those

available facts which formed the basis for the position taken in

the notice of deficiency and during the litigation, as well as

upon any legal precedents related to the case.      DeVenney v.

Commissioner, supra at 930; see Nalle v. Commissioner, 

, 191-192 (5th Cir. 1995), affg. T.C. Memo. 1994-182; Coastal

Petroleum Refiners, Inc. v. Commissioner, 

, 688

(1990).

     The fact that the Commissioner eventually loses or concedes

a case does not by itself establish that the position taken is

unreasonable.     Estate of Perry v. Commissioner, 

,

1046 (5th Cir. 1991); Swanson v. Commissioner, 

, 94

(1996).     However, it is a factor that may be considered.      Estate

of Perry v. Commissioner, supra at 1046; Powers v. Commissioner,

supra at 471.

     We conclude that petitioner has failed to prove that

respondent's position did not have a reasonable basis in fact and

law and was not strongly supported by substantial evidence.

Although petitioner claimed to be a mere agent or conduit of

Ohanesian and SRI in the administrative proceeding before the IRS

and in the judicial proceeding before the Tax Court, petitioner

had taken the exactly opposite tack in its State court suit.        In
                              - 23 -

the State court suit, the jury accepted the position of MMC

(petitioner here) that it was an independent entity.   Moreover,

the special verdict found that the written agreements between

petitioner and the related entities were valid and enforceable,

and that the luxury automobiles and other personal property

belonged to petitioner.   These findings were wholly inconsistent

with petitioner's position in the instant proceedings that the

property was purchased by petitioner as an agent for Ohanesian

and the related entities.

     The doctrine of judicial estoppel precludes a party to a

judicial proceeding from taking a position contrary to one it

took and persuaded a court to accept in an earlier proceeding.

See Huddleston v. Commissioner, 

, 26-29 (1993).     The

doctrine of judicial estoppel focuses on the relationship between

a party and the courts; it seeks to preserve the integrity of the

judicial process by preventing a party from successfully

asserting one position before a court and thereafter asserting a

contradictory position before the same or another court merely

because it is now in that party's interest to do so.   

The United States Court of Appeals for the Sixth Circuit has

explained that the doctrine of judicial estoppel prevents a party

from "abusing the judicial process through cynical gamesmanship,

achieving success on one position, then arguing the opposite to

suit an exigency of the moment."   Teledyne Indus. v. NLRB, 

, 1218 (6th Cir. 1990).   In these circumstances it would
                               - 24 -

have been reasonable for respondent to take the position that

petitioner was estopped from arguing that the automobiles and

personal property did not belong to it, and that it was not

independent.    Respondent thus had a reasonable basis in both fact

and law for maintaining the position that the expenses deducted

by petitioner on account of the automobiles and other personal

items were not incurred as agent for Ohanesian and the related

entities.

     Even if one were to assume that the doctrine of judicial

estoppel did not apply in the instant case, respondent was

entitled to require from petitioner cogent evidence of the

genuineness of an agency relationship.   See Commissioner v.

Bollinger, 

, 349-350 (1988), wherein the Supreme

Court stated:

     the genuineness of the agency relationship is
     adequately assured, and tax-avoiding manipulation
     adequately avoided, when the fact that the corporation
     is acting as agent for its shareholders with respect to
     a particular asset is set forth in a written agreement
     at the time the asset is acquired, the corporation
     functions as agent and not principal with respect to
     the asset for all purposes, and the corporation is held
     out as the agent and not principal in all dealings with
     third parties * * * [Emphasis added.]

     In the instant case, petitioner alleged that an oral

agreement to pay personal expenses as an agent of the Ohanesians

existed, and that Ohanesian had de facto control over petitioner

even though he was not the nominative shareholder.   In State

court, however, petitioner contended that the relationship
                              - 25 -

between it and Ohanesian was defined solely by the written

agreements, that Margaret was petitioner's sole shareholder, that

petitioner was independent, and that any alleged oral agreements

did not exist or were unenforceable.   Agreeing with petitioner's

position in that case, the jury found in effect that an agency

relationship did not exist.   Therefore, based on the facts and

related legal precedent, we conclude that respondent reasonably

argued that the expenses deducted by petitioner on account of the

automobiles and other items were not incurred as agent for

Ohanesian and the related entities.

     Petitioner alternatively asserts that, even if it were not

an agent, respondent unreasonably refused to concede the

deductibility of the expenses under section 162 because the State

court jury found MMC to be contractually liable to pay the

expenses of the Ohanesians.    Based upon this fallacious

assumption as to what the jury found (see infra), petitioner

argues that, even though petitioner paid what amounted to

personal expenses of the Ohanesians, the payments were ordinary

and necessary business expenses of petitioner as a result of the

oral agreement.   However, the jury verdict makes no mention of

any liability to pay expenses of Ohanesian and the related

entities, and neither do the written agreements on which that

verdict was based.   In fact, the Gehans themselves stated in an
                                - 26 -

affidavit filed herein that the "issue [of the expenses] was not

critical to the [State court] trial".

     The jury verdict states that petitioner performed what it

was required to do under the contracts; the verdict does not

state that everything petitioner did was required by those

contracts.    Moreover, Mike himself testified that he bought the

cars due to the substantial business relationship of the parties

and because Ohanesian asked for them, not because he was required

to do so.    Thus, respondent's administrative and litigation

position disputing the deductibility of these expenses under

section 162 did not rely on evidence that was scant or unworthy

of belief.    See VanderPol v. Commissioner, 

, 370

(1988).     To the contrary, it was justified by legal precedent and

based upon the Gehans' prior affidavits and testimony.    See Nalle

v. 

; Coastal Petroleum Refiners,

Inc. v. Commissioner, 

.

     Furthermore, petitioner has not shown that respondent was

not substantially justified in refusing to concede the case with

petitioner until the Ohanesians conceded with respect to the

Ohanesian-related items.    Respondent was caught in a potential

"whipsaw" position.    A whipsaw occurs when different taxpayers

treat the same transaction involving the same items

inconsistently, thus creating the possibility that income could

go untaxed, or two unrelated parties could deduct the same
                               - 27 -

expenses on their separate returns.     In such circumstances,

respondent was fully entitled to defend against inconsistent

results by holding both parties to the transaction liable for the

deficiency.   See Powell v. Commissioner, 

, 679 (1988)

("We recognize that respondent must take alternative or

inconsistent positions at times to protect the revenue, but * * *

[respondent] may not take such a position without good cause."),

revd. on other grounds 

(5th Cir. 1990); Estate of

Dooley v. Commissioner, T.C. Memo. 1992-557; Moore v.

Commissioner, T.C. Memo. 1989-306.

     In addition, where, as here, the evidence in a case consists

of the testimony of persons who have maintained inconsistent

positions in prior proceedings, respondent also is entitled to

maintain inconsistent positions with respect to those parties

until this Court can hear the evidence and determine the

credibility of the witnesses and the weight to be given their

testimony.    See Smith v. Commissioner, T.C. Memo. 1990-430; see

also DeVenney v. Commissioner, 

; Boyle v.

Commissioner, T.C. Memo. 1995-74; Creske v. Commissioner, T.C.

Memo. 1990-318, affd. 

(7th Cir. 1991); Porter v.

Commissioner, T.C. Memo. 1986-465.

     In the instant case, in the absence of a settlement, the

deductibility of expenses would have hinged on whose testimony

the Court found credible.   Thus, we conclude that petitioner has

failed to prove that there was not good cause for respondent's
                                - 28 -

inconsistent positions.    As the Court of Appeals for the Ninth

Circuit has stated in an analogous context where the same

taxpayer receives conflicting notices of deficiency concerning

the same items of income:

     If the Commissioner * * * had chosen incorrectly to
     make only one tax deficiency determination * * * under
     a theory of tax liability reasonably grounded on the
     data procured, conceivably the bar of the statute of
     limitations on assessment would preclude other
     assessments on other determinations predicated on other
     theories of tax liability reasonably grounded on the
     data in * * * [her] possession. We find no legal or
     logical reason which compels the Commissioner to run
     such risk in the proper performance of * * * [her] duty
     to protect the revenue. [Revell, Inc. v. Riddell, 

, 660 (9th Cir. 1959)].

     Petitioner nonetheless asserts that such inconsistent

positions need not have been taken by respondent, and therefore

much litigation expense could have been avoided.    Petitioner

avers that it told respondent that, rather than moving to

consolidate petitioner's case with that of the Ohanesians,

respondent should have urged the Court to wait to decide

petitioner's case until after the Ohanesians' case was decided.

However, petitioner ignores that much of the litigation cost was

run up by its own intransigence.    The IRS had asked petitioner to

sign a Form 872, Consent to Extend the Time to Assess Tax, as

early as December 9, 1993, but was rebuffed, and so it was forced

to prepare the notice of deficiency to defend against

inconsistent results.     Petitioner also disregards the unnecessary

expenditure of judicial time and resources that two separate
                               - 29 -

trials involving substantially the same evidence would have

entailed.

     Petitioner has not proven that respondent was not

substantially justified in maintaining respondent's position

against petitioner.   In a case such as this, respondent is

charged with the difficult task of protecting the fisc.

Petitioner and Ohanesian asserted fundamentally conflicting

versions of the nature of their relationship and the payments of

the Ohanesian-related items.   Based on such evidence, and the

fact that Ohanesian and petitioner both reversed the positions

they took in the State court case, respondent acted reasonably in

maintaining the position taken in petitioner's case until the

Ohanesians conceded with respect to those items.

     Petitioner lamely asserts that respondent's agent took an

instant dislike to the Gehans which clouded his judgment as to

the strength of petitioner's position.   However, we find no

indication in the record that respondent sought to extract

unjustified concessions from petitioner, or that respondent

pursued the litigation to harass or embarrass petitioner, and

petitioner has pointed to none.   See Rutana v. Commissioner, 

, 1333 (1987); Wickert v. Commissioner, T.C. Memo. 1986-

277, affd. 

(8th Cir. 1988).

     Since we hold that petitioner has not proven that

respondent's position was not substantially justified with

respect to the deductibility of the Ohanesian-related items, we
                             - 30 -

need not address whether the costs claimed by petitioner are

reasonable or whether petitioner unreasonably protracted the

administrative and litigation proceedings.

     For all of the above reasons, we hold that petitioner is not

entitled to administrative and litigation costs pursuant to

section 7430.

     To reflect the foregoing,



                                             An appropriate order

                                        will be issued, and

                                        decision will be entered

                                        under Rule 155.