SUPPLEMENTAL MEMORANDUM OPINION

NIMS, Judge: This matter is before the Court on petitioner's Motion for Litigation and Administrative Costs (motion for costs) filed pursuant to Rule 231 and section 7430 on April 26, 1996. 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 during1996 Tax Ct. Memo LEXIS 440">*441 1989 and 1990.

The merits of the underlying case were decided in National Industrial Investors, Inc. v. Commissioner, T.C. Memo. 1996-151, filed March 26, 1996, and to the extent necessary for the disposition of this motion, the facts and holdings in T.C. Memo. 1996-151 are incorporated herein by this reference. We shall repeat the facts as necessary to clarify the following discussion.

Respondent issued a statutory notice of deficiency on September 16, 1993. A petition was filed on November 22, 1993. At that time, petitioner (NII), a California corporation, had its principal office at 956 Jackling Drive, Hillsborough, California 94010. On January 18, 1994, respondent filed an answer to the petition, which she subsequently amended twice. The trial took place on December 6, 1994 at San Francisco, California, and petitioner thereafter filed its motion for costs. Respondent filed notice of objection to petitioner's motion for costs on June 28, 1996, pursuant to the Court's Order. No hearing has been requested and none is necessary. Rule 232(a)(3). The issues for decision are: (1) Whether petitioner qualifies as a "prevailing1996 Tax Ct. Memo LEXIS 440">*442 party" for purposes of section 7430 and, if so, (2) whether the administrative and litigation costs petitioner seeks are reasonable.

A taxpayer considered a prevailing party in a civil tax proceeding may be awarded a judgment for reasonable administrative and litigation costs incurred in that proceeding. Sec. 7430(a)(1) and (2). A taxpayer must satisfy several conjunctive requirements to be deemed a prevailing party. Sec. 7430(c); Polyco, Inc. v. Commissioner, 91 T.C. 963">91 T.C. 963, 91 T.C. 963">964 (1988); see Minahan v. Commissioner, 88 T.C. 492">88 T.C. 492, 88 T.C. 492">497 (1987). The taxpayer must:

(1) Establish that the position of the United States in the civil proceeding was not substantially justified (sec. 7430(c)(4)(A)(i));

(2) substantially prevail in the litigation (sec. 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 the Tax Reform Act of 1986, Pub. L. 99-514, sec. 1551(h)(3), 100 Stat. 2085, 2753) (sec. 7430(c)(4)(A)(iii)).

Courts will not award litigation costs1996 Tax Ct. Memo LEXIS 440">*443 under section 7430(a) unless a prevailing party has exhausted the administrative remedies available to such party with 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).

In the instant case, respondent agrees that petitioner has: (1) Substantially prevailed with respect to the amount in controversy; (2) exhausted the administrative remedies available to it; (3) not unreasonably protracted the proceedings; and (4) shown that the net worth and number of employees requirements have been met. Respondent contends, however, that her position was substantially justified so that petitioner is not a prevailing party for purposes of section 7430. In the alternative, respondent argues the amount of administrative and litigation costs claimed by petitioner is unreasonable.

Since petitioner's motion for costs was filed prior to the enactment of the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 701, 110 Stat. 1452, 1463 (1996), it bears the burden of proving that respondent's position in the1996 Tax Ct. Memo LEXIS 440">*444 proceedings was not substantially justified or was unreasonable. Sec. 7430(c)(4)(A)(i); Rule 232(e); 91 T.C. 963">Polyco, Inc. v. Commissioner, supra at 965; 88 T.C. 492">Minahan v. Commissioner, supra at 498; DeVenney v. Commissioner, 85 T.C. 927">85 T.C. 927, 85 T.C. 927">928-930 (1985). The pre-1986 version of section 7430 used the term "unreasonable". The Tax Reform Act of 1986 replaced "unreasonable" with "not substantially justified". Powers v. Commissioner, 100 T.C. 457">100 T.C. 457, 100 T.C. 457">471 (1993). This Court and others have concluded that the substantial justification standard is essentially the prior law's reasonableness standard couched in new language. Huffman v. Commissioner, 978 F.2d 1139">978 F.2d 1139, 978 F.2d 1139">1147 n.8 (9th Cir. 1992), affg. in part, revg. in part and remanding T.C. Memo. 1991-144; 100 T.C. 457">Powers v. Commissioner, supra at 471; Rutana v. Commissioner, 88 T.C. 1329">88 T.C. 1329, 88 T.C. 1329">1333 (1987).

For purposes of the administrative proceedings in this case, respondent's position is that which she stated in the notice1996 Tax Ct. Memo LEXIS 440">*445 of deficiency. Sec. 7430(c)(7)(B). See 978 F.2d 1139">Huffman v. Commissioner, supra at 1143-1147. For purposes of the court proceedings in this case, respondent's position is that which she set forth in the answer to the petition, as subsequently amended. Sec. 7430(c)(7)(A); see 978 F.2d 1139">Huffman v. Commissioner, supra at 1147-1148.

The administrative and litigation positions of respondent are substantially justified if they have a reasonable basis in both law and fact or are sufficient to satisfy a reasonable person. E.g., Anthony v. United States, 987 F.2d 670">987 F.2d 670, 987 F.2d 670">674 (10th Cir. 1993); Norgaard v. Commissioner, 939 F.2d 874">939 F.2d 874, 939 F.2d 874">881 (9th Cir. 1991), affg. in part and revg. in part T.C. Memo. 1989-390; 100 T.C. 457">Powers v. Commissioner, supra at 472. For a position to be substantially justified, "substantial evidence" must exist to support it. Pierce v. Underwood, 487 U.S. 552">487 U.S. 552, 487 U.S. 552">564 (1988). "That phrase does not mean a large or considerable amount of evidence, but rather 'such relevant evidence as a 1996 Tax Ct. Memo LEXIS 440">*446 reasonable mind might accept as adequate to support a conclusion.'" 487 U.S. 552">Id. at 564-565 (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197">305 U.S. 197, 305 U.S. 197">229 (1938)). Respondent's position may be incorrect but substantially justified "if a reasonable person could think it correct". 487 U.S. 552">Id. at 566 n.2. Thus, whether respondent acted reasonably in the instant case ultimately turns upon the facts available to her which formed the legal basis for the position she took in the deficiency notice and during the litigation. 85 T.C. 927">DeVenney v. Commissioner, supra at 930.

The fact that the Commissioner eventually loses or concedes a case does not by itself establish that her position is unreasonable. Estate of Perry v. Commissioner, 931 F.2d 1044">931 F.2d 1044, 931 F.2d 1044">1046 (5th Cir. 1991); Swanson v. Commissioner, 106 T.C. 76">106 T.C. 76, 106 T.C. 76">94 (1996). However, it "clearly remains" a factor to be considered. Heasley v. Commissioner, 967 F.2d 116">967 F.2d 116, 967 F.2d 116">120 (5th Cir. 1992), affg. in part and revg. in part T.C. Memo. 1991-189; Estate of Perry, 931 F.2d 1044">931 F.2d at 1046;1996 Tax Ct. Memo LEXIS 440">*447 100 T.C. 457">Powers v. Commissioner, supra at 471. Where the facts on which the Commissioner relies are not "unusually scanty or unworthy of belief," the failure of the facts to convince the Court of the ultimate persuasiveness of the respondent's position generally is not reason to hold that her position is unreasonable or without substantial justification. VanderPol v. Commissioner, 91 T.C. 367">91 T.C. 367, 91 T.C. 367">370 (1988).

Issue 1. Whether Petitioner Qualifies as a Prevailing Party

A. Recovery of Administrative Costs

Section 7430, for present purposes, limits recoverable administrative costs to those incurred on or after the date of the notice of deficiency and up to the time the petition was filed. Sec. 7430(c)(2). See 978 F.2d 1139">Huffman v. Commissioner, supra at 1145. Petitioner claims $ 2,312.55 as recoverable administrative costs, based on accounting fees of $ 2,724 incurred between December 7, 1991 and August 15, 1992, and legal fees of $ 1,375 incurred from June 24, 1992 to March 9, 1993. However, the notice of deficiency was not issued until September 16, 1993. Petitioner thus seeks administrative costs1996 Tax Ct. Memo LEXIS 440">*448 for accounting and legal fees that it admittedly incurred prior to the date of the statutory notice of deficiency. Consequently, we hold that petitioner cannot recover any of these costs.

B. Recovery of Litigation Costs

Petitioner seeks recovery of litigation fees and costs in the total amount of $ 25,121.17. In her original answer, respondent averred that petitioner had not fully substantiated claimed expenditures, their deductibility, or their business purpose, thereby denying petitioner's allegations that it had paid or incurred all the expenses in dispute as ordinary and necessary business expenses. Moreover, respondent denied that petitioner was entitled to claim depreciation deductions as well as deductions for disputed net operating loss carryovers. Respondent also disputed petitioner's contention that no part of any underpayment was attributable to negligence or failure to comply with applicable rules or regulations. As revised in subsequent amendments to the answer, respondent's litigation position came to include an issue of unreported services income and a related addition to tax for negligence.

In some cases courts have adopted an issue-by-issue approach to section1996 Tax Ct. Memo LEXIS 440">*449 7430, apportioning the requested awards between those issues for which respondent was, and those issues for which respondent was not, substantially justified. See Powers v. Commissioner, 51 F.3d 34">51 F.3d 34, 51 F.3d 34">35 (5th Cir. 1995); 106 T.C. 76">Swanson v. Commissioner, supra. We follow that approach here and separately discuss whether respondent's position on each issue was substantially justified.

(1) Disallowed Current Business Expenses

Respondent disallowed the claimed business expenses for 1989 and 1990 as a result of petitioner's failure to substantiate the expenditures and/or their business purpose. At trial, we held that expenses respondent had found unsubstantiated were, in large part, not allowable, reflecting the reasonableness of respondent's position at least as to the inadequately documented expenses.

Respondent conceded some deductions and admitted that petitioner had substantiated some of the expenditures that had been in controversy, although she maintained that such expenditures lacked a business purpose. The Court substantially sustained petitioner as to many of these expenses. Although respondent has conceded that1996 Tax Ct. Memo LEXIS 440">*450 petitioner has not unreasonably protracted the proceedings, we note that petitioner repeatedly failed to respond adequately to respondent's requests for records and documents, and refused to permit respondent the opportunity to meet with Frances Byrne, petitioner's president, to explore further the nature of its business and the purpose of the corporation's expenditures. Moreover, correspondence between the parties' counsel reveals that records introduced at trial were not continually available to respondent's counsel and some were produced as late as November 1994, one year after the petition was originally filed. In light of the lack of evidence available to respondent, her position was not unreasonable.

Furthermore, respondent's litigation position disputing expenses that the Court ultimately found allowable did not rest on evidence that was scant or unworthy of belief. 91 T.C. 367">VanderPol v. Commissioner, supra at 370. Respondent relied on testimony and trial exhibits showing that petitioner's only asset and overwhelming source of its income during 1989 and 1990 was a triple net lease, a purely passive activity. Testimony from petitioner's own accountant 1996 Tax Ct. Memo LEXIS 440">*451 tended to show that petitioner's business records did not reflect income from activities other than holding the leased premises. Moreover, a reasonable person could discount evidence of founder and former principal shareholder Charles Byrne's consulting activities on behalf of NII that endeavored to show petitioner did not engage solely in a passive activity. Therefore, respondent reasonably argued that such a passive activity would generate virtually none of the disallowed deductions, other than interest and depreciation expenses, discussed infra pp. 10-14.

The Court holds that respondent was substantially justified in maintaining her position on the issue of current business expenses, so that the parties could present their conflicting evidence to the Court and so we could judge the weight to be given to testimony concerning the business purpose of the claimed expenses. See DeVenney v. Commissioner, 85 T.C. 927">85 T.C. 930; Boyle v. Commissioner, T.C. Memo. 1995-74; Creske v. Commissioner, T.C. Memo. 1990-318, affd. 946 F.2d 43">946 F.2d 43 (7th Cir. 1991); Porter v. Commissioner, T.C. Memo. 1986-465.

1996 Tax Ct. Memo LEXIS 440">*452 (2) Disallowed Current Interest Expenses

Petitioner argues that respondent unreasonably refused to stipulate before trial the deductibility of interest on a $ 475,000 San Francisco Federal Savings mortgage (the San Francisco loan) on certain leased property (the Burke property). However, petitioner's representatives did not complete and sign the stipulation until December 3, 1994--3 days before trial. Moreover, petitioner was dilatory in providing evidence to show NII's complete debt obligations, providing some information on the loans as late as November 1, 1994. Cf. DeVenney v. Commissioner, 85 T.C. 927">85 T.C. 933, a case in which respondent was held not to have unreasonably refused to concede an issue where petitioners withheld crucial evidence in the form of witnesses and their testimony. Respondent might have conceded the issue many months prior to trial if petitioner had provided its records when originally requested. See Currie v. Commissioner, T.C. Memo. 1989-23. In light of such behavior, the Court holds that respondent was substantially justified in waiting until her opening argument to concede the deductibility1996 Tax Ct. Memo LEXIS 440">*453 of the San Francisco Federal mortgage interest expense for 1989 and 1990. See Ashburn v. United States, 740 F.2d 843">740 F.2d 843, 740 F.2d 843">850 (11th Cir. 1984); Brice v. Commissioner, T.C. Memo. 1990-355, affd. without published opinion 940 F.2d 667">940 F.2d 667 (9th Cir. 1991); R.C. Lindsey Plumbing, Inc. v. Commissioner, T.C. Memo. 1988-73; Rouffy v. Commissioner, T.C. Memo. 1987-5.

At trial, respondent continued to dispute whether interest on another obligation secured by the Burke property, namely, the McMahon note, was currently deductible, arguing that the "all events" test had not been satisfied. See United States v. General Dynamics Corp., 481 U.S. 239">481 U.S. 239 (1987); Guardian Inv. Corp. v. Phinney, 253 F.2d 326">253 F.2d 326, 253 F.2d 326">331 (5th Cir. 1958). The McMahon note provided for 7-percent interest compounded annually starting on January 1, 1988, with any unpaid principal and interest due and payable on December 31, 1997. The terms of the McMahon note required no payment until December 31, 1997, the day before the termination1996 Tax Ct. Memo LEXIS 440">*454 of the Burke lease. If the Burke property were sold, however, the note would become immediately due and payable. Respondent argued that the interest expense on the McMahon note was not allowable since the payment of the principal was contingent and dependent on the disposition of the Burke property and the note was subordinated to another obligation. 253 F.2d 326">Id. at 331.

Although we found respondent's logic on this issue "less than compelling" at trial, that does not mean that her position lacked any reasonable basis; i.e., was not substantially justified. See VanderPol v. Commissioner, 91 T.C. 367">91 T.C. 370. There was no indication that respondent's evidence was unusually scanty or unworthy of belief, nor any reason to suspect that respondent had taken her position for any other purpose other than to prevail in the litigation. We have stated in the past:

Petitioners point only to the ultimate failure of respondent's * * * [argument] * * * to show that * * * [her] position was unreasonable. * * * If a party can be chastised for such a failure, then every losing party must be so chastised. Such an interpretation does not manifest 1996 Tax Ct. Memo LEXIS 440">*455 Congress' intention in enacting * * * [section 7430]. [Id.; citations omitted.]