MEMORANDUM OPINION

WELLS, Judge: The instant matter is before the Court on petitioner's motion for litigation fees and costs pursuant to section 7430 and Rule 231. The issues to be decided are whether respondent's position in the court proceeding was substantially justified and whether the litigation costs petitioner claims are reasonable. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Background

The parties have not requested a hearing on the instant motion. Consequently, we base our decision on the parties' submissions and the record. The underlying facts of this case are set forth in detail in Coburn v. Comm'r, T.C. Memo 2005-283 (Coburn I), and we incorporate by reference the portions of Coburn I that are relevant to our disposition of the instant motion. The following represents a brief summary of the factual and procedural background of the instant case.

At the time of filing the petition, petitioner2006 Tax Ct. Memo LEXIS 119">*120 resided in Glastonbury, Connecticut. During 1996, petitioner received stock of PhyMatrix Corp. (PhyMatrix) and CareMatrix Corp. (CareMatrix) with an aggregate value of $ 1,675,000, and petitioner incurred a related income tax liability of $ 621,980. On April 15, 1997, CareMatrix lent petitioner $ 621,980, and petitioner pledged 57,248 shares of PhyMatrix common stock (the collateral) as security on the loan. ¹ To complete the loan transaction, petitioner executed a promissory note (the promissory note), a stock pledge agreement (the stock pledge agreement), and a stock transfer power (the stock transfer power). The promissory note, stock pledge agreement, and stock transfer power are collectively referred to as the loan documents.

The promissory note became due and payable on April 15, 2000. CareMatrix subsequently demanded payment, but petitioner refused to pay on grounds2006 Tax Ct. Memo LEXIS 119">*121 that the promissory note was nonrecourse and that CareMatrix held the collateral. CareMatrix made no further collection efforts.

Respondent determined that petitioner's default on the promissory note resulted in cancellation of indebtedness income of $ 750,000 in 2000 and that petitioner was liable for an income tax deficiency of $ 277,951 and a section 6662 accuracy-related penalty of $ 55,590.20 for that year. Petitioner timely petitioned this Court for a redetermination. The parties submitted the case fully stipulated, without trial, pursuant to Rule 122. In Coburn I, we held that petitioner did not realize discharge of indebtedness income in 2000 and that petitioner is not liable for a section 6662 accuracy-related penalty. On January 17, 2006, petitioner filed the instant motion for award of litigation costs of $ 94,860.81.

Discussion

Section 7430(a) provides that a taxpayer may recover litigation costs incurred in a court proceeding brought against the United States in connection with the determination of a tax or penalty. Litigation costs may be awarded pursuant to section 7430 if (1) the taxpayer has exhausted administrative remedies, (2) the taxpayer has not unreasonably2006 Tax Ct. Memo LEXIS 119">*122 protracted the court proceedings, (3) the taxpayer is the prevailing party, and (4) the claimed litigation costs are reasonable. Sec. 7430(a), (b)(1), (3), (c)(4). Respondent concedes that petitioner exhausted all administrative remedies and did not unreasonably protract the court proceedings. We must decide whether petitioner is the prevailing party and whether the amount of petitioner's claimed litigation costs is reasonable.

Prevailing Party

To qualify as the prevailing party pursuant to section 7430(c)(4)(A), the taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented, and the taxpayer must satisfy the net worth requirement of section 7430(c)(4)(A)(ii). ² Respondent concedes that petitioner substantially prevailed with respect to the amount in controversy and the most significant issue presented and that petitioner satisfies the net worth requirement.

2006 Tax Ct. Memo LEXIS 119">*123 Notwithstanding a taxpayer's satisfaction of the prevailing party requirements of section 7430(c)(4)(A), section 7430(c)(4)(B)(i) provides that a taxpayer is not treated as the prevailing party if the United States establishes that its position in the court proceeding was substantially justified. Accordingly, the Commissioner has the burden of proof on the issue of whether the Commissioner's position was substantially justified. To be considered substantially justified, the Commissioner's position must be justified to a degree that could satisfy a reasonable person and must have a reasonable basis in both law and fact. Corkrey v. Commissioner, 115 T.C. 366">115 T.C. 366, 115 T.C. 366">373 (2000). In deciding whether the Commissioner acted reasonably, we consider both the basis for the Commissioner's legal position and the manner in which the position was maintained. 115 T.C. 366">Id. at 373. The mere fact that the Commissioner loses a case does not establish that the Commissioner's position was unreasonable, but the loss of the case may be considered as a factor. Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430">108 T.C. 430, 108 T.C. 430">443 (1997).

Generally, the Commissioner's position in a court proceeding2006 Tax Ct. Memo LEXIS 119">*124 is established in the Commissioner's answer to the petition. See Huffman v. Commissioner, 978 F.2d 1139">978 F.2d 1139, 978 F.2d 1139">1148 (9th Cir. 1992), affg. in part, revg. in part and remanding T.C. Memo. 1991-144; 108 T.C. 430">Maggie Mgmt. Co. v. Commissioner, supra at 442. In the instant case, the petition in relevant part states that the "determination of the income tax and penalty set forth in the notice of deficiency is based upon an erroneous determination that the debt was forgiven by * * * [CareMatrix] during 2000." ³2006 Tax Ct. Memo LEXIS 119">*125 Respondent's answer tothe petition responded as follows: "Denies; alleges that the respondent determined a deficiency and a penalty in income tax." We understand respondent's position in the answer to be that petitioner realized discharge of indebtedness income from forgiveness of indebtedness of $ 750,000 in 2000 and that petitioner is liable for an income tax deficiency of $ 277,951 and a section 6662 accuracy-related penalty of $ 55,590.20. ⁴

We now turn to our analysis of whether respondent has proved that respondent's legal position was substantially justified. We base our analysis on the facts and legal precedents which formed the basis of that position. See 108 T.C. 430">Maggie Mgmt. Co. v. Commissioner, supra at 443. Relying on Cozzi v. Commissioner, 88 T.C. 435">88 T.C. 435, 88 T.C. 435">445 (1987), respondent contends in the instant motion that a debt is viewed as having been discharged the moment that it becomes clear that the debt will never have to be paid and that the moment is determined by applying a facts and circumstances analysis. On the basis of the following facts, respondent contends that a reasonable person could conclude that no expectation of repayment remained after petitioner's refusal to pay in 2000, and, consequently, that respondent's position was substantially justified: (1) A "unique relationship" existed between petitioner and CareMatrix as demonstrated by the loan to cover petitioner's income tax liability;2006 Tax Ct. Memo LEXIS 119">*126 (2) the terms of the loan documents on their face provide for a recourse liability; (3) petitioner had made no payment as of April 15, 2000; (4) petitioner abandoned the collateral in 2000; (5) CareMatrix took no action to collect the liability in 2000, either by selling the collateral or by commencing an action against petitioner, ⁵ and (6) nearly 4 years passed from the date on which the promissory note became due and payable until the date on which respondent issued the notice of determination.

We agree with respondent that a debt2006 Tax Ct. Memo LEXIS 119">*127 is discharged when it becomes clear that the debt will never have to be paid and that a facts and circumstances analysis is applied to determine the timing of the discharge. 88 T.C. 435">Cozzi v. Commissioner, supra at 445. We do not agree, however, that respondent's legal position was reasonable on the basis of the facts and legal precedents which formed the basis of that position.

We note, however, that respondent's position in the instant proceedings was not based on the absence of collection activities by CareMatrix after 2000, the year in issue. ⁶ The test for determining the time of discharge requires a practical assessment of the facts and circumstances relating to the likelihood of repayment. Id. Facts and circumstances after 2000 were unavailable for assessing the likelihood of repayment during 2000. Accordingly, in deciding whether respondent's position was substantially justified, we do not consider any acts or omissions of CareMatrix after 2000, the year of the alleged discharge. See 88 T.C. 435">Maggie Mgmt. Co. v. Commissioner, supra at 443.

2006 Tax Ct. Memo LEXIS 119">*128 Moreover, while respondent's position at trial, as stated in respondent's trial memorandum, was that the liability was nonrecourse, respondent's position in the answer was not based on the fact now alleged in respondent's response to the instant motion that the loan documents on their face provide for a recourse liability. Respondent's answer did not address the issue of whether the liability was recourse or nonrecourse. Even though respondent's trial memorandum took the position that the liability was nonrecourse, respondent's opening brief contended that the Federal income tax result in the instant case does not depend on whether the loan is recourse or nonrecourse. ⁷ Clearly, as we noted in Coburn I, respondent has not been of one mind concerning the facts of the instant case. In deciding whether respondent's position was substantially justified, we will not consider the fact now alleged in respondent's response to the instant motion, that the loan documents on their face provided for a recourse liability. See id.

2006 Tax Ct. Memo LEXIS 119">*129 With respect to the "unique relationship" of petitioner and CareMatrix now alleged by respondent, we understand respondent to contend that CareMatrix discharged the liability on account of either mutual interests with petitioner or sympathy for him. We recognize that the facts demonstrate the existence of an interrelationship among petitioner, CareMatrix, and PhyMatrix: During 1996, petitioner received stock of CareMatrix and PhyMatrix valued in the aggregate at $ 1,675,000; Abraham D. Gosman served as chief executive officer and chairman of the board of CareMatrix at all relevant times and appears to have simultaneously served as chief executive officer and chairman of the board of PhyMatrix; ⁸CareMatrix advanced a loan to petitioner for the purpose of covering petitioner's income tax liability incurred in relation to petitioner's receipt of the CareMatrix and PhyMatrix stock; and the loan from CareMatrix was secured solely by petitioner's PhyMatrix stock. However, despite the evidence of that interrelationship, respondent conceded that the loan constituted bona fide indebtedness and offered no evidence to the contrary. Respondent chose to submit the instant case fully stipulated2006 Tax Ct. Memo LEXIS 119">*130 without trial rather than placing the issue of the bona fides of the CareMatrix loan before the Court and questioning the intent of petitioner and CareMatrix at trial. Given respondent's concession, and absent the raising of the issue of the bona fides of the loan, we will not consider the facts relating to the interrelationship among petitioner, CareMatrix, and PhyMatrix for the purpose of the instant motion.

As we held in Coburn I, regardless of whether the liability in the instant case is nonrecourse or recourse, petitioner's default on the loan and abandonment of the collateral in 2000 did not result in petitioner's realizing discharge of indebtedness income in 2000. In Coburn I, we held that, if the loan2006 Tax Ct. Memo LEXIS 119">*131 were nonrecourse, any income realized upon petitioner's loan default and abandonment of collateral in satisfaction of the liability would constitute gain on the sale or other disposition of the collateral pursuant to section 1001(a) rather than discharge of indebtedness income. See L&C Springs Associates v. Commissioner, 188 F.3d 866">188 F.3d 866, 188 F.3d 866">868 (7th Cir. 1999), affg. T.C. Memo. 1997-469; sec. 1.1001-2(a)(1), Income Tax Regs. We also held, alternatively, that, if the loan were recourse, petitioner's loan default and abandonment of collateral, alone, would not discharge the underlying liability because the collateral would not represent the only source of repayment of the loan. See Lockwood v. Commissioner, 94 T.C. 252">94 T.C. 252, 94 T.C. 252">260 (1990).

Moreover, in Coburn I, we held that, regardless of whether the liability is nonrecourse or recourse, the absence of action by CareMatrix to collect the liability in the year of default did not result in petitioner's realizing discharge of indebtedness income in 2000. With respect to nonrecourse indebtedness, the liability was satisfied upon petitioner's abandonment of the collateral to CareMatrix. 2006 Tax Ct. Memo LEXIS 119">*132 See 188 F.3d 866">L&C Springs Associates v. Commissioner, supra at 868; Carlins v. Commissioner, T.C. Memo. 1988-79. Consequently, no collection activity was necessary. With respect to recourse indebtedness, CareMatrix could take action to collect the liability in a subsequent year. Upon a default by petitioner, the stock pledge agreement provided that CareMatrix could sell the collateral and apply the proceeds toward the payment of the loan, and the loan documents did not preclude the commencement of an action by CareMatrix to recover directly from petitioner. However, neither the loan documents nor Massachusetts law required that such a collection action be commenced during the year of default. On the contrary, the promissory note expressly provided that a delay by CareMatrix did not constitute a waiver of its rights:

[CareMatrix] shall not, by any act, delay, omission or otherwise be deemed to waive any of its rights or remedies hereunder unless such waiver be in writing and signed by * * * [CareMatrix], and then only to the extent expressly set forth therein.