                      123 T.C. No. 10



                UNITED STATES TAX COURT



             THOMAS CORSON, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 1025-03.              Filed August 11, 2004.


     P was an investor in a partnership involved in tax
shelter litigation in this Court. In 1985, P entered
into settlement agreements with R, pursuant to which P
could not deduct losses in excess of payments he had
made to or on behalf of the partnership for taxable
years before 1980 or after 1982. In 1999, after the
partnership litigation concluded, R assessed additional
income tax and accrued interest for P’s taxable year
1983 attributable to P’s involvement in the
partnership. P filed a claim for abatement of the
interest. During P’s correspondence conference with R,
P provided to R a copy of the settlement agreements and
argued that he had settled the taxable year 1983. R
refused to consider the content or effect of the
settlement agreements and denied P’s request for
abatement of interest. P then filed a petition with
this Court, appealing R’s determination. After R filed
an answer to the petition, R decided that P was
entitled to a full abatement of interest for the
taxable year 1983. P then filed a motion with this
Court for reasonable litigation costs.
                               - 2 -


          Held: The settlement agreements constituted
     binding agreements between P and R; settled all taxable
     years after 1982 with respect to the partnership; and
     converted the partnership items into nonpartnership
     items, giving R 1 year in which to assess any income
     tax liabilities for taxable years included under the
     settlement agreements’ terms. Held, further, R
     delayed in performing the ministerial act of assessing
     P’s 1983 tax liability. Held further, R’s position in
     the answer was not substantially justified.

          Held: P is entitled to an award of reasonable
     litigation costs.


     Thomas Corson, pro se.

     Matthew J. Bailie, for respondent.


                              OPINION

     MARVEL, Judge:   This case is before the Court on

petitioner’s motion for reasonable litigation costs filed

pursuant to section 7430 and Rule 231.    Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect at the time petitioner filed the petition, and all

Rule references are to the Tax Court Rules of Practice and

Procedure.   Petitioner resided in Saratoga, California, when his

petition in this case was filed.

     On December 12, 2003, we filed the parties’ stipulation of

settled issues,1 and petitioner’s motion for reasonable

litigation costs.   On February 11, 2004, we filed respondent’s


     1
      On Oct. 28, 2003, we entered the parties’ stipulated
decision. Then, on Dec. 1, 2003, we filed petitioner’s motion to
vacate the decision. On Dec. 12, 2003, we granted petitioner’s
motion to vacate and filed the decision document as a stipulation
of settled issues.
                               - 3 -

response to petitioner’s motion.   On March 15, 2004, we filed an

additional affidavit of petitioner pursuant to Rule 232(d), and

on March 25, 2004, we filed petitioner’s reply to respondent’s

response.

     On February 19, 2004, in petitioner’s motion for leave to

file a reply, petitioner requested that we schedule a hearing

only if a relevant fact were in dispute.   We have concluded,

however, that a hearing on this matter is not necessary.   See

Rule 232(a)(2).   In disposing of this motion, we rely on the

parties’ filings and attached exhibits.

                            Background

     During the 1980s, petitioner was an investor in Boulder Oil

and Gas Associates (Boulder), a partnership involved in the

Elektra Hemisphere tax shelter litigation in this Court (the

partnership litigation).2   In 1985, petitioner signed Forms 906,

Closing Agreement on Final Determination Covering Specific

Matters, for the taxable years 1980 and 1982 (settlement

agreements).   The settlement agreements provided that, for

taxable years before 1980 or after 1982, petitioner could not

deduct losses in excess of payments he had made to or on behalf

of the partnership.   When petitioner executed the settlement

agreements, his taxable year 1981 remained open as a result of


     2
      See Krause v. Commissioner, 99 T.C. 132 (1992), affd. sub
nom. Hildebrand v. Commissioner, 28 F.3d 1024 (10th Cir. 1994).
                               - 4 -

the partnership litigation.

     After the partnership litigation concluded, in a letter

dated September 14, 1999, respondent explained to petitioner that

respondent had adjusted petitioner’s 1983 income tax return as

described in an enclosed Form 4549A-CG, Income Tax Examination

Changes.   The Form 4549A-CG indicated that petitioner owed

additional income tax for 1983 attributable to his involvement in

Boulder in the amount of $766 and interest in the amount of

$2,523.04.3   On November 29, 1999, respondent assessed the

additional income tax and accrued interest.

     Believing that he had settled all taxable years other than

1981 when he signed the settlement agreements, petitioner first

attempted to resolve the matter with the Taxpayer Advocate’s

Office in January 2000.   Then, on August 31, 2000, petitioner

submitted to respondent a Form 843, Claim for Refund and Request

for Abatement, requesting an abatement of interest for the

taxable year 1983.   In a letter to Appeals Officer Paul Sivick

dated July 31, 2001 (July 31 letter), petitioner argued that he

had settled all taxable years other than 1981.     As evidence,

petitioner attached copies of the settlement agreements.

     In a letter dated September 18, 2001, Appeals Officer Sivick

addressed the arguments in petitioner’s July 31 letter.

Responding to petitioner’s argument that he had settled all

     3
      The interest was computed to Oct. 9, 1999.
                                - 5 -

taxable years other than 1981, Appeals Officer Sivick stated:

“Your desire and belief are not the relevant factors considered

under the law in abatement of interest cases.    Therefore, I would

not consider this argument to have any merit for purposes of a

request for abatement of interest.”     Appeals Officer Sivick did

not address the content or effect of the settlement agreements.

In closing, Appeals Officer Sivick gave petitioner until October

17, 2001, to continue to present arguments.

     In a notice of final determination dated July 26, 2002,

respondent denied petitioner’s request for an abatement of

interest.   Respondent explained the denial of petitioner’s

request as follows:   “We did not find any errors or delays on our

part that merit the abatement of interest in our review of

available records and other information for the period from April

15, 1984 to October 9, 1995.”

     On January 21, 2003, petitioner filed a petition with this

Court pursuant to section 6404(h) and Rule 280 seeking review of

respondent’s refusal to abate interest under section 6404(e).     In

his petition, petitioner primarily contended that, pursuant to

section 6231(b)(1)(C), when the parties executed the settlement

agreements, partnership items converted to nonpartnership items;

the conversion to nonpartnership items triggered the 1-year

statutory limitations period on assessment contained in section

6229(f) (section 6229(f) assessment period); respondent failed to
                                 - 6 -

assess petitioner’s 1983 tax liability during the section 6229(f)

assessment period; and respondent’s delay in making his demand

for payment was caused by respondent’s error or delay in

performing a ministerial or managerial act.     In making the

section 6229(f) assessment period argument in his petition,

petitioner relied on Crnkovich v. United States, 41 Fed. Cl. 168

(1998), affd. per curiam 202 F.3d 1325 (Fed. Cir. 2000).

     On March 7, 2003, respondent filed an answer to the

petition.     In the answer, respondent maintained that his

determination not to abate interest pursuant to section 6404 was

not an abuse of discretion and that the interest for the taxable

year 1983 was timely assessed.     Subsequently, the parties reached

a settlement, under which petitioner was entitled to a full

abatement of interest for the taxable year 1983.

     From the preparation of the petition through the settlement

of the case, Stephen Benda served as petitioner’s attorney.     On

January 11, 2003, petitioner had his first meeting with Mr.

Benda.   Petitioner and Mr. Benda had a fee arrangement of $250

per hour.     Petitioner now seeks litigation costs in the amount of

$2,676.32.4

     4
      In his motion for reasonable litigation costs filed on Dec.
12, 2003 (the motion), petitioner asked that we award litigation
costs in the amount of $2,536.32. When petitioner filed his
reply on Mar. 25, 2004, petitioner requested an additional $140
of litigation costs, part of which he had incurred since filing
the motion. After examining petitioner’s attorney’s additional
                                                   (continued...)
                                   - 7 -

                                Discussion

       Section 7430(a) authorizes the award of reasonable

litigation costs to the prevailing party in court proceedings

brought by or against the United States in connection with the

determination of income tax.      In addition to being the prevailing

party, in order to receive an award of reasonable litigation

costs, a taxpayer must exhaust administrative remedies and not

unreasonably protract the court proceeding.        Sec. 7430(b)(1),

(3).       Unless the taxpayer satisfies all of the section 7430

requirements, we do not award costs.         Minahan v. Commissioner, 88

T.C. 492, 497 (1987).

       Section 7430(c)(4)(A) and (B)(i) provides that a taxpayer is

a prevailing party if (1) the taxpayer substantially prevailed

with respect to the amount in controversy or the most significant

issue or set of issues, (2) the taxpayer meets the net worth

requirements of 28 U.S.C. section 2412(d)(2)(B) (2000), and (3)

the Commissioner’s position in the court proceeding was not

substantially justified.      See also sec. 301.7430-5(a), Proced. &

Admin. Regs.      Although the taxpayer has the burden of proving


       4
      (...continued)
affidavit filed pursuant to Rule 232(d) and the attached detailed
summary of costs, we conclude that the court costs and “fees paid
or incurred for the services of attorneys in connection with the
court proceeding” totaled $2,676.32. See sec. 7430(c)(1); see
also Sokol v. Commissioner, 92 T.C. 760, 767 n.12 (1989) (“The
costs incurred in seeking an award of litigation costs may be
included in the award.”).
                               - 8 -

that the taxpayer meets requirements (1) and (2), supra, the

Commissioner must show that the Commissioner’s position was

substantially justified.   See sec. 7430(c)(4)(B)(i); Rule 232(e).

      Respondent concedes that petitioner did not unreasonably

protract the court proceeding and that petitioner meets the net

worth requirement of 28 U.S.C. section 2412(d)(2)(B).    In

addition, respondent does not dispute that petitioner

substantially prevailed with respect to the amount in

controversy.   Respondent alleges, however, that respondent’s

position was substantially justified, that petitioner did not

exhaust the administrative remedies available to him, and that

the costs petitioner claims are unreasonable.

A.   Whether Respondent’s Position Was Substantially Justified

      For purposes of deciding a motion for reasonable litigation

costs, section 7430(c)(7)(A) defines the Commissioner’s

“position” as the position taken in the court proceeding.     In the

present case, respondent took a position when respondent filed an

answer to petitioner’s petition.   See Huffman v. Commissioner,

978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part, revg. in part

and remanding T.C. Memo. 1991-144; Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 442 (1997).

      The Commissioner’s position is substantially justified if it

has a reasonable basis in both fact and law and is justified to a

degree that could satisfy a reasonable person.   Huffman v.
                                - 9 -

Commissioner, supra at 1147 n.8 (citing Pierce v. Underwood, 487

U.S. 552, 565 (1988)); Rosario v. Commissioner, T.C. Memo. 2002-

247; sec. 301.7430-5(c)(1), Proced. & Admin. Regs.    In deciding

whether the Commissioner’s position was substantially justified,

a significant factor is whether, on or before the date the

Commissioner assumed the position, the taxpayer provided “all

relevant information under the taxpayer’s control and relevant

legal arguments supporting the taxpayer’s position to the

appropriate Internal Revenue Service personnel.”5    Sec. 301.7430-

5(c)(1), Proced. & Admin. Regs.

     1.   Section 6404(e)(1)6

     Under section 6404(e)(1), the Commissioner may abate part or

all of an assessment of interest on any deficiency or payment of

income tax to the extent that any error or delay in payment is

attributable to erroneous or dilatory performance of a



     5
      “Appropriate Internal Revenue Service personnel” are those
employees who are reviewing the taxpayer’s information or
arguments, or employees who, in the normal course of procedure
and administration, would transfer the information or arguments
to the reviewing employees. Sec. 301.7430-5(c)(1), Proced. &
Admin. Regs.
     6
      To the extent that petitioner’s allegations in the present
case are based on sec. 6404(a)(2) and are in the nature of a
claim for abatement that is prohibited by sec. 6404(b), we do not
consider them in deciding whether respondent’s position with
respect to petitioner’s petition for abatement of interest under
sec. 6404(e) was substantially justified. See sec. 6404(b);
Urbano v. Commissioner, 122 T.C. 384, 395 (2004); Kosbar v.
Commissioner, T.C. Memo. 2003-190.
                             - 10 -

ministerial act by an officer or employee of the IRS.7   A

ministerial act means a procedural or mechanical act that does

not involve the exercise of judgment or discretion and occurs

during the processing of a taxpayer’s case after all the

prerequisites to the act, such as conferences and review by

supervisors, have taken place.   See Lee v. Commissioner, 113 T.C.

145 (1999); sec. 301.6404-2T(b)(1), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).8   In contrast, a

decision concerning the proper application of Federal tax law, or

other applicable Federal or State laws, is not a ministerial act.

See sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs.,

supra.

     In the legislative history of section 6404(e), Congress

observed that “issuing either a statutory notice of deficiency or




     7
      Sec. 6404(e) was amended by the Taxpayer Bill of Rights 2,
Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457 (1996),
to permit the Commissioner to abate interest with respect to an
“unreasonable” error or delay resulting from “managerial” or
ministerial acts. The amendment applies to interest accruing
with respect to deficiencies for taxable years beginning after
July 30, 1996, and is inapplicable to the instant case.
     8
      The final regulations under sec. 6404 were issued on Dec.
18, 1998, and generally apply to interest accruing with respect
to deficiencies or payments of tax described in sec. 6212(a) for
taxable years beginning after July 30, 1996. See sec. 301.6404-
2(d)(1), Proced. & Admin. Regs. As a result, sec. 301.6404-2T,
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13,
1987), applies and is effective for interest accruing with
respect to deficiencies for those taxable years beginning after
Dec. 31, 1978, but before July 30, 1996. See sec. 301.6404-2(c),
Proced. & Admin. Regs.
                                  - 11 -

notice and demand for payment[9] after all procedural and

substantive preliminaries have been completed” is a ministerial

act.       H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1,

844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.

Congress further provided that “a ministerial act is a procedural

action * * *.       For example, a delay in the issuance of a

statutory notice of deficiency after the IRS and the taxpayer

have completed efforts to resolve the matter could be grounds for

abatement of interest.”       S. Rept. 99-313, supra at 209, 1986-3

C.B. (Vol. 3) at 209; see also H. Rept. 99-426, supra at 845,

1986-3 C.B. (Vol. 2) at 845.

       Similar to the issuance of either a notice of deficiency or

a notice and demand for payment, the assessment of tax is a

procedural action that does not require the use of judgment or

discretion.       In Fruit of the Loom, Inc. v. Commissioner, T.C.

Memo. 1994-492, affd. 72 F.3d 1338 (7th Cir. 1996), we observed

that “Assessment is the ministerial act of recording a taxpayer’s

Federal tax liability in the office of the District Director.”

Additionally, in Phillips v. Commissioner, 106 T.C. 176, 179-180



       9
        Sec. 6303(a) provides in part:

       Where it is not otherwise provided by this title, the
       Secretary shall, as soon as practicable, and within 60
       days, after the making of an assessment of a tax
       pursuant to section 6203, give notice to each person
       liable for the unpaid tax, stating the amount and
       demanding payment thereof. * * *
                               - 12 -

(1996), we stated that the “assessment of additional taxes shown

on an amended return is routine IRS procedure.    * * *   To ascribe

to this essentially ministerial act the same binding effect as a

considered judgment would make little sense as a practical

matter.”

     2.    The Parties’ Contentions

     In arguing that respondent’s position was not substantially

justified, petitioner contends that respondent did not have a

reasonable basis in fact and law for the position that there were

no delays in the performance of ministerial acts.    In particular,

petitioner alleges that respondent delayed in performing the

ministerial acts of assessing petitioner’s 1983 tax liability and

issuing notice and demand for payment.    According to petitioner,

the terms of the settlement agreements clearly included the

taxable year 1983 and disallowed petitioner’s deductions of

partnership losses in excess of payments he had made to or on

behalf of the partnership.    Once petitioner and respondent

entered into the settlement agreements, petitioner argues: “all

that remained was for Respondent to enforce the agreement

according to its terms, a ministerial act requiring no

discretion.”

     In contrast, respondent disputes that there was a delay in

assessment that would reasonably warrant an abatement of

interest.    According to respondent, the amount of time that
                              - 13 -

elapsed before respondent made an assessment was attributable to

the partnership litigation, and petitioner’s 1983 tax liability

was assessed within 1 year of the partnership litigation’s

conclusion pursuant to section 6229(d).    Citing Beagles v.

Commissioner, T.C. Memo. 2003-67, respondent further contends

that (1) the mere passage of time during the litigation phase of

a tax dispute does not establish a delay in performing a

ministerial act, and (2) decisions on how to proceed during the

litigation phase require the exercise of judgment and are not

ministerial acts.

     3.   Reasonableness of Respondent’s Position

     Although we agree with respondent that decisions on how to

proceed during litigation are not ministerial acts, see id.,

petitioner’s taxable year 1983 was not involved in the

partnership litigation.   To the contrary, in 1985, petitioner

signed settlement agreements, the terms of which settled all

taxable years after 1982 with respect to Boulder.    The settlement

agreements constituted binding agreements between petitioner and

respondent.   See sec. 6224(c)(1).   The legal effect of the

settlement agreements was that the partnership items converted to

nonpartnership items, and respondent had 1 year in which to

assess any income tax liabilities for taxable years included

under the settlement agreements’ terms.    See secs. 6229(f),

6231(b)(1)(C).   Respondent, however, did not assess petitioner’s
                               - 14 -

1983 tax liability until the partnership litigation concluded in

1999, even though the settlement agreements were not based on the

outcome of the partnership litigation.

     Under the circumstances, respondent’s position that there

were no delays in the performance of a ministerial act lacked a

reasonable basis in both fact and law.    Considering the

explicitness of the settlement agreements and the absence of

petitioner’s taxable year 1983 from the partnership litigation,

there is no reasonable explanation for respondent’s delay in

performing the ministerial act of assessment.    If Appeals Officer

Sivick had consulted the Internal Revenue Manual, the section

pertaining to “Agreement Forms” for the settlement of tax shelter

cases would have informed him of the following:

     Closing agreements should be avoided in settlements
     when subsequent years are TEFRA. On the date they are
     executed by the Service these agreements convert
     partnership items to nonpartnership items for the
     future years involved, triggering a one year assessment
     period under I.R.C. Section 6229(f) for those years.

See 4 Administration, Internal Revenue Manual (CCH), sec.

8.3.1.2.4, at 27,134 (Apr. 13, 1998).    Furthermore, the record

contains no evidence that any significant aspect of the delay was

attributable to petitioner.    See S. Rept. 99-313, supra at 208,

1986-3 C.B. (Vol. 3) at 208.

     The record also indicates that petitioner appropriately

provided all relevant information under his control and all

relevant legal arguments supporting his position.    See sec.
                              - 15 -

301.7430-5(c)(1), Proced. & Admin. Regs.   In the July 31 letter,

approximately a year and a half before respondent filed the

answer, petitioner alerted respondent to the possibility of an

error or delay in the assessment of his 1983 tax liability.

Petitioner argued that he had settled the taxable year 1983, and

petitioner enclosed copies of the settlement agreements.

Respondent does not dispute receiving the July 31 letter or

copies of the settlement agreements.   Instead of considering the

effect of the settlement agreements on petitioner’s 1983 tax

liability and consulting the Internal Revenue Manual, respondent

brushed off petitioner’s settlement argument as petitioner’s

irrelevant “belief”.

     At the time of the exchange with respondent regarding the

July 31 letter, petitioner was not represented by counsel, and

the record contains no evidence that petitioner had any legal

expertise.   Nevertheless, petitioner provided respondent with the

factual information respondent needed to verify that respondent

delayed assessing petitioner’s 1983 interest liability.

Petitioner was entitled to expect that respondent would give due

consideration to petitioner’s claims.10

     4.   Conclusion

     Respondent has not established that the position in the


     10
      In a letter dated June 18, 2001, Appeals Officer Sivick
provided to petitioner a “Review of the Law and related
material”. The review contained references to secs. 6224(c) and
6229(a) and (b) but did not mention secs. 6229(f) or 6231(b).
                              - 16 -

answer was substantially justified.    Consequently, we conclude

that petitioner is the prevailing party.

B.   Exhaustion of Administrative Remedies

      Section 7430(b)(1) provides in part:   “A judgment for

reasonable litigation costs shall not be awarded under subsection

(a) in any court proceeding unless the court determines that the

prevailing party has exhausted the administrative remedies

available to such party within the Internal Revenue Service.”      In

general, in order to exhaust administrative remedies, the

taxpayer or the taxpayer’s qualified representative must

participate in an Appeals Office conference.    Sec. 301.7430-

1(b)(1)(i), Proced. & Admin. Regs.     “Participation” in an Appeals

Office conference is defined as “[disclosure] to the Appeals

office [of] all relevant information regarding the party’s tax

matter to the extent such information and its relevance were

known or should have been known to the party or qualified

representative at the time of such conference.”    Sec. 301.7430-

1(b)(2), Proced. & Admin. Regs.

      The documents in the record indicate that the parties

conducted petitioner’s conference through oral and written

correspondence and that the conference began in July 2001 and

ended on October 17, 2001.   During this period, in the July 31

letter, petitioner argued that he had settled the taxable year

1983, and petitioner attached copies of the settlement
                                - 17 -

agreements.     In responding to petitioner’s argument, Appeals

Officer Sivick did not address the content of the settlement

agreements or their possible effect on petitioner’s 1983 taxable

year.     Indeed, the substance of Appeals Officer Sivick’s response

suggests that he was unaware of the settlement agreements’

relevance to petitioner’s tax matter.

     Overall, petitioner made a reasonable and good-faith effort

to disclose to Appeals Officer Sivick all relevant information in

the context and development of the case at the time of the

conference.     See Allen v. Commissioner, T.C. Memo. 2002-302.

Accordingly, we conclude that petitioner exhausted the

administrative remedies available to him.

C.   Reasonableness of Costs Claimed

        Section 7430(c)(1) defines reasonable litigation costs to

include, among other things, reasonable court costs and

reasonable fees paid or incurred for the services of attorneys in

connection with the court proceeding (attorney’s fees).

Attorney’s fees are limited by statute and adjusted for cost of

living.     Sec. 7430(c)(1)(B)(iii) (and flush language).   For

purposes of this motion, the statutory rate for attorney’s fees

is $150 per hour.     See Rev. Proc. 2002-70, 2002-2 C.B. 845, 850.

A taxpayer may recover attorney’s fees in excess of the statutory

limit in the presence of one or more of the following special

factors:     (1) Limited availability of qualified attorneys for the
                              - 18 -

proceeding, (2) difficulty of the issues presented in the case,

or (3) local availability of tax expertise.   Sec.

7430(c)(1)(B)(iii).

     Respondent contends that the costs petitioner claims are

unreasonable, because the $250 per hour fee arrangement between

petitioner and Mr. Benda exceeds the statutory limit, and

petitioner has not shown that any of the three special factors

applies.   On the other hand, petitioner asserts that this case

involves an uncommon and difficult issue, which entitles him to

the full amount of attorney’s fees incurred in connection with

the court proceeding.11

     We disagree with petitioner that he is entitled to enhanced

attorney’s fees.   Petitioner has not established that the issue

in this case is of sufficient difficulty to qualify as a special

factor under section 7430(c)(1)(B)(iii).   We award petitioner

reasonable litigation costs in the amount of $1,631.32.

     We have considered the remaining arguments of both parties

for results contrary to those expressed herein, and, to the

extent not discussed above, we find those arguments to be

irrelevant, moot, or without merit.



     11
      Although petitioner established that Mr. Benda was
qualified to act as petitioner’s attorney in this proceeding,
petitioner submitted no evidence with respect to the availability
of qualified attorneys or the local availability of tax
expertise.
                        - 19 -

To reflect the foregoing,



                                  An appropriate order and

                             decision will be entered.
