ROSARIO v. COMMISSIONER

MEMORANDUM OPINION

VASQUEZ, Judge: This case is before the Court on petitioners' motion for award of administrative and litigation costs pursuant to section 7430 and Rule 231. ¹ Neither party requested a hearing, and we see no reason for a hearing on this matter. Rule 232(a)(2). Accordingly, we rule on petitioners' motion on the basis of the parties' submissions and the existing record. Rule 232(a)(1). We incorporate by reference portions of Rosario v. Commissioner, T.C. Memo 2002-70 (Rosario I), our opinion on the merits in the instant case, that are relevant to our disposition of this motion.

*257 After concessions, ² the issue for decision is whether petitioners are the "prevailing party" in the underlying tax case.

Background

Antonio Rosario (petitioner), an orthopedic surgeon, executed a Professional Practice Agreement (the practice agreement) with the Jesse Holman Jones Hospital (the hospital) which provided that petitioner would receive funds from the hospital to ensure a monthly income of $ 33,334 (guarantee payment). During 1993, pursuant to the practice agreement, petitioner received $ 242,556 in guarantee payments from the hospital. In Rosario I, the issue was whether the $ 242,556 petitioner received from the hospital in 1993 was taxable*258 income to him in 1993. We held that the guarantee payments petitioner received were not includable in his income in 1993 because those payments were a loan.

Discussion

Section 7430 provides for the award of administrative and litigation costs to a taxpayer in an administrative or court proceeding brought against the United States involving the determination of any tax, interest, or penalty pursuant to the Internal Revenue Code. An award of administrative or litigation costs may be made where the taxpayer (1) is the "prevailing party", (2) exhausted available administrative remedies, ³ (3) did not unreasonably protract the administrative or judicial proceeding, and (4) claimed reasonable administrative and litigation costs. Sec. 7430(a), (b)(1), (3), and (c). These requirements are conjunctive, and failure to satisfy any one will preclude an award of costs to petitioners. Minahan v. Commissioner, 88 T.C. 492, 497 (1987).

To be*259 a "prevailing party" (1) the taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented, and (2) at the time the petition in the case is filed, the taxpayer must meet the net worth requirements of 28 U.S.C. sec. 2412(d)(2)(B) (2000). Sec. 7430(c)(4)(A). A taxpayer, however, will not be treated as the prevailing party if the Commissioner establishes that the Commissioner's position was substantially justified. Sec. 7430(c)(4)(B). For purposes of the administrative proceedings, respondent's position is that which was articulated in the notice of deficiency. Sec. 7430(c)(7)(B); Huffman v. Commissioner, 978 F.2d 1139, 1143-1147 (9th Cir. 1992), affg. in part and revg. in part T.C. Memo 1991-144; Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 442 (1997). For purposes of the court proceedings, respondent's position is that which was set forth in the answer. Sec. 7430(c)(7)(A); Huffman v. Commissioner, 978 F.2d at 1147-1148; Maggie Mgmt. Co. v. Commissioner, supra at 442.

The substantially justified standard is "essentially*260 a continuation of the prior law's reasonableness standard." Swanson v. Commissioner, 106 T.C. 76, 86 (1996). A position is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis in both fact and law. Pierce v. Underwood, 487 U.S. 552, 565, 101 L. Ed. 2d 490, 108 S. Ct. 2541 (1988); ⁴Huffman v. Commissioner, supra at 1147; Swanson v. Commissioner, supra at 86. A position that merely has enough merit to avoid sanctions for frivolousness will not satisfy this standard. Pierce v. Underwood, supra at 566.

*261 The determination of reasonableness is based on all of the facts and circumstances surrounding the proceeding and the legal precedents relating to the case. Coastal Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 694-695 (1990). A position has a reasonable basis in fact if there is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Pierce v. Underwood, supra at 565. A position is substantially justified in law if legal precedent substantially supports the Commissioner's position given the facts available to the Commissioner. Coastal Petroleum Refiners, Inc. v. Commissioner, supra 94 T.C. 685 at 688. Determining the reasonableness of the Commissioner's position and conduct requires considering what the Commissioner knew at the time. Rutana v. Commissioner, 88 T.C. 1329, 1334 (1987); DeVenney v. Commissioner, 85 T.C. 927, 930 (1985).

The fact that the Commissioner loses on the merits or concedes the case does not establish that a position was not substantially justified; however, it is a factor to be considered. Powers v. Commissioner, 100 T.C. 457, 471 (1993), affd. in part and revd. *262 in part 43 F.3d 172 (5th Cir. 1995).

Respondent contends that petitioners are not the prevailing party because his position is substantially justified in that he had a reasonable basis in both fact and law. ⁵ Petitioners argue that they substantially prevailed with respect to the amount in controversy, as well as with regard to the most significant issue, whether moneys petitioners received constituted additional income or qualified as loan proceeds.

In Rosario I, we were required to examine and interpret the practice agreement in order to resolve the issue. We did not have any testimonial evidence to aid in interpreting the practice agreement because the parties submitted the case fully stipulated. Although we ultimately held for petitioners, our holding was not easily reached.

*263 The relevant language in the practice agreement regarding the guarantee payments was not clear. The agreement provided, in part:

   To the extent that Physician's gross income in any month during

   the term of this Agreement is less than $ 33,334.00, the Hospital

   will pay Physician by the tenth day of the closing of the

   Physician's books for that month any amount sufficient to raise

   Physician's income for that month to $ 33,334.00 (such payment by

   Hospital, will be referred to as a "Gross Guarantee

   Payment"). If, during any month of the term of this

   Agreement, Physician's income is greater than $ 33,334.00,

   Physician will pay to Hospital by the tenth day after the

   closing of Physician's books for the month, the excess over

  $ 33,334.00, to the extent necessary to reimburse hospital for

   Gross Guarantee Payments previously paid. Such payments by

   Physician will be made to the Hospital during the term of this

   Agreement until the total amount of Gross Guarantee Payments

   made by Hospital have been repaid in full.

The main ambiguity in the practice agreement was that the*264 above language could have been construed to favor respondent's view that petitioner would have to repay the hospital only to the extent his monthly income were over $ 33,334; therefore, the guarantee payments would not be characterized as a loan because there would not be an unconditional obligation for petitioner to pay them back. United States v. Henderson, 375 F.2d 36, 39 (5th Cir. 1967); Bouchard v. Commissioner, 229 F.2d 703 (7th Cir. 1956), affg. T.C. Memo 1954-243; Haag v. Commissioner, 88 T.C. 604, 615-616 (1987), affd. without published opinion 855 F.2d 855 (8th Cir. 1988). The above language also could have been construed to favor petitioner's view that it required petitioner to pay back the guarantee payments in all events, which would support characterizing the payments as a loan.

On January 1, 1994, petitioner and the hospital signed an amended practice agreement that provided:

   Hospital intended that Physician, upon expiration of the Income

   Guarantee, be required to repay that portion of the Income

   Guarantee not repaid pursuant to the Guarantee Payback,

   regardless of*265 the level of Physician's gross income, * * * .

It was not clear whether the amended practice agreement, which was not signed until after the year in issue, changed, or instead merely clarified, the parties' intentions in the practice agreement. To resolve the ambiguity, we examined all stipulated documents and concluded that the evidence weighed in favor of treating the guarantee payments as a loan. Although we did not agree with respondent's interpretation in the final analysis, we believe that respondent's position had a reasonable basis in law and in fact given the ambiguity of the language in the practice agreement.

Accordingly, we hold that petitioners are not entitled to an award of administrative or litigation costs.

To reflect the foregoing,

An appropriate order will be issued and a decision will be entered for petitioners.