Phillip Lee and Carolyn F. Allen - Page 2




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          determination was in error.  In Allen v. Commissioner, T.C. Memo.           
          1998-406, filed November 13, 1998, we found that a settlement               
          paid to petitioners by their homeowners’ insurance company was              
          for compensatory, and not punitive, damages.  Accordingly, the              
          settlement payment was not taxable, and no deficiency resulted.             
          Our findings of fact in Allen v. Commissioner, supra, are                   
          incorporated by this reference.                                             
               A tax litigant may recover the reasonable litigation fees              
          and costs incurred in connection with the litigation only if the            
          four elements of section 7430 are present.  See sec. 7430.  Those           
          elements are:  (1) The fees or costs requested were incurred in             
          an administrative or court proceeding in connection with the                
          determination, collection, or refund of a tax; (2) administrative           
          remedies have been exhausted; (3) the proceedings have not been             
          unreasonably protracted by the taxpayer; and (4) the taxpayer was           
          the prevailing party in the action.  See id.  The taxpayer will             
          not be treated as the prevailing party if respondent establishes            
          that respondent’s position was substantially justified.2  To be             

               2  Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat.               
          1463, 1464, modified sec. 7430(c)(4) by striking the requirement            
          that the party seeking an award must prove that the United                  
          States’ position was “not substantially justified” in order to              
          recover. The 1996 amendment, for purposes of this case, provides            
          that “A party shall not be treated as the prevailing party in a             
          proceeding to which subsection (a) applies if the United States             
          establishes that the position of the United States in the                   
          proceeding was substantially justified.”  Thus, the 1996                    
          amendment effectively shifted the burden of proof on the issue of           
                                                             (continued...)           




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