Laura E. Austin - Page 21

          A prepared by respondent's revenue agent that the facts of the              
          case were known to respondent prior to the date that the notice             
          of deficiency was mailed, we find that respondent's position was            
          not substantially justified as of all relevant dates.                       
          The Research and Development Issue                                          
               Respondent disallowed the $26,676 deduction petitioners                
          claimed for research and development costs for computer software,           
          because petitioners did not establish that they accounted for the           
          costs in a consistent manner as required by section 174.                    
          Specifically, respondent determined that in prior years                     
          petitioner had capitalized and amortized the costs of computer              
          software; however, in 1990, petitioner expended $26,676 and                 
          deducted the entire amount in the year it was paid.                         
               Petitioner contends that the $26,676 paid in 1990 was to               
          develop a unique computer program, created from "scratch".                  
          Petitioner claims that the software costs incurred in prior                 
          years, which were capitalized and amortized, were not research              
          and development costs, but were incurred to purchase commercially           
          available word processing and spreadsheet programs.                         
               Respondent's position may be incorrect but substantially               
          justified if a reasonable person could think it correct.  Pierce            
          v. Underwood, 487 U.S. at 566.  Whether respondent acted                    
          reasonably on this issue ultimately turns on the facts available            
          to her which formed the legal basis for the position she took in            
          the deficiency notice and during the litigation.  DeVenney v.               

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