-7-
position, and then decide whether the position taken from that
point forward was not substantially justified.
The position taken by the United States, for purposes of
litigation costs, refers to the position of the United States in
a judicial proceeding. Sec. 7430(c)(7)(A). Respondent's
position in the judicial proceeding herein was taken on December
27, 1994, the date respondent's answer was filed. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part
and revg. in part T.C. Memo. 1991-144. More specifically,
respondent's position in Galedrige I was that petitioner's use of
the cash method of accounting did not clearly reflect its income
(the method of accounting issue), and that it was therefore
subject to the addition to tax pursuant to section 6661(a) for
the substantial understatement of tax (the section 6661 issue).
Whether respondent's position was not substantially
justified turns on a finding of reasonableness, based upon all
the facts and circumstances, as well as legal precedents relating
to the case. Pierce v. Underwood, 487 U.S. 552 (1988); Coastal
Petroleum Refiners, Inc. v. Commissioner, supra at 694-695; Sher
v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th
Cir. 1988); DeVenney v. Commissioner, 85 T.C. 927, 930 (1985). A
position is substantially justified if the position is "justified
to a degree that could satisfy a reasonable person." Pierce v.
Underwood, supra at 565; Powers v. Commissioner, 100 T.C. 457,
470-471 (1993). A position that merely has enough merit to avoid
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