Galedrige Construction, Inc. - Page 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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