Galedrige Construction, Inc. - Page 9

          reasonableness of respondent's position and conduct necessarily             
          requires considering what respondent knew at the time.  Cf.                 
          Rutana v. Commissioner, 88 T.C. 1329, 1334 (1987); DeVenney v.              
          Commissioner, supra.  Thus, in determining whether respondent               
          acted reasonably, this Court must "consider the basis for                   
          respondent's legal position and the manner in which the position            
          was maintained."  Wasie v. Commissioner, supra at 969.                      
               Petitioner concedes that respondent's position with respect            
          to the method of accounting issue was not unreasonable; however,            
          it asserts that respondent's position was not substantially                 
          justified with respect to the section 6661 issue.  In some cases            
          courts have adopted an issue-by-issue approach to section 7430,             
          apportioning the requested awards between those issues for which            
          the Commissioner was, and those issues for which the Commissioner           
          was not, substantially justified.  See Powers v. Commissioner, 51           
          F.3d 34, 35 (5th Cir. 1995); Swanson v. Commissioner, 106 T.C.              
          76, 102 (1996).  We follow that approach here and separately                
          discuss whether respondent's position on the section 6661 issue             
          was substantially justified.                                                
          Issue 1.  Whether Respondent's Determination of the Section 6661            
          Addition to Tax Was Substantially Justified                                 
               Section 6661(a) imposes an addition to tax if there is a               
          substantial understatement of income tax.  There is an                      
          understatement where the amount of tax shown on the return is               
          less than the amount required to be shown on the return.  A                 

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