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and for that reason they lack merit. A few of these arguments,
however, deserve some further discussion.
Petitioner asserts that respondent's settlement of the case
largely in petitioner's favor, and for an amount roughly equal to
an offer made by petitioner during audit, establishes that
respondent's position was not substantially justified. We
disagree. As stated previously, the settlement of a case in
petitioner's favor is not determinative of whether respondent's
position is substantially justified. We find this particularly
true in cases where the issue is substantiation of gross income
and deductions. In reaching this conclusion, we note that this
case does not involve a situation where the Commissioner
continued to litigate the issue long after the taxpayer had
provided the net worth analyses. Here, despite petitioner's
apparent failure to keep adequate records, respondent settled the
case accepting an indirect method of verifying taxable income
proposed by petitioner on condition that petitioner would change
its method of accounting. In such circumstances, we believe that
respondent's refusal of petitioner's settlement offers little
weight in determining whether respondent's position was
substantially justified. In this regard, while petitioner may
have substantially prevailed, the agreed deficiency is hardly de
minimis.
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