-5-
his principal residence. In Schlicher I, we held that petitioner
used 43-1/2 of the 51 acres of the Clayton property as his
principal residence. Thus, petitioner was entitled to defer the
gain therefrom under section 1034(a).
Petitioner asserts, based on our holding in Schlicher I,
that he has substantially prevailed with respect to both the
amount in controversy and the most significant issue. We agree
with petitioner on this point. However, the fact that respondent
loses the underlying litigation does not require a determination
that the position of the Internal Revenue Service (IRS) was
unreasonable so as to mandate an award for attorney's fees.
Broad Ave. Laundry & Tailoring v. United States, 693 F.2d 1387,
1391-1392 (Fed. Cir. 1982). It does remain, however, a relevant
factor to consider in determining the degree of the
Commissioner's justification. Estate of Perry v. Commissioner,
931 F.2d 1044, 1046 (5th Cir. 1991). Thus, we must decide
whether the position of the United States in this court
proceeding was substantially justified.
A position is "substantially justified" when it is
"justified to a degree that could satisfy a reasonable person."
Pierce v. Underwood, 487 U.S. 552, 565 (1988). It is not enough
that a position simply has enough merit to avoid sanctions for
frivolousness; it must have a "reasonable basis both in law and
fact". Id.
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