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Respondent concedes that petitioners exhausted their
administrative remedies within the IRS. Respondent also concedes
that petitioners did not unreasonably protract the court
proceeding. Accordingly, we must decide whether petitioners
qualify as the "prevailing party" in the court proceeding.
B. Prevailing Party
In order to qualify as the "prevailing party", a taxpayer
must establish: (1) The position of the United States in the
proceeding was not substantially justified; (2) the taxpayer has
substantially prevailed with respect to the amount in controversy
or the most significant issue or set of issues presented; and (3)
the taxpayer satisfies the applicable net worth requirement.
Sec. 7430(c)(4)(A).
Respondent concedes that petitioners substantially prevailed
within the meaning of section 7430(c)(4)(A)(ii). Respondent also
concedes that petitioners satisfy the applicable net worth
requirement. However, respondent contends that the position
taken by respondent in the court proceeding was substantially
justified.
Petitioners bear the burden of proving that respondent's
position in the court proceeding was not substantially justified.
Rule 232(e); Dixson Corp. v. Commissioner, 94 T.C. 708, 714-715
(1990); Gantner v. Commissioner, 92 T.C. 192, 197 (1989), affd.
905 F.2d 241 (8th Cir. 1990). Accordingly, we must decide
whether petitioners have carried their burden of proving that
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