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determination, collection, or refund of any tax, the "prevailing
party" may be awarded reasonable litigation costs. To be a
"prevailing party" taxpayers must establish (1) that they
substantially prevailed with respect to the amount in controversy
or with respect to the most significant issue presented, (2) that
the position of the United States in the proceeding was not
substantially justified, and (3) that taxpayers met the net worth
requirements of 28 U.S.C. 2412(d)(2)(B)(1994) on the date the
petition was filed. Sec. 7430(c)(4)(A). As a prerequisite for
obtaining a judgment for litigation costs, the taxpayers must
also establish that they have exhausted the administrative
remedies available to them within the IRS, that they did not
unreasonably protract the proceeding, and that the costs claimed
are reasonable. Sec. 7430(b). Taxpayers must establish each of
these elements to recover litigation costs. Rule 232(e); Dixson
Intl. Serv. Corp. v. Commissioner, 94 T.C. 708, 714-715 (1990).
Respondent contends that petitioners should not be entitled
to recover litigation costs because petitioners did not exhaust
the administrative remedies available within the IRS.
As stated above, a judgment for reasonable litigation fees
shall not be awarded in any court proceeding unless the court
determines that the prevailing party has exhausted the
administrative remedies available within the Internal Revenue
Service. Sec. 7430(b)(1). A taxpayer has not exhausted his
administrative remedies if he does not request an Appeals Office
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Last modified: May 25, 2011