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determination was in error. In Allen v. Commissioner, T.C. Memo.
1998-406, filed November 13, 1998, we found that a settlement
paid to petitioners by their homeowners’ insurance company was
for compensatory, and not punitive, damages. Accordingly, the
settlement payment was not taxable, and no deficiency resulted.
Our findings of fact in Allen v. Commissioner, supra, are
incorporated by this reference.
A tax litigant may recover the reasonable litigation fees
and costs incurred in connection with the litigation only if the
four elements of section 7430 are present. See sec. 7430. Those
elements are: (1) The fees or costs requested were incurred in
an administrative or court proceeding in connection with the
determination, collection, or refund of a tax; (2) administrative
remedies have been exhausted; (3) the proceedings have not been
unreasonably protracted by the taxpayer; and (4) the taxpayer was
the prevailing party in the action. See id. The taxpayer will
not be treated as the prevailing party if respondent establishes
that respondent’s position was substantially justified.2 To be
2 Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat.
1463, 1464, modified sec. 7430(c)(4) by striking the requirement
that the party seeking an award must prove that the United
States’ position was “not substantially justified” in order to
recover. The 1996 amendment, for purposes of this case, provides
that “A party shall not be treated as the prevailing party in a
proceeding to which subsection (a) applies if the United States
establishes that the position of the United States in the
proceeding was substantially justified.” Thus, the 1996
amendment effectively shifted the burden of proof on the issue of
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