Phillip Lee and Carolyn F. Allen - Page 3




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          treated as the prevailing party, the taxpayer must show that the            
          taxpayer substantially prevailed with respect to the amount in              
          controversy or the main issues and has met the net worth limits.            
          See sec. 7430(c)(4)(B)(i).  If respondent’s position was                    
          substantially justified, the taxpayer cannot be considered a                
          prevailing party and therefore cannot meet the requirements of              
          section 7430.                                                               
               The Supreme Court has interpreted “substantially justified”            
          to mean “justified to a degree that could satisfy a reasonable              
          person.”  Pierce v. Underwood, 487 U.S. 552, 565 (1988).  The               
          United States’ position need not be correct to be “substantially            
          justified”; it need only have “a reasonable basis in law and                
          fact.”  Id. at 566 n.2.  The determination of reasonableness is             
          made on the basis of all the facts and circumstances, and the               
          fact that the Government eventually loses the case is not                   
          determinative.  See Baker v. Commissioner, 83 T.C. 822, 828                 
          (1984), vacated and remanded on another issue 787 F.2d 637 (D.C.            
          Cir. 1986).                                                                 
               In their motion for fees, petitioners contend that they have           
          met all elements for an award under section 7430.  Conversely,              


               2(...continued)                                                        
          the Government’s “substantial justification” from the party                 
          seeking the award to the Government.                                        
               The amendment applies to proceedings commenced after July              
          30, 1996.  The petition was filed after July 30, 1996, making the           
          amended sec. 7430 applicable.                                               




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