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respondent argues that, although petitioners substantially
prevailed with respect to the issues and amounts in controversy,
petitioners are not the prevailing party because respondent was
substantially justified in maintaining his position. Respondent
also argues that all administrative remedies were not exhausted,
that petitioners unreasonably protracted the proceedings, and
that the fees requested are unreasonable. If we determine that
respondent was substantially justified, we need not address the
other aspects raised by respondent.
Respondent contends that the evidence that was available
prior to trial substantially justified the position that
petitioners’ settlement included payment for punitive damages.
Petitioners counter that the evidence they provided to respondent
regarding the expenses of rehabilitating their home rendered
respondent’s position on the taxability of the settlement
unreasonable and without justification.
In seeking to recover from their insurance company,
petitioners made a series of demands for reimbursement as the
repairs progressed and the amount of damage grew due to
subsequent discoveries of damage. After a few payments to
petitioners, the insurance company disputed petitioners’
estimates and refused to honor petitioners’ demands. Petitioners
brought suit over this refusal and alleged delay by the insurance
company. In their complaint, petitioners set forth several
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