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presented in their case, and whether the Government's litigation
position was substantially justified. See Swanson v.
Commissioner, 106 T.C. 76, 86 (1996).
Substantially Prevail Requirement
In petitioners' motion to determine the prevailing party,
petitioners argue that because respondent ultimately agreed to a
reduced deficiency and settled the case on a different legal
theory from that on which the notice of deficiency was issued,
petitioners are the prevailing party with respect to the most
substantial issue in their case. Respondent, on the other hand,
denies that the case was settled on a new legal theory and
further alleges that the settlement did not substantially reduce
the deficiency. Rather, respondent contends that the settlement
reduced the ultimate deficiency amount only by about $10,000 and
respondent prevailed on 88 percent of the adjustment.
To determine whether the taxpayer has substantially
prevailed within the meaning of section 7430(c)(4)(A), we look to
the final outcome of the case, whether by judgment or settlement.
Cassuto v. Commissioner, 936 F.2d 736, 741 (2d Cir. 1991), affg.
in part and revg. in part 93 T.C. 256 (1989). Section
7430(c)(4)(A)(i) is phrased in terms of issues, not claims. See
Huckaby v. United States, 804 F.2d 297, 299 (5th Cir. 1986).
In this case, the issues presented were: (1) Whether
petitioners must recognize net capital gain on the incorporation
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