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In deciding this issue, we must identify the point at which
the United States is first considered to have taken a position,
and then decide whether the position taken was or was not
substantially justified. The position taken by the United
States, for purposes of litigation costs, is the position of the
United States in the judicial proceeding. Sec. 7430(c)(7)(A).
The first opportunity for the United States to take a position in
the judicial proceeding is in the answer filed. See Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part,
revg. in part T.C. Memo. 1991-144. Therefore, in deciding
whether the Government's position was substantially justified, we
must review the actions of the IRS District Counsel in answering
the petition and the actions of the IRS Appeals officers who
considered petitioner's case after the answer was filed.
When the answer was filed in this case, respondent denied
that there was error contained in the notice of deficiency.
Respondent denied error even though the notice of deficiency did
not contain a section 362 basis adjustment. Respondent argues
that no basis adjustment was allowed because the Government was
caught in a potential whipsaw situation, and was trying to
prevent the possibility that income could go untaxed. The
Bowdens had filed a petition in their case, alleging that they
should recognize no gain upon transfer of their assets to the
corporation. Respondent contends the corporation was originally
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