John Bowden, Inc. - Page 9

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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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