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Respondent concedes that petitioners have satisfied the
requirements of section 7430(c)(4)(A). Petitioners will
nevertheless fail to qualify as the prevailing party if
respondent can establish that his position in the court and
administrative proceedings was substantially justified. See sec.
7430(c)(4)(B).
B. Substantial Justification
The Commissioner's position is substantially justified if,
on the basis of all of the facts and circumstances and the legal
precedents relating to the case, the Commissioner acted
reasonably. See Pierce v. Underwood, 487 U.S. 552 (1988); Sher
v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th
Cir. 1988). In other words, to be substantially justified, the
Commissioner's position must have a reasonable basis in both law
and fact. See Pierce v. Underwood, supra; Rickel v.
Commissioner, 900 F.2d 655, 665 (3d Cir.1990), affg. in part and
revg. in part on other grounds 92 T.C. 510 (1989). A position is
substantially justified if the position is "justified to a degree
that could satisfy a reasonable person." Pierce v. Underwood,
supra at 565 (construing similar language in the Equal Access to
Justice Act). Thus, the Commissioner's position may be incorrect
but nevertheless be substantially justified "'if a reasonable
person could think it correct'". Maggie Management Co. v.
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