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proceeding. See sec. 7430(c)(7)(A). A judicial proceeding in
this Court is commenced with the filing of a petition. See Rule
20(a). Generally, respondent initially takes a position in the
litigation on the date he files the answer in response to the
petition. See, e.g., Han v. Commissioner, T.C. Memo. 1993-386.
The Commissioner’s position is substantially justified if
that position could satisfy a reasonable person and if it has a
reasonable basis in both fact and law. See Pierce v. Underwood,
487 U.S. 552, 565 (1988). Determining the reasonableness of the
Commissioner’s position and conduct requires considering what the
Commissioner knew at the time. See DeVenney v. Commissioner, 85
T.C. 927, 930 (1985). The Commissioner’s position can be
justified even if the Commissioner eventually concedes the case.
See Sokol v. Commissioner, 92 T.C. 760, 767 (1989).
Petitioners’ records were at best in a disordered state when
respondent sought to review them. Only incomplete information
was available to respondent, and respondent was forced to rely
upon reconstructed records to determine petitioners’ tax
liability. It is well established that taxpayers are required to
keep adequate books and records, and in the absence of such,
respondent may determine a taxpayer’s tax liability by any method
which respondent finds to clearly reflect income. See sec. 6001;
sec. 446(b); sec. 1.6001-1(a), Income Tax Regs.; sec. 1.446-
1(a)(4), (b)(1), Income Tax Regs. This is true even where the
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Last modified: May 25, 2011