Ted and Tammy Estes - Page 10

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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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