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explanation concerning unreported income. Furthermore,
petitioner’s letter indicates that petitioner attempted to
substantiate some of his claimed business expenses with his
wife’s receipts. Petitioner’s letter did not describe the
prenuptial agreement between himself and his wife, which affected
the division of business income and expenses. Petitioner did not
disclose the terms of the prenuptial agreement until the Appeals
conference in June 1997.
Accordingly, respondent was reasonable in refusing to
concede the adjustments until petitioner substantiated his
deductions and disclosed the source of his unreported income.
See Sokol v. Commissioner, supra at 765. Therefore, we hold that
respondent’s position was substantially justified at the time the
answer was filed.
B. 1993 and 1994 Tax Years
Petitioner is not entitled to litigation costs for the tax
years 1993 and 1994 because he failed to exhaust his
administrative remedies. “A judgment for reasonable litigation
costs shall not be awarded * * * in any court proceeding unless
the court determines that the prevailing party has exhausted the
administrative remedies available to such party within the
Internal Revenue Service.” Sec. 7430(b)(1). In general, a
taxpayer has not exhausted the administrative remedies available
within the IRS unless prior to filing a petition in the Tax
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