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Diplomat Associates engaged in an apartment rental activity,
and its partners were subject to the section 469 disallowance
rule. Phillip could not deduct any loss incurred by Diplomat
Associates unless he disposed of his entire interest in the
partnership in a fully taxable transaction.
Petitioners assert that respondent was not substantially
justified, because respondent conceded the issue on the basis of
the same argument petitioners submitted in the audit.
Respondent took the position that Phillip did not dispose of
his entire interest in the partnership because the outstanding
balance of the loan remained unpaid. Respondent asserts that the
partnership did not report any income from the discharge of
indebtedness. Respondent, however, did not determine in the
notice of deficiency that the partnership had cancellation of
indebtedness. Nor did respondent raise that issue in the answer
to the petition. Respondent has not provided the Court with
petitioners' legal argument that was first rejected and then
accepted. Respondent has not provided any legal argument or
authority supporting his position that Phillip had not disposed
of his entire interest in the partnership.
We find that respondent has not established that he was
substantially justified in taking the position that Phillip had
not disposed of his entire interest in the partnership.
Therefore, we shall allow attorney's fees related to this issue.
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