John S. Gibson, f.k.a. John S. Mactavish - Page 6




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          to verify income.  Finally, petitioner asserts that the “need to            
          independently verify the calculation [gross receipts] arose from            
          the IRS’ distrust of the taxpayer, not the inadequacy of the                
          records.”                                                                   
               Respondent contends that he was substantially justified                
          because he relied on petitioner’s books and records in                      
          determining income pursuant to section 446(a), and, when it                 
          became apparent that petitioner’s books and records were                    
          inaccurate, respondent, in concert with petitioner’s counsel,               
          employed the bank deposits method.  Further, respondent claims              
          that he was substantially justified as to tax year 1994 because             
          petitioner did not file a tax return, and, therefore, respondent            
          was required to compute income.  It was by use of the bank                  
          deposits method that the parties were able to resolve the amounts           
          in dispute.                                                                 
          Discussion                                                                  
               A.  Section 7430                                                       
               Section 7430(a) provides that the prevailing party in any              
          administrative or court proceeding may be awarded a judgment for            
          (1) reasonable administrative costs incurred in connection with             
          such administrative proceedings within the Internal Revenue                 
          Service (IRS), and (2) reasonable litigation costs incurred in              
          connection with such court proceedings.  See sec. 7430(a), (c).             
          The prevailing party must exhaust his administrative remedies,              






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