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satisfaction of these requirements, a taxpayer may be entitled to
reasonable costs incurred in connection with the administrative
or court proceeding. See sec. 7430(a)(1) and (2), (c)(1) and (2).
To be a prevailing party, the taxpayer must substantially
prevail with respect to either the amount in controversy or the
most significant issue or set of issues presented and satisfy the
applicable net worth requirement. See sec. 7430(c)(4)(A).
Respondent concedes that petitioners have satisfied the
requirements of section 7430(c)(4)(A). Petitioners have
nevertheless failed to qualify as the prevailing party if
respondent can establish that respondent's position in the
administrative and court proceedings was substantially justified.
See sec. 7430(c)(4)(B).
Substantial Justification
The Commissioner's position is substantially justified if,
on the basis of all of the facts and circumstances and the legal
precedents relating to the case, the Commissioner acted
reasonably. See Pierce v. Underwood, 487 U.S. 552 (1988); Sher
v. Commissioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th
Cir. 1988). In other words, to be substantially justified, the
Commissioner's position must have a reasonable basis in both law
and fact. See Pierce v. Underwood, supra; Rickel v.
Commissioner, 900 F.2d 655, 665 (3d Cir. 1990), affg. in part and
revg. in part on other grounds 92 T.C. 510 (1989). A position is
substantially justified if the position is "justified to a degree
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