Greg McIntosh and Sheila R. McIntosh - Page 11

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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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