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justification standard with respect to the recovery of litigation
costs is the position taken by the Commissioner in the answer to
the petition. See Bertolino v. Commissioner, 930 F.2d 759, 761
(9th Cir. 1991), affg. an unpublished decision of this Court;
Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir. 1988).
Ordinarily, we consider the reasonableness of each of these
positions separately. See Huffman v. Commissioner, 978 F.2d
1139, 1144-1147 (9th Cir. 1992), affg. in part, revg. in part and
remanding on other issues T.C. Memo. 1991-144. There was no
answer filed in this case. See Rule 175(b). There is, however,
no indication that respondent's position changed between the
issuance of the notice of deficiency and the partial concession
by respondent's counsel.
The issue of whether respondent's positions in the
underlying proceedings were substantially justified shall be
addressed first. In order to decide whether a position of
respondent was substantially justified, we must review the
substantive merits of the case.
Reasonable Basis In Fact
Petitioners do not suggest that respondent applied the wrong
legal standard in taking a position on their documentation of the
loan in 1994 as an explanation of apparent unreported income.
Petitioners argue that respondent's position on the adjustment
was not reasonable in fact based on the evidence they presented.
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