Phillip Lee Allen and Carolyn F. Allen - Page 19




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          damages.  The Appeals officer also considered the application of              
          section 1033 to the circumstances of petitioners’ facts.                      
               Accordingly, petitioners were forced to decide whether to                
          proceed to trial.  Approximately 3 months prior to trial,                     
          petitioners proceeded to procure information from third parties               
          that would show that the insurance company’s payment was not                  
          intended to settle petitioners’ claim for punitive damages.12  A              
          few days before trial, respondent’s attorney became aware that                
          the insurance company’s lawyer would testify that the $130,000                
          payment was not for “bad faith” or punitive damages.                          
          Respondent’s attorney had expected that the insurance company’s               
          lawyer would testify otherwise.  In spite of that newly                       
          discovered information, respondent proceeded to trial, and,                   
          ultimately, respondent’s position in the litigation was held to               
          be unjustified, beginning 3 days before trial.                                
               Respondent, relying on sec. 301.7430-1(b)(2), Proced. &                  
          Admin. Regs., contends that there was more information available              
          to petitioners at the time of the Appeals conference and that                 
          petitioners’ failure to seek out and/or present that information              
          to the Appeals officer should result in a failure to exhaust                  
          administrative remedies.  On the other hand, petitioners contend              
          that they provided the Appeals officer with relevant information              

               12 Subsequent to the Appeals conference, petitioners’ pre-               
          trial cost to develop third party information was $34,031.  By                
          comparison, the amount of the income tax deficiency was $39,697.              





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