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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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