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However, respondent’s use of statistical data here was not
reasonable because Manwah was clearly below average.
Respondent relies on Estes v. Commissioner, T.C. Memo. 2000-
96, in which we held that the Commissioner’s reconstruction of
the taxpayers’ income based on partial records provided by the
taxpayers was reasonable. However, unlike the situation in Estes
v. Commissioner, supra, where the determination was based
primarily on partial records provided by the taxpayers,
respondent’s method of reconstruction in the instant case relied
too little on petitioners’ records and too much on statistical
data from noncomparable stores.
3. Conclusion
We conclude that respondent lacked a reasonable basis in
fact for respondent’s position that petitioners understated
Manwah’s gross receipts for the years in issue. The
substantially justified standard requires that respondent’s
position have a reasonable basis in both law and fact. Pierce v.
Underwood, supra at 565. Thus, respondent’s position in this
case was not substantially justified, and petitioners are
entitled to an award for reasonable litigation costs.
C. Whether the Attorney’s Fees and Costs Claimed Are Reasonable
Petitioners seek an award of attorney’s fees and
miscellaneous costs totaling $10,032.
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Last modified: May 25, 2011