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B. Substantial Justification
The Commissioner's position is substantially justified if,
based on all of the facts and circumstances and the legal
precedents relating to the case, the Commissioner acted
reasonably. 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. 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 that could
satisfy a reasonable person". Pierce v. Underwood, supra at 565
(construing similar language in the Equal Access to Justice Act).
Thus, the Commissioner's position may be incorrect but
nevertheless be substantially justified "'if a reasonable person
could think it correct'". Maggie Mgmt. Co. v. Commissioner, 108
T.C. 430, 443 (1997) (quoting Pierce v. Underwood, supra at 566
n.2).
The relevant inquiry is "whether * * * [the Commissioner]
knew or should have known that * * * [his] position was invalid
at the onset". Nalle v. Commissioner, 55 F.3d 189, 191 (5th Cir.
1995), affg. T.C. Memo. 1994-182. We look to whether the
Commissioner's position was reasonable given the available facts
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