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section 7430.12 Accordingly, we first reduce petitioners’ claim
by $2,281.25 (18.25 hours multiplied by the recovery rate of $125
per hour claimed by petitioners), leaving potentially recoverable
costs in the amount of $8,697.49.
B. Allocation of Costs Between the Two Issues
Petitioners have not allocated their costs between the
discharge of indebtedness issue and the penalty issue, nor would
we expect them to, given the interrelatedness of the two issues.
We therefore allocate petitioners’ remaining eligible costs
between the two issues based on the relative dollar amounts
involved. See, e.g., Galedrige Constr., Inc. v. Commissioner,
T.C. Memo. 1997-485 (25 percent of costs allocated to issue
regarding 25 percent substantial understatement penalty).13
12 Sec. 3101(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (1998 Act), Pub. L. 105-206,
112 Stat. 728, pushed back the “start date” for recoverable
administrative costs in a deficiency proceeding from the date of
the notice of deficiency to the earlier date of the
Commissioner’s “30-day letter.” That amendment applies to costs
incurred after Jan. 18, 1999, the date that is 180 days after the
date of enactment of the 1998 Act. 1998 Act sec. 3101(g), 112
Stat. 729.
13 Because petitioners did not separately address the
reasonableness of respondent’s position with respect to the
discharge of indebtedness issue and the penalty issue,
respectively, we do not think it appropriate to allocate
petitioners’ costs between those issues on a pro rata basis
(i.e., 50 percent to each issue). Cf. Heasley v. Commissioner,
T.C. Memo. 1991-189, affd. in part and revd. in part 967 F.2d 116
(5th Cir. 1992) (taxpayers challenged the reasonableness of the
Commissioner’s position with respect to four separate penalties;
award of costs proportionate to number of issues on which
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