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section 7430. See Rule 232(e). Upon satisfaction of these
requirements, a taxpayer may be entitled to reasonable costs
incurred in connection with the administrative proceeding. See
sec. 7430(a)(1) and (2), (c)(1) and (2).
To be a prevailing party, the taxpayer must substantially
prevail with respect to either the amount in controversy or the
most significant issue or set of issues presented and satisfy the
applicable net worth requirement. See sec. 7430(c)(4)(A).
Respondent argues that petitioners have not shown that they
satisfy the net worth requirements of section 7430(c)(4)(A)(ii).
Because petitioners, even if they meet the net worth
requirements, will nevertheless not be treated as prevailing
parties if respondent can establish that his position in the
administrative proceedings was substantially justified, we
examine this factor first. See sec. 7430(c)(4)(B).
Substantial Justification
The Commissioner's position is substantially justified if,
based on all of the facts and circumstances and the legal
precedent relating to the case, the Commissioner acted
reasonably. See 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. See Pierce v. Underwood, supra; Rickel v.
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