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requirements (subpars. (A)(ii) and (D)(ii) of sec. 7430(c)(4)).
Respondent contends that (1) Sandra is not “the prevailing party”
because respondent’s position “was substantially justified” (sec.
7430(c)(4)(B)(i)), (2) the amount of costs Sandra claims is not
reasonable (pars. (1) and (2) of sec. 7430(c)), and (3) Sandra
“unreasonably protracted” the proceedings (sec. 7430(b)(3)).
We consider first whether respondent’s position was
substantially justified, then whether Sandra unreasonably
protracted the proceedings, and then the proper allocation of
allowable costs. Finally, we consider whether Sandra is allowed
a recovery of any amount under the “qualified offer” provisions.
B. Substantially Justified
To recover costs from respondent, Sandra must establish she
is the “prevailing party” within the meaning of section
7430(c)(4). (As we noted in Downing I note 31, section 7491,
which shifts the burden of proof to the Commissioner if the
taxpayer meets certain conditions, does not apply in the instant
case because the examination of petitioners’ tax returns began
before the effective date of section 7491.) Under section
7430(c)(4)(B)(i), Sandra shall not be treated as having satisfied
the prevailing party requirement if respondent “establishes that
the position of the United States in the proceeding was
substantially justified.” (Although the overall burden of proof
as to “prevailing party” is on Sandra, the burden of proof on the
“substantially justified” element is on respondent, as a result
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