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which these fees relate involve the legal and factual issues
raised by the misconduct of IRS attorneys McWade and Sims in the
original trial of the test cases. Accordingly, we look to the
misconduct inquiry (as opposed to tax deficiency) phase of these
proceedings to determine “the position of the United States in
the proceeding”.
While the parties are in general agreement that the relevant
“position of the United States” derives from the misconduct
inquiry phase of these proceedings, their respective submissions
compel us to clarify exactly what it is we are testing against
the substantial justification standard. Not surprisingly,
petitioners repeatedly draw our attention to the odious character
of the attorney misconduct. At the other end of the spectrum,
respondent emphasizes the inherent reasonableness of defending a
trial court victory on appeal. In our view, the issue is not
whether the conduct of Sims and McWade was substantially
justified (it obviously was not), nor whether respondent’s
decision to defend his Dixon III victory against petitioners’
appeals (as opposed to simply rolling over) was substantially
justified (it obviously was). Rather, our inquiry focuses on
respondent’s litigating position regarding the legal effect of
the attorney misconduct (i.e., that such misconduct amounted to
harmless error and therefore did not invalidate the decisions
entered against the test case petitioners following the issuance
of Dixon II).
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