Gary C. and Maru E. Johansen - Page 4

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               Respondent does not agree:  (1) That petitioners have                  
          exhausted their available administrative remedies within the                
          Internal Revenue Service (IRS), and (2) that petitioners are a              
          “prevailing party”, because (i) the qualified offer provision               
          does not apply, and (ii) respondent’s position in the court                 
          proceedings was substantially justified.                                    
               The parties have not requested a hearing in this case, and             
          the Court concludes that a hearing is not necessary to decide               
          this motion.  See Rule 232(a)(2).  Accordingly, the Court rules             
          on the motion based on the parties’ submissions and the record in           
          this case.                                                                  
               At the time the petition in this case was filed, petitioners           
          resided in Los Angeles, California.                                         
               For the year in issue, petitioners were self-employed,                 
          operating a small consulting business.  Petitioners jointly filed           
          a Form 1040, U.S. Individual Income Tax Return, for 2002, which             
          they prepared without the assistance of a professional.                     
               By letter dated August 10, 2004, Tax Compliance Officer Mark           
          Harris (TCO Harris) notified petitioners that their 2002 return             
          had been selected for examination.  At the same time, TCO Harris            
          sent to petitioners Form 4564, Information Document Request, to             
          request documentation establishing certain expense deductions               
          that petitioners claimed on their Schedule A, Itemized                      

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