Michael and Tanya Neylan - Page 5

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          other grounds and remanding T.C. Memo. 1991-144.  Respondent’s              
          administrative and litigation positions are substantially                   
          justified if they have a reasonable basis in both law and fact.             
          Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997).                 
               In the instant case, we conclude that respondent’s position            
          was both reasonable and substantially justified in both the                 
          administrative and judicial proceedings.  Petitioners failed to             
          provide the requisite documentation until after respondent issued           
          the notice of deficiency and filed an answer.  Deductions are a             
          matter of legislative grace, and petitioners must prove they are            
          entitled to the deductions.  Rule 142(a); New Colonial Ice Co. v.           
          Helvering, 292 U.S. 435, 440 (1934).  In the absence of any proof           
          of entitlement to the disputed deductions, respondent was                   
          reasonable to maintain his position that the disputed deductions            
          were not allowed.  Prouty v. Commissioner, T.C. Memo. 2002-175.             
          It was not until March 21, 2006, that respondent received the               
          documentation relating to the disputed deductions, at which time            
          respondent conceded the propriety of the deductions.5                       

               5Respondent also contends that petitioners protracted the              
          instant proceedings and are therefore ineligible for cost                   
          recovery.  Sec. 7430(b)(3).  Although we do not address that                
          issue, since we have disposed of the instant motion on other                
          grounds, we note that petitioners did not provide the required              
          documentation to support their claimed deductions until less than           
          2 weeks before trial.  Once in possession of the requested                  
          documentation, respondent presumably would have conceded the                
          deductions at any point in the administrative or litigation                 
          process, as respondent ultimately did on the eve of trial after             
                                                             (continued...)           





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