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position was essentially the same in the administrative and Court
proceedings. See Maggie Mgmt. Co. v. Commissioner, supra at 442.
The parties agree, more or less, that prior to the
settlement, the items at issue as a result of respondent’s
examination were primarily: (1) Petitioners’ claimed business
expense deductions; and (2) ISOA, Inc.’s “deferred income” in
1995 in the amount of $195,000. We have previously adopted an
issue-by-issue approach to the awarding of costs under section
7430, apportioning the requested award among the issues according
to whether the position of the United States was substantially
justified. Swanson v. Commissioner, 106 T.C. 76, 102 (1996);
O’Bryon v. Commissioner, T.C. Memo. 2000-379; see also Powers v.
Commissioner, 51 F.3d 34, 35 (5th Cir. 1995). We follow that
approach here and separately discuss whether respondent’s
position was substantially justified with respect to each of the
above issues.16
I. Business Expense Deductions
In the notice of deficiency, respondent disallowed various
business expense deductions claimed on petitioners’ individual
tax returns, as well as the tax returns of Beacon and ISOA, Inc.,
16 Much of petitioners’ presentation at the hearing
addressed the criminal referral and the proposed civil fraud
penalty. Although the civil fraud penalty was proposed in the
revenue agent’s report, it was neither included in the notice of
deficiency nor the answer. Consequently, the substantial
justification of respondent’s proposed imposition of the civil
fraud penalty is not considered here. See sec. 7430(c)(7).
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