Gerard and Audrey Kathleen Hennessey - Page 40




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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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