in disregard of a business connection such as exists herein" and (2) "Such a result discriminates against the individual who operates his or her business as a proprietorship instead of in corporate form where the limitations on the deduction of 'personal interest' would not apply." Majority op. pp. 4041. As a preliminary matter, the majority has not identified the business connection here. The majority relies on cases whose reasoning it concedes is confusing. Majority op. p. 37. Moreover, the majority has warned that, to satisfy section 163(h)(2)(A), it is insufficient simply to show that the cause of the deficiency interest is an underpayment of income tax attributable to a trade or business. Majority op. p. 47. The majority has not specified the principles to be used in deciding future cases. Assuming that there are such principles, however, the majority does not explain why Congress may not discriminate between individuals doing business as proprietorships and in corporate form. Granted, section 163(h) applies only to individuals. Congress has been of two minds as to the deductibility of Federal income taxes, and perhaps the distinction reflects some residual ambiguity. Perhaps Congress views corporate deficiency interest as properly an investment expense of shareholders. We do not know. In any event, the majority has not convinced me that the inconsistency is unconstitutional. E. Conclusion Again, the temporary regulations in question, sections 1.163-8T and 1.163-9T, Temporary Income Tax Regs., supra, resolve ambiguities and fill gaps in the statute in a permissible fashion, and for that reason, must be upheld. NationsBank v. Variable Annuity Life Ins. Co., 513 U.S. at 115 S. Ct. at 813-814. I would hold for respondent. HAMBLEN, COHEN, WHALEN, and BEGHE, JJ., agree with this dissent. JAMES H. SWANSON AND JOSEPHINE A. SWANSON, REVENUE, RESPONDENT Docket No. 21203-92. Filed February 14, 1996. Ps filed a motion for reasonable litigation costs pursuant to Rule 231, Tax Court Rules of Practice and Procedure, and sec. 7430, I.R.C., claiming that R was not substantially justified in determining that: (1) Prohibited transactions had occurred under sec. 4975, I.R.C., with respect to a domestic international sales corporation, a foreign sales corporation, and two individual retirement accounts; and (2) the sale of Ps' Illinois residence to P's closely held corporation was a sham transaction. 1. Held, R was not substantially justified with respect to the first issue, but was substantially justified with respect to the second issue. 2. Held, further, net worth, for purposes of the Equal Access to Justice Act, 28 U.S.C.. sec. 2412(d)(2)(B) (1994), as incorporated by sec. 7430(c)(4)(A)(iii), is determined based upon the cost of acquisition rather than the fair market value of assets, and was less than $2 million each with respect to Ps on the date their petition was filed. 3. Held, further, Ps' failure to request an Appeals Office conference did not constitute a "[refusal] *** to participate in an Appeals office conference" within the meaning of sec. 301.7430-1(e)(2)(ii), Proced. & Admin. Regs., and, because no 30-day letter was issued to Ps prior to the mailing of their notice of deficiency, Ps are deemed to have per se exhausted their administrative remedies for purposes of sec. 7430(b)(1). 4. Held, further, Ps have not unreasonably protracted the proceedings within the meaning of sec. 7430(b)(4). 5. Held, further, the amount sought by Ps for litigation costs Neal J. Block and Maura Ann McBreen, for petitioners. OPINION DAWSON, Judge: This case was assigned to Special Trial Judge John F. Dean pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183.1 The Court agrees 1 Unless otherwise indicated, all section references are to the Internal Revenue Code. All Rule references are to the Tax Court Rules of Practice and Procedure. with and adopts the Special Trial Judge's opinion, which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE DEAN, Special Trial Judge: This matter is before the Court pursuant to petitioners' motion for award of reasonable litigation costs under section 7430 and Rule 231. References to petitioner are to James H. Swanson. The matter before us involves petitioners' combined use of a domestic international sales corporation, a foreign sales corporation, and two separate individual retirement accounts as a means of deferring the recognition of income. Respondent zealously strove to characterize this arrangement, as well as an unrelated sale by petitioners of their Illinois residence, as tax avoidance schemes. A protracted period of entrenchment ensued, during which the parties firmly established their respective positions, neither side wavering from its conviction that it was in the right. Ultimately, however, these issues were resolved by respondent's notice of no objection to petitioners' motion for partial summary judgment as well as the entry of an agreed decision document, which was later set aside and filed as a stipulation of settlement. As a consequence, petitioners now seek redress for what they claim were unreasonable positions taken by respondent. A. Factual Background Petitioners resided in Florida at the time the petition was filed. At all times relevant to the following discussion, petitioner was the sole shareholder of H&S Swansons' Tool Co. (hereinafter, Swansons' Tool), which has operated as a Florida corporation since 1983.2 Swansons' Tool elected to be taxed as a subchapter S corporation effective in 1987. Swansons' Tool is in the business of building and painting component parts for various equipment manufacturers. As a part of these activities, Swansons' Tool manufactures and exports property for use outside the United States. 2 Initially organized as a corporation in the State of Illinois, Swansons' Tool was subsequently merged into a newly formed Florida corporation of the same name on Dec. 30, 1983. 1. The DISC and IRA #1 Following the advice of experienced counsel, petitioner arranged in the early part of January 1985 for the organization of Swansons' Worldwide, Inc., a domestic international sales corporation (hereinafter the DISC or Worldwide). During this period, petitioner also arranged for the formation of an individual retirement account (hereinafter IRA #1). The articles of incorporation for Worldwide were filed on January 9, 1985, and under the terms thereof petitioner was named the corporation's initial director. Shortly thereafter, Worldwide filed a Form 4876A, Election to be Treated as an Interest Charge DISC. A Form 5305, Individual Retirement Trust Account, was filed on January 28, 1985, establishing Florida National Bank (hereinafter Florida National) as trustee of IRA #1, and petitioner as the grantor for whose benefit the IRA was established. Under the terms of the IRA agreement, petitioner retained the power to direct IRA #1's investments. On the same day that the Form 5305 was filed, petitioner directed Florida National to execute a subscription agreement for 2,500 shares of Worldwide original issue stock. The shares were subsequently issued to IRA #1, which became the sole shareholder of Worldwide. For the taxable years 1985 to 1988, Swansons' Tool paid commissions to Worldwide with respect to the sale by Swansons' Tool of export property, as defined by section 993(c). In those same years, petitioner, who had been named president of Worldwide, directed, with Florida National's consent, that Worldwide pay dividends to IRA #1.3 Commissions paid to Worldwide received preferential treatment, and the dividends paid to IRA #1 were tax deferred pursuant to section 408. Thus, the net effect of these transactions was to defer 3 The following dividends were paid by Worldwide to IRA #1 during the taxable years 1986 through 1988: No distributions were made to petitioners from the trust during the years at issue. 4 Under sec. 991, except for the taxes imposed by ch. 5, a DISC is not subject to income tax. recognition of dividend income that otherwise would have flowed through to any shareholders of the DISC. In 1988, IRA #1 was transferred from Florida National Bank to First Florida Bank, N.A. (hereinafter First Florida), as custodian. Swansons' Tool stopped paying commissions to Worldwide after December 31, 1988, as petitioners no longer considered such payments to be advantageous from a tax planning perspective. 2. The FSC and IRA #2 In January 1989, petitioner directed First Florida to transfer $5,000 from IRA #1 to a new individual retirement custodial account (hereinafter IRA #2). Under the terms of the IRA agreement, First Florida was named custodian of IRA #2, and petitioner was named as the grantor for whose benefit the IRA was established. Under the terms of the IRA agreement, petitioner reserved the right to serve as the "Investment Manager" of IRA #2. Contemporaneous with the formation of IRA #2, petitioner incorporated H&S Swansons' Trading Co. (hereinafter Swansons' Trading or the FSC). Petitioner directed First Florida to execute a subscription agreement for 2,500 newly issued shares of Swansons' Trading stock. The shares were subsequently issued to IRA #2, which became the corporation's sole shareholder. Swansons' Trading filed a Form 8279, Election To Be Treated as a FSC or as a Small FSC, on March 31, 1989, and paid a dividend to IRA #2 in the amount of $28,000 during the taxable year 1990. 3. The Algonquin Property In anticipation of Swansons' Tool's transferring its operations to Florida, petitioners moved during 1981 from their Algonquin, Illinois, residence (hereinafter, the Algonquin property or the property) to a condominium in St. Petersburg, Florida. The Algonquin property was not advertised for sale until sometime during 1983. Conscious of a change in the Internal Revenue Code which would eliminate preferential treatment of capital gain recognized on the sale of their home, petitioners sought to sell the |