T.C. Memo. 2002-301
UNITED STATES TAX COURT
ESTATE OF ELMA MIDDLETON DAILEY, DECEASED, DONOR,
K. ROBERT DAILEY, II, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF ELMA MIDDLETON DAILEY, DECEASED,
K. ROBERT DAILEY, II, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 6251-00, 6262-00. Filed December 9, 2002.
Harold A. Chamberlain, for petitioners.
Richard T. Cummings, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: This matter is before the Court on
petitioners’ motion for allowance of claims for litigation and
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administrative costs pursuant to section 7430 and Rule 231.1
This Court ruled in favor of petitioners, in Dailey v.
Commissioner, T.C. Memo. 2001-263, and we incorporate herein by
reference the facts set forth in that opinion.
Background
On October 20, 1992, Elma Middleton Dailey executed a will,
a Revocable Living Trust (trust), and an Agreement of Limited
Partnership (agreement) of Elma Middleton Dailey Family Limited
Partnership (FLP). On November 13, 1992, Mrs. Dailey contributed
publicly traded stock to the FLP, and on December 8, 1992, she
gave limited partnership interests in the FLP to her son, her
son’s wife, and the trust.
By notices dated March 15, 2000, respondent determined
Federal gift and estate tax deficiencies relating to the
valuation of the FLP interests. At trial, the Court upheld
petitioners’ discounts and held that there were no deficiencies.
On December 4, 2001, petitioners filed their motion for
allowance of claims for litigation and administrative costs. On
March 4, 2002, respondent filed an objection to motion for
litigation costs and memorandum of points and authorities in
support of respondent’s objection to the motion for litigation
costs. Petitioners then filed an affidavit on June 19, 2002.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at relevant times, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
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After a conference call on June 21, 2002, and pursuant to an
order dated June 24, 2002, petitioners filed a supplement to
motion for allowance of claims for litigation and administrative
costs (supplement) seeking only those litigation costs incurred
after February 1, 2001, for services provided by Jeffrey A.
Schumacher, expert; Harold A. Chamberlain, lead attorney; and
Michael C. Riddle, attorney. On July 8, 2002, respondent filed
his objection to supplement to motion for allowance of claims for
litigation and administrative costs.
Discussion
The prevailing party in a Tax Court proceeding may recover
litigation costs. Sec. 7430(a); Rule 231. Except as provided in
section 7430(c)(4)(B), petitioners bear the burden of proving
that they meet each of the requirements of section 7430. Rule
232(e). Their failure to establish any one of the requirements
of section 7430 on which they have the burden of proof will
preclude an award of costs. Minahan v. Commissioner, 88 T.C.
492, 497 (1987).
Respondent contends that he was substantially justified in
challenging the valuation of Mrs. Dailey’s FLP (valuation issue).
Respondent, however, concedes he was not substantially justified
in maintaining his position that Mrs. Dailey’s FLP should be
disregarded for tax purposes (FLP issue). We must, therefore,
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decide whether respondent’s position relating to the valuation
issue was substantially justified, and whether costs relating to
the FLP issue are reasonable.
I. Substantial Justification
We may award costs to petitioners where respondent’s
position was not substantially justified (i.e., did not have a
reasonable basis in law and fact). See Pierce v. Underwood, 487
U.S. 552, 565 (1988). In addition, the justification for each of
respondent’s positions must be independently determined. See
Swanson v. Commissioner, 106 T.C. 76, 92, 97 (1996). This Court
will determine the reasonableness of respondent’s position as to
each issue independently and apportion the requested award
between those issues for which respondent was, and those issues
for which respondent was not, substantially justified. See id.
at 87-92; Salopek v. Commissioner, T.C. Memo. 1998-385, affd.
without published opinion 210 F.3d 390 (10th Cir. 2000). The
fact that respondent loses an issue is not determinative of the
reasonableness of respondent’s position. Wasie v. Commissioner,
86 T.C. 962, 969 (1986).
To establish that respondent was substantially justified on
the valuation issue, respondent must establish that he was
reasonable in adopting his expert’s analysis. See Smith v.
United States, 850 F.2d 242, 246 (5th Cir. 1988); see also Fair
v. Commissioner, T.C. Memo. 1994-602 (holding that when deciding
if respondent’s position on valuation is substantially justified,
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the Court “must consider the facts of the case, the nature of the
asset to be valued, the qualifications of the expert, the
soundness of the valuation methods, the reliability of the
expert’s factual assumptions, and the persuasiveness of the
reasoning supporting the expert’s opinion”).
The values of family limited partnership interests are
difficult to determine. See Estate of Smith v. Commissioner, 57
T.C. 650, 655 (1972) (“valuation has been consistently recognized
as an inherently imprecise process”), affd. 510 F.2d 479 (2d Cir.
1975). Respondent’s expert began with the net asset value of the
FLP, then made adjustments reflecting minority and marketability
discounts. Regarding the minority discount, he compared the FLP
to closed-end mutual funds. Regarding the marketability
discount, he relied on studies relating to the value of common
stock with legal restrictions impairing transferability (i.e.,
Restricted Stock Studies) and a study relating to the value of
closely held company shares prior to initial public offerings
(i.e., Pre-IPO Study).
Problems with the expert’s analysis were not revealed until
petitioners’ counsel conducted voir dire and cross-examination.
With respect to the valuation of the FLP interests, this Court
held that, “although neither expert was extraordinary,
petitioners’ expert provided a more convincing and thorough
analysis than respondent’s expert.” Dailey v. Commissioner,
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supra. The Court upheld petitioners’ discounts for the valuation
of the FLP interests.
Respondent’s expert holds a Ph.D. and M.B.A., has extensive
qualifications and expertise, and used sound valuation methods in
his report. Cf. Estate of Cervin v. Commissioner, 111 F.3d 1252
(5th Cir. 1997) (holding that respondent was not substantially
justified for relying upon the discredited unity-of-ownership
valuation theory), revg. T.C. Memo. 1994-550. Despite the
expert’s performance at trial, respondent’s adoption of the
expert’s report was reasonable. Accordingly, respondent was
substantially justified, and petitioner is not entitled to
litigation costs related to the valuation issue.
II. Reasonable Costs
Petitioners may recover only litigation costs related to the
FLP issue. See sec. 7430(a)(2), (c)(1). Section
7430(c)(1)(B)(iii) imposes a statutory rate for attorney’s fees
(i.e., $140 per hour relating to calendar year 2001). See Rev.
Proc. 2001-13, 2001-1 C.B. 337, 341. In their supplement,
petitioners seek litigation costs in the amount of $68,593 (i.e.,
489.95 hours), of which petitioners allocated $50,540 (i.e., 361
hours2) to the FLP issue. Respondent contends $39,900 (i.e., 285
2
Petitioners, in their supplement, state that Chamberlain
worked 48 hours on the valuation issue, but Exhibit C of the
supplement indicates that Chamberlain worked 49 hours on that
issue.
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hours3) is the appropriate amount allocated to the FLP issue.
The following chart represents the petitioners’ proposed
allocation of hours:
FLP Valuation
(hours) (hours)
Jeffrey A. Schumacher (expert) 0 77.95
Subtotal-Jeffrey A. Schumacher 0 77.95
Harold A. Chamberlain (lead attorney)
Pleadings 30 0
Summary judgment 7 0
Expert witness 0 31
Conference with district counsel 21 1
Pre-trial prep/memorandum/motions 77 15
Trial-day 1 10 0
Trial-day 2 10 2
Briefing and posttrial review 106 0
Review respondent’s posttrial brief 3 0
Motion 40 0
Subtotal-Harold A. Chamberlain 304 49
Michael C. Riddle, Esq. (attorney)
Conferences with Chamberlain 37 0
Trial-Day 1 10 0
Trial-Day 2 10 2
Subtotal-Michael C. Riddle 57 2
Total (489.95 hours) 361 128.95
Petitioners allocated 106 hours to the FLP issue relating to
briefing and posttrial review by Chamberlain. This allocation is
unreasonable because the parties’ findings of fact predominantly
deal with valuation and more than 80 percent of their brief is
dedicated to valuation. Moreover, the portion of the brief
dedicated to the FLP issue merely references Knight v.
Commissioner, 115 T.C. 506 (2000), and Estate of Strangi v.
Commissioner, 115 T.C. 478 (2000), revd. on other grounds 293
F.3d 279 (5th Cir. 2002), which are decisions in which the Court
held that an FLP is not disregarded for tax purposes. Under
3
Respondent, however, neglected to exclude 47 hours of
time that petitioners allocated to the valuation issue.
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these circumstances, respondent’s contention that only half of
these hours were allocable to the FLP issue is more than
reasonable. Accordingly, petitioners are entitled to only 53
hours relating to briefing and posttrial review. Petitioners
also seek 3 hours for review of respondent’s posttrial brief by
Chamberlain, but respondent’s posttrial brief does not even
mention the FLP issue. Accordingly, petitioners are not entitled
to these costs either.
Petitioners attributed 59 hours to work performed by Riddle
and allocated 57 of these hours to the FLP issue. Riddle served
as attorney for the probate of Mrs. Dailey’s estate, represented
her during the administrative proceedings, and assisted
Chamberlain during litigation. Petitioners have adequately set
forth the services he performed. We reject respondent’s
contention that such services were duplicative. Accordingly,
petitioners are entitled to 57 hours relating to work performed
by Riddle.
Thus, petitioners are entitled to litigation costs in the
amount of $42,700 (i.e., 305 hours).
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
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Appropriate orders and
decisions will be entered.