T.C. Memo. 2002-299
UNITED STATES TAX COURT
ESTATE OF JOHN L. BAIRD, DECEASED, ELLEN B. KIRKLAND AND J.
SAMUEL BAIRD, CO-EXECUTORS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
ESTATE OF SARAH W. BAIRD, DECEASED, ELLEN B. KIRKLAND AND J.
SAMUEL BAIRD, CO-EXECUTORS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8656-99, 8657-99. Filed December 6, 2002.
William T.F. Dykes, for petitioners.
Wanda M. Cohen, for respondent.
- 2 -
MEMORANDUM OPINION
GERBER, Judge: In a prior opinion,1 we held that the
estates of John and Sarah Baird were entitled to use a 60-percent
discount in valuing their respective fractional interests in 16
tracts of realty. Both estates moved for litigation and
administrative costs under section 7430.2 The Estate of John L.
Baird is seeking litigation and administrative costs in amounts
of at least $142,612.47 and $622.50, respectively. The Estate of
Sarah W. Baird is seeking litigation and administrative costs in
amounts of at least $141,191.58 and $592.40, respectively.3
Subsections (b) and (c) of section 7430 provide that
prevailing parties, in order to recover litigation costs, must
meet the following requirements: (1) They exhausted available
administrative remedies; (2) they substantially prevailed in the
controversy; (3) the position of the United States in the
proceeding was not substantially justified; (4) they meet certain
net worth requirements; (5) they did not unreasonably protract
1
Estate of Baird v. Commissioner, T.C. Memo. 2001-258. The
findings in that opinion and the parties’ stipulation of facts
are incorporated by this reference.
2
All section references are to the Internal Revenue Code,
as modified and in effect for the periods under consideration.
Rule references are to the Tax Court’s Rules of Practice and
Procedure.
3
In the circumstances of these consolidated cases, there
was no need for an evidentiary hearing. We rule on the estates’
motion for litigation costs based on the existing record and the
parties’ submissions. See Rule 232(a)(1) and (2).
- 3 -
the proceeding; and (6) the amount of costs is reasonable.
Failure to meet any of the above-listed requirements will defeat
the recovery of litigation costs.
Respondent contends that the estates are not entitled to
litigation and administrative costs because respondent’s position
was substantially justified. In the alternative, respondent
contends that the estates’ attorney’s fees exceed the limits set
forth in the statute and are, therefore, not reasonable. On the
other hand, the estates contend that respondent’s position was
not substantially justified and/or that the amounts claimed are
reasonable.
Background
John L. Baird and Sarah W. Baird were married and died
within 1 year of each other. John’s and Sarah’s estates each
contained a similar (14/65 and 17/65, respectively) fractional
undivided interest in a family trust. The trust property
consisted of 16 parcels of real property and was held in
undivided ownership by family members related to the decedents.
On March 18, 1996, John’s estate tax return was filed with
his 14/65 undivided community property interest reported at a
value of $707,972. In support of that value, John’s estate
attached an appraisal opinion to the return. The appraisal
contained opinions as to the fair market value of the 16 parcels
- 4 -
of realty and applied a 25-percent discount to account for the
decedent’s fractional interest.
On January 31, 1997, Sarah’s estate reported that her 17/65
interest in the trust had a $665,686 value. Sarah’s estate
relied on the same fair market value for the 16 parcels of
realty, but used a different appraiser for the discount. Based
on that appraiser’s report, a 50-percent fractionalization
discount was applied to Sarah’s 17/65 interest. On February 24,
1997, John’s estate filed an amended return claiming a refund on
the basis of the opinion used for Sarah’s estate tax return and
applying the 50-percent discount that had been used by Sarah’s
estate. The 50-percent discount resulted in a reported value of
$550,378 for John’s 14/65 interest.
Respondent’s valuation engineer, a forester, also valued the
parcels in the course of examining the estates’ tax returns.
Respondent, after considering appraisals relied on by the
estates’ and his own valuation engineer’s reports, issued a 30-
day letter, on June 26, 1998, containing respondent’s position,
as follows:
After a review of the appraisals provided by the
taxpayer the engineering group recommends the timber
volumes and unit prices [of the estate’s appraisal
reports] be accepted. A change to the discounts in
valuing the fractional interest is recommended as per
the attached report. The service’s approach is more
fully explained therein.
- 5 -
The valuation engineer’s appraisal report, attached to the
30-day letter, generally agrees with the estates’ valuation of
fair market value of the 16 parcels, but does not accept the
discounts applied by the estates. The engineer’s report contains
a discussion of the fact that (1) John’s estate applied an
increasing progression of discounts and that (2) each discount
was supported by an opinion from a third party. The valuation
engineer’s report also provides an analysis of the estates’
appraisals and proposed comparables. Finally, the report
contains an analysis of valuation cases and the following
explanation for arriving at a $975,091 value for John’s 14/65
interest:
Using the recommended full interest value for the 2,957
acres of $4,685,331, a discount can be determined using
a cost of a revised timber inventory, surveying the
property into equal valued “lots” and legal costs
associated with the partition of the property.
Dividing the property into 40 acre “lots”, or
variations thereof, and an estimated $1,000 per survey
mile results in survey cost[s] of $49,250. A revised
timber inventory would cost $8,871. Legal cost, as
recommended by the Estate Agent, would approximate
$100,000. The total cost of partition would
approximate $158,121. Louisiana law cites all
partition cost[s] are borne in the pro-rata share of
ownership. Subtracting the partition cost of $158,121
from the recommended value of $4,685,331, results in an
after cost value of $4,527,210. Mr. John Baird owned a
14/65th interest in the property or a total recommended
estate value [of] $975,091.
In the March 4, 1999, notice of deficiency, respondent
relied on the valuation engineer to determine that John’s 14/65
interest had a fair market value of $975,091. In that regard,
- 6 -
respondent’s position during the administrative proceeding was
that the only reduction or discount from the fair market value of
the trust’s real property should be the cost to partition the
realty so that the partitioned interest of each decedent could be
converted into and sold as a full fee interest. Under that
partition approach, the fractional interest becomes a fee
interest and thereby not subject to any discount for
fractionalization, other than the cost to partition.
On March 18, 1999, John’s estate filed a second claim for a
refund based on an increase in the claimed discount from 50 to 60
percent. That discount resulted in a $504,610.37 value for
John’s 14/65 interest. Likewise, on May 11, 1999, Sarah’s estate
filed an amended return, claiming a refund on the basis of an
increased fractionalization discount from 50 to 60 percent. The
60-percent discount resulted in a reported value of $449,456.27
for Sarah’s 17/65 interest.
After the issuance of the notices of deficiency and the
filing of the estates’ petitions, the Appeals officer attempted
to arrange a settlement conference with the estates’
representative. Respondent points out that no settlement
conference was held because the estates’ representative “refused
to meet with the appeals officer in Houston unless the appeals
officer would agree to a minimum fractional interest discount of
45% for each estate.” Respondent also reports that “on the eve
- 7 -
of trial, respondent’s counsel made an offer to discuss
settlement with petitioners’ counsel * * * [and that] discussion
was futile since petitioners’ counsel responded by demanding a
70% fractionalization discount, once again increasing the
discounts previously demanded.”
Because of the refusal to meet, the estates’ representatives
did not present facts or arguments to respondent. The estates
did not address or discredit respondent’s position that partition
was a viable alternative. It was not until the trial of this
case that respondent was confronted with evidence reflecting that
partition may not have been a viable alternative.4 Respondent’s
position remained essentially the same until the time of trial in
both estate tax cases. During the administrative proceeding, the
estates changed their position several times by seeking larger
discounts.5
The controversy we consider is dependent upon whether
respondent’s position in the proceeding was not substantially
4
Respondent was provided with one expert’s report about 30
days before trial which was based on certain factual assumptions
that would have affected the ability to partition. Those factual
assumptions were not fully addressed, however, until the estates’
witnesses testified at the trial.
5
Our review of the record reveals that the position taken
by Sarah’s estate merely duplicates the position taken by John’s
estate. Accordingly, we analyze both through a discussion of the
development of John’s estate tax case and draw no meaningful
distinctions between them. Other adjustments, including an
administrative expense deduction, were also set forth in the
notice, but settled by the parties before trial.
- 8 -
justified. If respondent’s position is found to be substantially
justified, then the estates’ claim for litigation costs will
fail.6
Discussion
Section 7430(c)(4)(A) requires that, in order to qualify for
recovering administrative or litigation costs, the estates must
be the “prevailing party” in the proceeding. Generally, the
“prevailing party” is one who has substantially prevailed with
respect to the amount in controversy or with respect to the most
significant issue or set of issues presented. Sec.
7430(c)(4)(A)(i)(I) and (II). Based on that general rule or
standard, the estates were the prevailing parties in these
consolidated proceedings.
A party will not be considered a prevailing party, however,
if the “United States establishes that the position of the United
States in the proceeding was substantially justified.” Sec.
7430(c)(4)(B)(i). Respondent’s position in a proceeding is
“substantially justified” if it is “justified to a degree that
could satisfy a reasonable person” and if it has a reasonable
basis both in fact and law. Pierce v. Underwood, 487 U.S. 552,
564-565 (1988). The fact that respondent eventually loses or
6
If respondent’s position is found not to be substantially
justified, respondent contends, in the alternative, that the
amount of the estates’ claim for attorney’s fees is unreasonable
because it exceeds the statutory limit.
- 9 -
concedes a case, by itself, is not sufficient to establish that
the respondent’s position was or is unreasonable. Broad Ave.
Laundry & Tailoring v. United States, 693 F.2d 1387, 1391-1392
(Fed. Cir. 1982); Sokol v. Commissioner, 92 T.C. 760, 767 (1989).
However, it is a factor to be considered. Estate of Perry v.
Commissioner, 931 F.2d 1044, 1046 (5th Cir. 1991).
The valuation of a property interest for Federal estate tax
purposes is a factual question. See Estate of Bonner v. United
States, 84 F.3d 196, 197 (5th Cir. 1996); Sammons v.
Commissioner, 838 F.2d 330, 333 (9th Cir. 1988), affg. on this
point and revg. in part on another ground T.C. Memo. 1986-318.
Prior to the issuance of the notices of deficiency, respondent
accepted the estates’ appraisal of the fair market value of the
16 parcels of realty held by the trust. Throughout the
administrative and pretrial portions of these cases, the parties
disagreed about the purely factual question of how much discount
should be applied to the decedent’s fractional interests. During
the administrative proceeding, the parties relied on expert
opinions and appraisals in support of their respective positions.
The estates, at various times, sought progressively larger
discounts of 25, 50, 60 and 90 percent.7 Throughout the entire
period, respondent contended that the cost to partition and sell
7
The estates variously claimed 25-, 50-, and then 60-
percent discounts for the same interests. At trial, the estates
sought an increased discount of 90 percent.
- 10 -
fee interests was less than any of the discounts claimed by the
estates.
Two of the estates’ experts conducted studies of the
relatively limited universe in which there have been sales of
fractional interests in timberland. Based on those studies, the
experts recommended a range of discounts that could be applied to
the interests being considered by the Court. These experts did
not address the question of partition or opine on a specific
discount for either estate’s fractional interest. Their opinions
had been provided to respondent during the administrative
proceeding.
The estates’ third expert had personal involvement and
experience in the purchase and sale of fractional interests.
That expert provided the Court with specific instances of
somewhat comparable sales of fractional interests in the vicinity
of the subject realty. It does not appear that this expert’s
report was provided to respondent until about 1 month before
trial. This expert’s report did address the difficulties that
can be encountered in partitioning real property. The expert
also alluded to the difficulties surrounding the trusts in which
the decedents held fractional interests, but the report did not
establish those facts. Respondent was not confronted with the
factual predicate that partition may not have been a viable
approach until the trial when the estates’ witnesses testified
- 11 -
about the difficulties that would be encountered if partition
were attempted.
Courts, in approaching expert opinion evidence, are not
constrained to follow the opinion of any expert when the opinion
is contrary to the court’s own judgment. Courts may adopt or
reject expert testimony. Helvering v. Natl. Grocery Co., 304
U.S. 282, 295 (1938); Silverman v. Commissioner, 538 F.2d 927,
933 (2d Cir. 1976), affg. T.C. Memo. 1974-285. Valuation cases
are usually fact specific and are relied on by litigants and
courts for generalized guidance, but that do not establish bright
line rules for valuation; i.e., do not establish specific
percentage discounts to be applied under particular factual
circumstances.
Respondent’s position was that partition was a viable
alternative and that the cost of partition would be less than the
amount of the discounts claimed by the estates. Under
respondent’s position, a fractional interest could be purchased,
followed by partition resulting in value based on a fee interest.
The estates did not argue that partition and/or partition costs
should not play a role in the process of valuing partial
interests in property. Instead, at trial, the estates put on
evidence of the factual impediments to partition, such as:
Costs, delays in enjoyment of ownership, and legal problems. In
effect, the estates advanced evidence that resulted in our
- 12 -
finding that partition was not a viable alternative. That
evidence, however, was not made available to respondent during
the administrative or pretrial portions of the proceeding.8
Significantly, the estates increased the amount of discount
claimed from 25 to 50 percent, from 50 to 60 percent, and,
finally, from 60 to 90 percent. Each claimed discount was
supported by an opinion of an expert hired by the estates. No
facts or legal principles changed from the time the 25-percent
discount was claimed to the time the 90-percent discount was
claimed. Considering those circumstances, the Commissioner’s
failure to change his position, settle, or accept the estates’
position does not appear to be unreasonable. In particular,
values or discounts reported or claimed on an estate tax return
may be considered admissions and, to some extent binding or
probative and may not be overcome without cogent proof that such
admissions are wrong. Estate of Hall v. Commissioner, 92 T.C.
312, 342 (1989); Estate of Pillsbury v. Commissioner, T.C. Memo.
1992-425; Estate of McGill v. Commissioner, T.C. Memo. 1984-292.
The facts that are relevant in valuation cases are those
that would be attributed to a hypothetical knowledgeable seller
and buyer. United States v. Cartwright, 411 U.S. 546, 551
8
We note that the estates’ representatives refused to meet
with Appeals and/or respondent’s counsel unless the Government
representatives agreed, in advance, to minimum discounts of 45
and 70 percent, respectively.
- 13 -
(1973). A knowledgeable buyer or seller would aim to maximize
profit and/or minimize cost in the setting of a hypothetical
sale. See Estate of Watts v. Commissioner, 823 F.2d 483, 486
(11th Cir. 1987), affg. T.C. Memo. 1985-595; Estate of Newhouse
v. Commissioner, 94 T.C. 193, 218 (1990).
For example, a buyer’s knowledge that realty could be easily
partitioned would have an effect on the amount of discount
applied in connection with a partial interest. In such a
situation, discounts, far in excess of the cost to partition, may
not be warranted. Similarly, if partition is not feasible, then
the cost of partition would not have much effect on the amount of
discount that could be attributable to a fractional interest. In
either event, the cost to partition may play some role in the
valuation process. This Court’s decision that a 60-percent
discount was appropriate was based on facts presented at trial
and the testimony of the estates’ expert witness.
Respondent was not confronted with the facts concerning the
difficulties connected with the use of partition in these cases
until receipt of one of the estates’ experts’ reports
approximately 30 days prior to trial. That report had not been
provided to respondent prior to that time. The facts relied upon
by the expert had not been discussed with respondent due to the
lack of a meeting with the estates’ representatives. Those facts
- 14 -
were not established prior to trial. Accordingly, respondent’s
position had a reasonable basis in fact or law.
We therefore hold that respondent’s position in the
proceeding was substantially justified. Having decided that, it
is not necessary to consider the reasonableness of administrative
and litigation costs claimed by the estates.
To reflect the foregoing,
The estates’ motion for
administrative and litigation costs
as supplemented will be denied in
Docket Nos. 8656-99 and 8657-99.