                        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.
                                   - 7 -

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.
