88 T.C. 492 (1987), 3146-85, Minahan v. C.I.R

Docket Nº:VICTOR I. MINAHAN, ET AL., [1] Petitioners
Citation:88 T.C. 492
Opinion Judge:CHABOT, JUDGE:
Party Name:v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Thomas J. Phillips and Roger C. Minahan, for the petitioners. Sheldon M. Kay and Nelson Shafer, for the respondent.
Judge Panel:SIMPSON and COHEN, JJ., concur in the result only.
Case Date:March 05, 1987
Court:United States Tax Court

Page 492

88 T.C. 492 (1987)

VICTOR I. MINAHAN, ET AL., [1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 3146-85, 3147-85, 3148-85, 3203-85, 3204-85, 3205-85.

United States Tax Court

March 5, 1987.

Petitioners executed similar stock purchase agreements with separate trusts, each established for the primary benefit of an offspring of a petitioner. Pursuant to these agreements, petitioners sold unregistered common stock of a publicly traded corporation to each trust at a value equal to the stock exchange value as of the date of agreement. Each trust rendered an interest-bearing promissory note as partial payment. Respondent began an audit to determine whether the agreements reflected fair market value. Petitioners refused to extend the statute of limitations on assessment. Respondent determined deficiencies in petitioners' Federal gift taxes. Later, respondent conceded all disputed issues. Petitioners filed motions for litigation costs pursuant to sec. 7430, I.R.C. 1954, and Rule 231, Tax Court Rules of Practice & Procedure.

HELD: (1) Petitioners are entitled to an award of reasonable litigation costs.

(2) Paragraphs (b)(1)(i)(B) and (f)(2)(i) of sec. 301.7430- 1, Proc. & Admin. Regs., are invalid insofar as they provide that a taxpayer's failure to extend the statute of limitations is to be taken into account in determining whether the taxpayer has exhausted administrative remedies under sec. 7430(b), I.R.C. 1954.

Thomas J. Phillips and Roger C. Minahan, for the petitioners.

Sheldon M. Kay and Nelson Shafer, for the respondent.

OPINION

CHABOT, JUDGE:

Respondent determined deficiencies in Federal gift tax against petitioners for the calendar quarter

Page 493

ended September 30, 1981, in the following amounts:

Docket No. Petitioner Deficiency
3146-85 Victor I. Minahan $882,737.74
3147-85 Marilee Minahan 882,737.93
3148-85 Estate of Mary M. Walter, deceased, the Marine Trust Co., N.A., personal representative 1,796,800.32
3203-85 Estate of John B. Torinus, deceased, the Kellogg Citizens National Bank and Louise B. Torinus, co-personal representatives 592,747.86
3204-85 Roger C. Minahan 549,888.83
3205-85 Louise B. Torinus 589,725.25
The cases were called from the calendar for trial on March 17, 1986, at which time respondent submitted on behalf of the parties a stipulated decision in each case. Pursuant to these stipulated decisions, the parties agreed that no deficiencies in Federal gift tax are due from, or overpayments due to, petitioners for the calendar quarter ended September 30, 1981. Petitioners thereafter moved this Court to award litigation costs pursuant to section 7430 and Rule 231. [2] The issues for decision are as follows: [3] (1) Whether petitioners have satisfied the definition of a prevailing party within the meaning of section 7430(c)(2); and (2) Whether petitioners have exhausted administrative remedies available within the Internal Revenue Service within the meaning of section 7430(b)(2). BACKGROUND When the petitions were filed in the instant cases, petitioners resided in Wisconsin. On October 5, 1981, pursuant to similar stock purchase agreements dated September 28, 1981, petitioners sold shares of unregistered Post Corporation (hereinafter sometimes referred to as ‘ Post‘ ) common stock to trusts established for the primary benefit of an offspring of each petitioner. Petitioners valued the Page 494 unregistered Post common stock at $22.25 per share, a purchase price equal to the closing price of Post shares on the American Stock Exchange on September 28, 1981. Each trust rendered partial payment in cash and partial payment by an interest-bearing promissory note. Respondent's valuation in the notices of deficiency was prepared by respondent's National Office. Respondent's appraisal discounted the value of the promissory notes and aggregated all 357,124 shares sold by petitioners pursuant to the stock purchase agreements as a control block of Post common stock. As of September 28, 1981, the following petitioners [4] were corporate officers of Post:
Victor I. Minahan - President
Mary M. Walter - Vice President
John B. Torinus - Vice President
Roger C. Minahan - Secretary
Respondent began the audit at the administrative level on or about February 9, 1984. A telephone conference was held between respondent's examiner and petitioners' counsel on August 1, 1984. On August 31, 1984, respondent asked petitioners to execute a consent to extend the period for assessment until December 31, 1985. The period for assessment, as prescribed in section 6501(a), would otherwise expire on November 15, 1984. On October 5, 1984, petitioners refused to consent to extend this period. Respondent did not issue preliminary notices of proposed deficiency (so-called ‘ 30-day letters‘ ). Respondent issued notices of deficiency to all the petitioners on November 15, 1984, the last day prescribed in section 6501(a). On December 14, 1984, petitioners asked for a written statement of valuation as provided by section 7517. [5] Respondent failed to comply within the 45-day period prescribed by section 7517(a). Respondent did provide a valuation statement on October 10, 1985. Petitioners filed their petitions in this Court on February 11, 1985. Petitioners participated in Appeals Page 495 office conferences while the instant cases were in docketed status. Petitioner Roger C. Minahan (hereinafter sometimes referred to as ‘ attorney Minahan‘ ), petitioners' counsel of record, is a senior stockholder and president of the law firm of Minahan & Peterson, S.C. (hereinafter sometimes referred to as ‘ the law firm‘ ). Petitioners engaged the law firm to represent them regarding the determinations in the notices of deficiency. The agreement between petitioners and the law firm was such that the law firm submitted monthly bills for actual time spent, determined at the law firm's prevailing rates. The law firm spent a total of 386 attorney hours on behalf of petitioners, using the services of eight attorneys. Attorney Minahan spent a total of 102 3/4 hours on behalf of petitioners, billed at the law firm's prevailing rate for his service, $150.00 per hour. Monthly statements reflected time spent on all six dockets. Each petitioner agreed to pay the proportion of the total monthly bill by which the number of that petitioner's shares of Post common stock sold bore to the total number of shares of Post common stock sold by petitioners under the similar purchase agreements in issue. All fees and disbursements reflected in the monthly statements and submitted pursuant to Rule 231(d) have been paid by petitioners in the amounts indicated in table 1.
TABLE 1
Expert
appraisal Attorney's fees Proportionate
Petitioner fees and disbursements[6] interest
Victor I. Minahan, docket No. 3146-85 $3,360 $14,484.40 33.6%
Marilee Minahan, docket No. 3147-85 (included above with docket No. 3146-85)
Estate of Mary M. Walter, docket No. 3148-85 2,940 16,173.84 29.4%
Estate of John B. Torinus, docket No. 3203-85 2,520 13,863.29 25.2%
Louise B. Torinus, docket No. 3205-85 (included above with docket No. 3203-85)
Expert Attorneys' fees Proportionate
Petitioner appraisal fees and disbursements interest
Roger C. Minahan $1,180 $6,491.55 11.8%
docket No. 3204-85 10,000 55,013.08[7] 100.0%
Page 496 Of the $55,013.08 attorneys' fees and disbursements, $2,550 was billed to petitioners on October 16, 1984, and $8,348.15 was billed to petitioners on February 8, 1985; all of these two bills are for services and disbursements before the petitions were filed in the instant cases. Of the $55,013.08 total, $2,225 was billed to petitioners on March 7, 1985; about half is for services before the petitions were filed in the instant cases. Of the total 386 attorney hours spent by the law firm on the instant cases, 70 attorney hours were spent after the last billing that was taken into account in determining the $55,013.08 attorney fees and disbursements. At the law firm's prevailing rate for the services of its attorneys, these 70 attorney hours would produce about $9,000 in billings. ANALYSIS The Congress has provided for the awarding of litigation costs to taxpayers in certain circumstances. Under section 7430[8] (as applicable to the instant cases), in order to be Page 497 entitled to an award of litigation costs, the taxpayer must- (1) substantially prevail in the litigation (sec. 7430(c)(2)(A)(ii)); (2) establish that respondent's position is unreasonable (sec. 7430(c)(2)(A)(i)); and (3) have exhausted the administrative remedies available to that taxpayer in the Internal Revenue Service (sec. 7430(b)(2)). These requirements are in the conjunctive; i.e., petitioners must overcome EACH of these hurdle in order to succeed as to litigation costs. We consider these hurdles seriatim. I. PREVAILING IN THE LITIGATION Respondent determined deficiencies aggregating about $5.3 million. The parties settled the instant cases for an aggregate of zero. We conclude, and respondent agrees, that Page 498 petitioners have substantially prevailed in the instant cases, thus satisfying the requirements of section 7430(c)(2)(A)(ii). II. REASONABLENESS OF RESPONDENT'S POSITION The next focus of our inquiry is whether the position of the United States in the instant cases was unreasonable within the meaning of section 7430(c)(2)(A)(i). The statute imposes on petitioners the burden of establishing such unreasonableness. This Court and the Courts of Appeals of several circuits have previously determined that any award of costs under section 7430 is to be based on a determination of the reasonableness of respondent's position from the date the petition was filed. Ewing and Thomas, P.A. v. Heye, 803 F.2d 613 (CAl1 1986); Baker v. Commissioner, 787 F.2d 637 (CADC 1986), affg. on this issue 83 T.C. 822, 827 (1984); Wasie v....

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