Minahan v. Comm'r of Internal Revenue, Docket No. 3146-85Docket Nos. 3147-85

CourtUnited States Tax Court
Citation88 T.C. No. 23,88 T.C. 492
Docket NumberDocket No. 3146-85Docket Nos. 3147-85,3148-85,3203-85,3204-85,3205-85.
Decision Date05 March 1987

88 T.C. 492
88 T.C. No. 23

VICTOR I. MINAHAN, ET AL., 1 Petitioners

Docket No. 3146-85Docket Nos. 3147-85





United States Tax Court

Filed 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.

[88 T.C. 492]

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

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


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

[88 T.C. 493]

ended September 30, 1981, in the following amounts:

                ¦Docket ¦Petitioner ¦Deficiency ¦
                ¦No. ¦ ¦ ¦
                ¦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 ¦1,796,800.32¦
                ¦ ¦Co., N.A., personal representative ¦ ¦
                ¦ ¦Estate of John B. Torinus, deceased, the Kellogg ¦ ¦
                ¦3203-85¦Citizens National Bank and Louise B. Torinus, ¦592,747.86 ¦
                ¦ ¦co-personal representatives ¦ ¦
                ¦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).


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

[88 T.C. 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:

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

[88 T.C. 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 ¦interest ¦
                ¦ ¦ ¦disbursements6 ¦ ¦
                ¦Victor I. Minahan, docket No. ¦$3,360 ¦$14,484.40 ¦33.6% ¦
                ¦3146-85 ¦ ¦ ¦ ¦
                ¦Marilee Minahan, docket No. 3147-85 ¦(included above with docket No. 3146-85)¦
                ¦Estate of Mary M. Walter, docket No.¦2,940 ¦16,173.84 ¦29.4% ¦
                ¦3148-85 ¦ ¦ ¦ ¦
                ¦Estate of John B. Torinus, docket ¦2,520 ¦13,863.29 ¦25.2% ¦
                ¦No. 3203-85 ¦ ¦ ¦ ¦
                ¦Louise B. Torinus, docket No. ¦(included above with docket No. 3203-85)¦
                ¦3205-85 ¦ ¦

In the instant cases, the legislative history presents us with another consideration. In the description of the reasons for enacting section 7430 in the Tax Equity and Fiscal Responsibility Act of 1982, the first reason given is as follows:

Fee awards in such tax cases [i.e., ‘when the United States has acted unreasonably in pursuing the case‘] will deter abusive actions or overreaching by the Internal Revenue Service and will enable individual taxpayers to vindicate their rights regardless of their economic circumstances. [H. Rept. 97-404 (1981), p. 11; Staff of the Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, p. 445.]

[88 T.C. 505]

When the regulation interpreting a statute is written by the very agency whose ‘abusive actions or overreaching‘ were intended to be deterred by that statute, we must be especially vigilant to insure that the regulation ‘harmonizes with the plain language of the statute, its origins, and its purpose.‘ Durbin Paper Stock Co. v. Commissioner, 80 T.C. at 257.

In the instant cases, respondent relies on paragraphs (b)(1)(i)(B) and (f)(2)(i) of section 301.7430-1, Proc. & Admin. Regs.

Paragraph (b)(1)(i)(B) REQUIRES a taxpayer ‘to extend the time for an assessment of tax if necessary to provide the Appeals office with a reasonable time period to consider the tax...

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