                         T.C. Memo. 2010-158



                       UNITED STATES TAX COURT



         CONSOLIDATED INVESTORS GROUP, STEVEN G. LUCA,
               TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23703-06.               Filed July 22, 2010.



     Robert P. Ellis, for petitioner.

     John M. Tkacik, Jr., for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    This case is before the Court on

petitioner’s motion for award of administrative and litigation

costs pursuant to section 7430 and Rule 231.1    Neither party


     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
                                                   (continued...)
                               - 2 -

requested a hearing on this matter, and we conclude that a

hearing is not necessary.   See Rule 232(a)(2).    Accordingly, we

decide petitioner’s motion on the basis of the parties’

submissions and the existing record.     See Rule 232(a)(1).   The

portions of our opinion on the merits of this case in Consol.

Investors Group v. Commissioner, T.C. Memo. 2009-290

(Consolidated Investors I), that are relevant to our disposition

of this motion are incorporated herein by this reference.

     After concessions,2 the issues for decision are whether:

(1) Respondent’s positions in Consolidated Investors I were

substantially justified; (2) petitioner satisfies the net worth

requirements as provided by law; and (3) petitioner’s litigation

and administrative costs are reasonable.

                            Background

     Pursuant to a settlement agreement, the Ohio Transportation

Commission (OTC) paid petitioner $950,000 for the taking of

approximately 12.4 acres of petitioner’s property and for related

damages.3   Petitioner treated the transfer of the property as a


     1
      (...continued)
Court Rules of Practice and Procedure.
     2
        Respondent concedes that petitioner: (1) Substantially
prevailed with respect to the amount in controversy or the most
significant issues presented; (2) exhausted administrative
remedies; and (3) did not unreasonably protract the Court
proceedings.
     3
        Petitioner owned approximately 147 acres of real estate
along State Route 58 in Lorain County, Ohio. The OTC determined
                                                   (continued...)
                               - 3 -

part-gift/part-sale transaction and claimed a $641,000 charitable

contribution deduction on its 2003 Form 1065, U.S. Return of

Partnership Income.   Petitioner calculated the deduction by

subtracting the amount it received from the OTC ($950,000) from

the fair market value of the property as determined by its

appraiser ($1,591,000).

     Respondent disallowed the charitable contribution deduction

and has consistently maintained the following positions

throughout the administrative proceeding and the subsequent

litigation:   (1) The fair market value of the property was equal

to the negotiated settlement price of $950,000 (i.e., $641,000

less than the value petitioner reported); (2) petitioner did not

have the requisite donative intent under section 170 for the

transfer of property to qualify as a charitable contribution; and

(3) petitioner failed to properly substantiate its claimed

charitable contribution deduction.4


     3
      (...continued)
that it was necessary to acquire a portion of petitioner’s real
estate to construct a right-of-way for an interchange at State
Route 58. Following unsuccessful negotiations to acquire the
affected real estate, the OTC filed a “Complaint For
Appropriation For Public Road Project, Quick Take Eminent
Domain.”
     4
        Alternatively, respondent argued that if petitioner was
entitled to a charitable contribution deduction, sec. 1011(b)
required petitioner to determine its capital gain by allocating
the adjusted basis ratably between the sale and gift portions of
the transaction. Because petitioner was not the prevailing party
on this issue in Consolidated Investors I, petitioner is not
                                                   (continued...)
                                 - 4 -

     In our opinion in Consolidated Investors I issued on

December 16, 2009, we held that petitioner demonstrated that the

fair market value of the property was $1,591,000, that it

possessed the requisite donative intent when it transferred the

property to the OTC, and that it substantiated its deduction.

Accordingly, we allowed the $641,000 charitable contribution

deduction.   Petitioner now contends that it is entitled to

recover administrative and litigation costs.

                            Discussion

     Section 7430 provides for the award of administrative and

litigation costs to a taxpayer in a court proceeding brought

against the United States involving the determination of any tax,

interest, or penalty pursuant to the Internal Revenue Code.    An

award of litigation costs may be made where the taxpayer:     (1) Is

the “prevailing party”; (2) exhausted available administrative

remedies; (3) did not unreasonably protract the proceeding; and

(4) claimed reasonable administrative and litigation costs.    Sec.

7430(a), (b)(1), (3), and (c).    These requirements are

conjunctive, and failure to satisfy any one will preclude an

award of costs to petitioner.    See Minahan v. Commissioner, 88

T.C. 492, 497 (1987).




     4
      (...continued)
entitled to recover administrative or litigation costs
attributable to this issue. See sec. 7430.
                                  - 5 -

I.   Prevailing Party

      To be a “prevailing party”:     (1) The taxpayer must

substantially prevail with respect to either the amount in

controversy or the most significant issue or set of issues

presented; and (2) at the time the petition in the case is filed,

the taxpayer must meet the net worth requirements of 28 U.S.C.

sec. 2412(d)(2)(B).      Sec. 7430(c)(4)(A).   A taxpayer, however,

will not be treated as the prevailing party if the Commissioner

establishes that the Commissioner’s position was substantially

justified.   Sec. 7430(c)(4)(B).     For purposes of the court

proceedings, the Commissioner’s position is that which was set

forth in the answer.      Sec. 7430(c)(7)(A); Huffman v.

Commissioner, 978 F.2d 1139, 1147-1148 (9th Cir. 1992), affg. in

part and revg. in part T.C. Memo. 1991-144; Maggie Mgmt. Co. v.

Commissioner, 108 T.C. 430, 442 (1997).        The Commissioner’s

position in an administrative proceeding is the position taken as

of the earlier of:      (1) The date of receipt by the taxpayer of

the notice of decision of the Appeals Office; or (2) the date of

the notice of deficiency.      Sec. 7430(c)(7)(B).

      Respondent concedes that petitioner substantially prevailed

with respect to the amount in controversy or the most significant

issue or issues presented.      As previously stated, however,

respondent argues that petitioner cannot be a prevailing party

because respondent’s positions were substantially justified.
                                 - 6 -

     A position is substantially justified if it is justified to

a degree that could satisfy a reasonable person and has a

reasonable basis in both fact and law.       Pierce v. Underwood, 487

U.S. 552, 565 (1988); Huffman v. Commissioner, supra at 1147;

Swanson v. Commissioner, 106 T.C. 76, 86 (1996).       The

determination of reasonableness is based on all of the facts and

circumstances surrounding the proceeding and the legal precedents

relating to the case.     Coastal Petroleum Refiners, Inc. v.

Commissioner, 94 T.C. 685, 694-695 (1990).      A position has a

reasonable basis in fact if there is such relevant evidence as a

reasonable mind might accept as adequate to support a conclusion.

Pierce v. Underwood, supra at 565.       A position has a reasonable

basis in law if legal precedent substantially supports the

Commissioner’s position given the facts available to the

Commissioner.     Coastal Petroleum Refiners, Inc. v. Commissioner,

supra at 688.    Determining the reasonableness of the

Commissioner’s position requires considering what the

Commissioner knew at the time he took his position.          Rutana v.

Commissioner, 88 T.C. 1329, 1334 (1987); DeVenney v.

Commissioner, 85 T.C. 927, 930 (1985).      The justification for

each of the Commissioner’s positions must be independently

determined.     See Swanson v. Commissioner, supra at 92, 97.

     The fact that the Commissioner loses on the merits or

concedes the case does not establish that a position was not
                               - 7 -

substantially justified; however, it is a factor to be

considered.   Powers v. Commissioner, 100 T.C. 457, 471 (1993),

affd. in part and revd. in part on another ground 43 F.3d 172

(5th Cir. 1995).

     According to the positions taken by respondent in the

administrative and judicial proceedings, petitioner was not

entitled to a charitable contribution deduction because:   (1) The

fair market value of the property was equal to the $950,000

settlement price; (2) petitioner lacked donative intent when it

transferred the property to the OTC; and (3) petitioner did not

comply with the substantiation requirements.    In deciding whether

petitioner is entitled to administrative and litigation costs, we

must determine whether respondent’s positions with respect to

valuation, donative intent, and substantiation were substantially

justified.

     A.   Valuation

     To establish that respondent’s valuation position was

substantially justified, he must demonstrate that he was

reasonable in adopting his expert’s analysis.   See Smith v.

United States, 850 F.2d 242, 246 (5th Cir. 1988); Estate of

Dailey v. Commissioner, T.C. Memo. 2002-301.    In making this

determination, we consider the facts of the case, the nature of

the asset that was valued, the expert’s qualifications, the

soundness of the valuation methods, the reliability of the
                                - 8 -

expert’s factual assumptions, and the persuasiveness of the

reasoning supporting the expert’s opinion.    Fair v. Commissioner,

T.C. Memo. 1994-602.   The more difficult it is to appraise

property, the more leeway we give before concluding that a

party’s position was not substantially justified.   Id.    For

purposes of section 7430, our role is not to decide whether a

particular expert was correct but rather whether respondent’s

overall position, based on the expert report, was reasonable.

Hursh v. Commissioner, T.C. Memo. 1990-184.

     Before securing the advice of an expert, respondent reviewed

conflicting appraisals that valued the property at $771,000 and

$1,591,000.5   Because of the disparities between the appraisals,

the examining agent requested advice from a valuation specialist

in respondent’s general engineering group, who determined that

the fair market value of the property was the negotiated

settlement price of $950,000.   Respondent subsequently engaged

Richard G. Racek (Mr. Racek), an experienced appraiser with an

M.A.I. designation, to appraise petitioner’s property.    Mr. Racek

used the generally accepted sales comparison method in concluding

that the fair market value of the property was $953,671.      In


     5
        Respondent reviewed the appraisal report prepared by
Wesley Baker (Mr. Baker), of Wesley Baker & Associates, whom the
OTC hired to appraise the property during its negotiations with
petitioner. Mr. Baker’s appraisal concluded that the fair market
value of the property was $771,000. Respondent also reviewed the
appraisal prepared on petitioner’s behalf by Richard D. Masters
(Mr. Masters), of Masters & Associates, which listed the fair
market value of the property as $1,591,000.
                               - 9 -

doing so, Mr. Racek evaluated the purchase prices of comparable

commercial and residential real estate and made adjustments to

reflect differences including land size, location, date of sale,

inflation, and commercial exposure.    Although the Court

identified flaws in Mr. Racek’s analysis,6 four appraisers

determined a wide range of values for the property at issue in

the underlying case (e.g., $771,000, $953,671, $1,591,000, and

$2,875,726).7   This fact highlights the difficulty the experts

faced in appraising the property and the inherent element of

subjectivity in their respective analyses.    See Smith v. United

States, supra at 246 (“There is inevitably a subjective aspect to

the shaping of any appraisal”); 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).




     6
        In Consolidated Investors I, we concluded that the
appraisal prepared by Mr. Masters, petitioner’s expert, was more
thorough because he included more sales of comparable properties
in his analysis, considered more factors that could potentially
affect the sale prices of comparable properties, and explained
and disclosed the adjustments he made to the sale prices and the
weight he awarded to particular sales. While Mr. Racek used
nearly as many sales of comparable properties, he did not explain
the adjustments he made to the sale prices or disclose the
amounts of the adjustments.
     7
        In addition to the appraisals prepared by Messrs. Baker,
Racek, and Masters, discussed supra, Jay Arthur Berk III prepared
an appraisal report on petitioner’s behalf that valued the
property at $2,875,726.
                              - 10 -

     Given Mr. Racek’s level of expertise and experience, his use

of generally accepted valuation techniques, the difficult nature

of valuing the property, and the substantial disparities in the

experts’ appraisals, we find that respondent’s reliance on Mr.

Racek was reasonable.   Accordingly, we find that respondent’s

valuation position was substantially justified.

     B.   Donative Intent

     Respondent maintained that petitioner did not have the

requisite donative intent under section 170 for the transfer of

property to qualify as a charitable contribution.    In doing so,

respondent argued that petitioner’s characterization of the

transaction was not determinative; rather, an objective inquiry

must be made in deciding whether a gift has been made.   See

Hernandez v. Commissioner, 490 U.S. 680, 690 (1989);

Commissioner v. Duberstein, 363 U.S. 278, 288 (1960).

     Respondent identified various factors that he viewed as

indicative of a commercial transaction, not a charitable

contribution.   For example, petitioner purchased the property for

investment purposes, aggressively negotiated the transaction with

the OTC, and had part of the property rezoned from

residential/agricultural to commercial in an effort to increase

the value of the property.

     Respondent also emphasizes that while the settlement

agreement acknowledged that petitioner would file Form 8283,
                              - 11 -

Noncash Charitable Contributions, the OTC insisted on an

indemnification clause that would absolve the OTC from liability

if the Internal Revenue Service subsequently challenged the

characterization of the transaction.   Finally, respondent points

out that at the time the OTC signed the donee acknowledgment

section of Form 8283, the form did not contain information

regarding the appraised fair market value of the property.

According to respondent, these facts support his position that

the charitable contribution was an afterthought in an otherwise

commercial transaction.

     Two OTC employees who were directly involved in the

negotiations with petitioner testified in a manner that was

consistent with respondent’s position.   Joseph DiSantis, the

right-of-way coordinator, claimed that the prospect of a part-

gift/part-sale transaction was mentioned, but it was never

seriously considered.   Noel Tsevdos, the OTC’s general counsel,

also testified that a potential gift was not discussed during the

settlement negotiations until after the parties reached an

agreement on the purchase price.

     Relying on S. Pac. Transp. Co. v. Commissioner, 75 T.C. 497,

604 (1980), respondent argued that petitioner’s inability to

obtain a higher price during negotiations did not transform an

otherwise commercial transaction between adverse parties

following arm’s-length negotiations into a charitable
                               - 12 -

contribution.    Respondent, citing Swetland v. Curry, 188 F.2d 841

(6th Cir. 1951), further argued that a transfer of property

pursuant to an appropriation proceeding or “Quick Take” was

against the will of the owner and therefore petitioner lacked the

requisite donative intent when it transferred the property to the

OTC.

       In deciding whether petitioner intended to make a gift to

the OTC, the Court had to determine the credibility of the

witnesses and interpret inconclusive documentary evidence8 in

view of the surrounding facts and circumstances.    In doing so, we

assigned great weight to the testimony of petitioner’s witness,

Steve Luca, who credibly testified that petitioner intended to

donate a portion of the property to the OTC.    We also found that

Mr. Luca’s straightforward testimony was consistent with other

evidence including written correspondence between petitioner and


       8
        Petitioner sent three letters to the OTC between July
2001 and July 2002 that expressed its support for the OTC’s
activities and introduced the possibility of a part-gift/part-
sale transaction. Respondent argued that the letters failed to
memorialize specific details regarding the purported gift.
Petitioner’s letter dated July 25, 2001, to the OTC contained the
following statement: “Since 1990 our organization has been a
strong advocate of the OTC and its activities. Currently we
continue to support your activities with caution.” On Aug. 28,
2001, petitioner sent the OTC a letter that contained the
following statement: “In conclusion, our organization consists
of various gentlemen of the community that continue to support
the activities of the OTC.” On July 17, 2002, petitioner wrote
the OTC explaining that it would consider a part-gift/part-sale
transaction of the property and stated: “Since approximately
1990, our organization has been a strong advocate of the OTC and
its activities.”
                               - 13 -

the OTC.   We gave little weight to the testimony of the OTC

employees and found their responses evasive and argumentative.

Therefore, we concluded that petitioner possessed the requisite

donative intent when it transferred the property to the OTC.

     On the basis of the evidence, however, we hold that it was

reasonable for respondent to believe the partnership lacked

donative intent.    Furthermore, we find that respondent’s legal

positions were substantially supported by legal precedent given

the facts available.    Accordingly, we find that respondent’s

position that petitioner lacked donative intent was substantially

justified.

     C.    Substantiation

     Respondent argued that petitioner failed to properly

substantiate its deduction with a “qualified appraisal” because

the appraisals it submitted were untimely and lacked required

information.9   As a factual matter, respondent was correct that

petitioner’s appraisals were not prepared within the requisite

60-day period, did not show the date of contribution or the fair

market value of the property on that date, and did not contain a


     9
        A qualified appraisal is made not earlier than 60 days
before the date of contribution of the appraised property but not
later than the due date of the return on which a deduction is
first claimed under sec. 170. Sec. 1.170A-13(c)(3)(i)(A), Income
Tax Regs. The qualified appraisal must include, inter alia, the
date of contribution to the donee, a statement that the appraisal
was prepared for income tax purposes, and the fair market value
of the appraised property on the date of the contribution. Sec.
1.170A-13(c)(3)(ii)(C), (G), (I), Income Tax Regs.
                               - 14 -

statement indicating that the reports were prepared for income

tax purposes.   Accordingly, petitioner did not strictly comply

with the substantiation regulations.     As we stated in

Consolidated Investors I, however, substantial rather than

literal compliance may be sufficient to substantiate a charitable

contribution deduction in certain instances.     See Bond v.

Commissioner, 100 T.C. 32 (1993).

      The fact that we decided in Consolidated Investors I that

petitioner substantially complied with the regulation does not

cause respondent’s position to be unreasonable.     See Fair v.

Commissioner, T.C. Memo. 1994-602.      Respondent identified what he

perceived to be material deficiencies in petitioner’s appraisals,

leading him to conclude that petitioner did not substantially

comply with the regulations.   Though we concluded in Consolidated

Investors I that petitioner’s errors were immaterial,

respondent’s position throughout the administrative proceeding

and the subsequent litigation had a reasonable basis in the

regulations and applicable legal precedent given the facts

available.   Accordingly, we find that respondent’s position was

substantially justified.

II.   Conclusion

      We conclude that respondent has established that his

positions were substantially justified at both the administrative

and litigation levels because they were sufficiently supported by
                              - 15 -

the facts and circumstances of the case and the existing legal

precedent.   Thus, petitioner was not the prevailing party with

respect to any of the issues and is not entitled to an award of

administrative and litigation costs.   Having concluded that

petitioner is not the prevailing party under section 7430, the

remaining issues are moot.   In reaching our holdings, we have

considered all arguments made, and, to the extent not mentioned,

we conclude that they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                         An appropriate order will

                                    be issued, and decision will

                                    be entered under Rule 155.
