                    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.
