                       United States Court of Appeals
                             FOR THE EIGHTH CIRCUIT
                                 ___________

                                No. 96-2896
                                 ___________
D. Sherman and Maxine M. Cox,          *
                                       *
           Appellants,                 *
                                       *   Appeal from the
     v.                                *   Internal Revenue Service.
                                       *
Commissioner of Internal Revenue,      *
                                       *
           Appellee.                   *
                                       *

                                 ___________

                         Submitted: March 12, 1997
                              Filed: August 5, 1997
                                ___________

Before McMILLIAN, FLOYD R. GIBSON, and JOHN R. GIBSON, Circuit Judges.
                               ___________

JOHN R. GIBSON, Circuit Judge.
      D. Sherman and Maxine M. Cox, husband and wife, appeal from two
orders of the tax court allowing them to deduct only one half of the rent
paid by Mr. Cox for his law practice in 1987 and refusing to award the
Coxes their attorneys' fees and costs in this proceeding. Mr. Cox paid
rent to himself and Mrs. Cox, as they owned as tenants by the entirety the
property in which Mr. Cox operated his law practice. The Coxes argue that
they should be allowed to deduct all of the rent, and because the position
taken by the Commissioner of the Internal Revenue Service was not
substantially justified, they should be awarded their attorneys' fees and
costs. We affirm.
      Mr. Cox practices law as a sole proprietorship.     The Coxes had
purchased a building in 1980, and held title to that building as tenants
by the entirety. In 1987, Mr. Cox's law practice occupied space in this
building, and he paid $18,000 in rent for the space to himself and his
wife.

      The Coxes filed a joint tax return in 1987. In that return the Coxes
claimed the $18,000 in rent as an expense of Mr. Cox's law practice and
reported that same amount as rental income. The Commissioner refused to
allow the deduction for rent and assessed a tax deficiency against the
Coxes.

      The Coxes petitioned the United States Tax Court1 for relief from the
Commissioner's decision to deny the rental deduction. The Coxes and the
Commissioner agreed that there were no facts in dispute, and the tax court
decided the case on partial summary judgment. The court held that under
26 U.S.C. § 162(a)(3) (1994) the Coxes could claim only one half of the
rent paid as an expense of Mr. Cox's law practice and as rental income
because of Mr. Cox's equity interest in the rental property.

      After this decision the Coxes moved to recover their attorneys' fees
and costs in this proceeding pursuant to 26 U.S.C. § 7430 (1994). The tax
court2 denied their motion, concluding that the Coxes were not entitled to
their attorneys' fees and costs because the Commissioner's initial denial
of the rent deduction was substantially justified. The Coxes appeal from
both decisions of the tax court.




     1
      The Honorable Helen A. Buckley, Judge, United States Tax Court.
     2
      The Honorable Stanley J. Goldberg, Judge, United States Tax Court.

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                                    I.

      The Coxes argue that they should be able to deduct as an expense all
of the rent paid for Mr. Cox's law practice.

      We review de novo the tax court's grant of summary judgment as it
involves only questions of law. See Estate of Robertson v. Commissioner,
15 F.3d 779, 781 (8th Cir. 1994). The issue is entirely one of state law
concerning the nature of property held in a tenancy by the entirety, and
we review questions of state law de novo without deference to the court
below. See Salve Regina College v. Russell, 499 U.S. 225, 231-33 (1991).

                                    A.

      Section 162(a)(3) of the Internal Revenue Code allows Mr. Cox to
deduct rents paid for his law practice as long as he does not have title
to or equity in the rented property. The Coxes contend that they can
deduct all of the rent paid by Mr. Cox for his law practice under section
162(a)(3). They assert that under Missouri law a separate entity known as
the marital community owns all property that they own as tenants by the
entirety. The Coxes argue that this marital community is separate from
them, and that therefore neither Mrs. Cox nor Mr. Cox has title to or
equity in any property which they own as tenants by the entirety.
      We reject the Coxes' argument that the building was titled to the
marital community rather than to them. We recognize that decisions by some
Missouri courts have stated that "[t]he distinctive characteristic of an
estate by the entirety is that it is deemed to be owned by a single entity,
the marital community." United States Fidelity & Guar. Co. v. Hiles, 670
S.W.2d 134, 137 (Mo. Ct. App. 1984). Indeed this court, in an opinion by
Judge Collet in 1951, United States v. Hutcherson, 188 F.2d 326 (8th




                                    -3-
Cir. 1951), has stated that the estate by the entirety "is built upon the
fiction of the law that a husband and wife are one and only one legal
entity."    Id. at 329.   We must follow, however, the Missouri Supreme
Court's more recent discussion of tenancy by the entirety in Ronollo v.
Jacobs, 775 S.W.2d 121 (Mo. 1989). There, Judge Covington observed that
the conveyance was to "Carl J. Ronollo and Virginia A. Ronollo, his wife,"
and that this language was presumed to create a tenancy by the entirety.
Id. at 123. She went on to state:
      In Missouri and at common law an estate by the entirety
      possesses like characteristics.     Unities of interest, time,
      title and possession exist in the husband and wife.        Each
      spouse is seized of the whole or entirety and not a share,
      moiety or divisible part.       Thus, neither spouse owns an
      undivided half interest in entirety property; the whole
      entirety estate is vested and held in each spouse and the whole
      continues in the survivor.
Id. (citations omitted). This recent statement of the Missouri Supreme
Court makes clear that each spouse is seized of the whole or entirety, and
neither owns an undivided half interest in the entirety property. The
whole entirety estate is vested and held in each spouse, and the whole
continues in the survivor. Ronollo makes clear that the ownership interest
is in the spouses, and not in a separate entity. The only conclusion that
can be reached from Ronollo is that both Mr. and Mrs. Cox had title to the
building in question, and not a fictional but separate entity, as the Coxes
argue.
      The tax court did not base its decision on the principles we have
discussed above, but rather on the principle that Mr. Cox had equity in the
building. Under Missouri law, Mr. Cox's ownership of the building as a
tenant by the entirety gives him a right to one half of the rents earned
from the building, see Rezabek v. Rezabek, 192 S.W. 107, 111 (Mo. Ct. App.
1917), and a one-half interest in the building should the Coxes decide to
end their tenancy by the entirety in the building, see Coffey v. Coffey,
485 S.W.2d 167, 172-74 (Mo. Ct. App. 1972). These interests give Mr. Cox
equity in the building that he rented for his law practice. As section
162(a)(3) only allows rent




                                    -4-
to be deducted when Mr. Cox has no equity in the rented property, we reject
the Coxes' argument that the tax court should have allowed them to deduct
all of the rent paid by Mr. Cox for his law practice.3

                                            B.

      The Coxes also argue that even if Mr. Cox had title to or equity in
the building, they should still be allowed to deduct all of the rent paid
because Mr. Cox's law practice rented the space in the building and the law
practice had no title or equity in the building. We reject this argument.
Mr. Cox practices as a sole practitioner, he owns his practice, and his law
practice is not an entity separate from Mr. Cox. Mr. Cox himself rented
the space for his law practice.

                                            II.

      The Coxes argue that they are entitled to their attorneys' fees and
costs because the position taken by the Commissioner in the tax court was
not substantially justified.
      The Coxes may collect their attorneys' fees and costs if the
Commissioner's position in the tax court was not substantially justified.4
26 U.S.C. § 7430(c)(4)(A) (1994).        The Commissioner's position was
substantially justified if it had a reasonable basis in law and fact. See
Barton v. United States, 988 F.2d 58, 59 (8th Cir. 1993). We review the
tax court's decision to deny the Coxes an award of their attorneys' fees




       3
       The Commissioner has not argued that the tax court erred in allowing the Coxes
to deduct one half of the rent, and we do not decide that issue.
       4
        We assume without deciding that the Coxes substantially prevailed in the tax
court, and except for this question and the question of the substantial justification of the
Commissioner's position, the Commissioner concedes that the Coxes have met all other
requirements under section 7430 for an award of attorneys' fees and costs.

                                            -5-
and costs for an abuse of discretion.    See Kenagy v. United States, 942
F.2d 459, 463 (8th Cir. 1991).

      The Commissioner argued in the tax court that the Coxes were not
entitled to deduct any of the rent that Mr. Cox paid for his law practice.
The Commissioner contended that section 162(a)(3) prevented the Coxes from
deducting the rent because Mr. Cox had title to or equity in the property
he was renting.

      As we have held above, Mr. Cox had some equity in the building he
rented. Section 162(a)(3) states that a taxpayer can only deduct rent for
property "in which he has no equity."      (Emphasis added).    The plain
language of section 162(a)(3) provides a reasonable basis for the
Commissioner's position even though that position did not prevail in the
tax court. The tax court did not abuse its discretion in concluding that
the Commissioner's position had a reasonable basis in law and fact.

     Accordingly, we affirm the judgment of the tax court in all respects.

           A true copy.

                      Attest:

                           CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




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