                        T.C. Memo. 1996-468



                      UNITED STATES TAX COURT



                BETTY W. THOMPSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18922-93.                Filed October 17,1996.



     David D. Aughtry and Donald P. Lancaster, for petitioner.

     Julie M. T. Foster, for respondent.



                        MEMORANDUM OPINION

     DAWSON, Judge:   This case was assigned to Special Trial

Judge John F. Dean pursuant to section 7443A(b)(4) and Rules 180,

181 and 183.1   The Court agrees with and adopts the Special Trial

Judge's opinion which is set forth below.

     1
      Unless otherwise specified, all section references are to
the Internal Revenue Code, as amended. All Rule references are
to the Tax Court Rules of Practice and Procedure.
                                    -2-

                  OPINION OF THE SPECIAL TRIAL JUDGE

     DEAN, Special Trial Judge:       This matter is before the Court

on petitioner's Motion for Litigation and Administrative Costs

pursuant to section 7430 and Rule 231.

     In separate notices of deficiency addressed to Betty W.

Thompson (hereinafter petitioner) and her husband, Lawrence N.

Thompson (hereinafter Mr. Thompson), respondent determined a

deficiency in and an addition to the Federal gift tax liability

of each of them as follows:

      Calendar                               Addition to Tax
     Year Ended       Deficiency               Sec. 6660
     12/31/88         $398,683.08               $119,605

     The adjustment in the respective notices of deficiency was

primarily attributable to respondent's determination that the

value of gifts of common stock made in the year 1988 was

$3,163,500, instead of $1,260,072 as reported on the gift tax

return signed by petitioner and Mr. Thompson.2

     The petition in this case was filed on September 1, 1993.

On November 5, 1993, the Court issued its notice setting

petitioner's case and Mr. Thompson's case for trial at the

April 11, 1994, trial calendar in Atlanta, Georgia.      Within the

period allowed by Rule 143(f), petitioner and Mr. Thompson

submitted an expert witness report on the valuation of the

     2
      The notices also determined that there were taxable gifts
from prior periods in the amount of $27,575.33 and not "$0.00" as
reported on the return.
                                 -3-

closely held stock which was the subject of respondent's

deficiency notices.    Shortly before trial, respondent accepted

the valuation contained in the expert witness report.     A

stipulation of settled issues and a revised stipulation of

settled issues were filed with the Court in May and August of

1994, respectively.3

     Concurrently with the filing of the stipulation of settled

issues, petitioner filed her motion for litigation and

administrative costs.    Respondent filed a response to

petitioner's motion, and petitioner filed a reply to respondent's

response to petitioner's motion.    Also, since the filing of the

motion and responses, the parties have stipulated additional

facts and petitioner has filed an additional affidavit4.

     Neither party initially requested a hearing in this matter.

Respondent eventually requested a hearing on the element of

petitioner's payment of legal fees, but the Court concludes that

a hearing is not necessary for the proper consideration and

disposition of this motion.    Rule 232(a).




     3
      The parties have agreed that there is a deficiency in gift
tax due from petitioner for the taxable year 1988 in the amount
of $24,942 and that there is no addition to tax due from
petitioner for the taxable year 1988 under the provisions of sec.
6660.

     4
      Petitioner supplied an additional affidavit attesting to
the attorney's fees that she allegedly paid or incurred.
                                -4-

     The Court decides the motion for litigation and

administrative costs based upon the pleadings, petitioner's

motion with attached exhibits, respondent's response with

attached exhibits, petitioner's reply to respondent's response

with attached exhibits, the parties' stipulations, and

petitioner's additional affidavit.    The relevant facts as drawn

from the record are set out below.

                            Background

     Petitioner and Mr. Thompson resided at Milledgeville,

Georgia, at the time the petition in this case was filed.

Mr. Thompson is the chief executive of and principal shareholder

in T & S Hardwoods, Inc. (the Company).    The Company is a closely

held family corporation located in Milledgeville, Georgia.     The

Company is engaged in the operation of hardwood sawmills.

     On August 8, 1988, Mr. Thompson made gifts of stock in the

Company to his son and two daughters.5    On April 18, 1989, the

Internal Revenue Service received a Form 709, United States Gift

and Generation-Skipping Transfer Tax Return, signed by L. N.

Thompson, Jr., as donor.   Petitioner also signed the return

indicating her consent to "split-gift" treatment under section



     5
      Petitioner and Mr. Thompson had given "split gifts" of
stock in the Company to their children in the years 1986 and 1987
that reduced the amount of unified credit available for
application to the tax on the gifts made in 1988. See sec.
2505(a). This issue has been settled by agreement of the
parties.
                                  -5-

2513.6   On a schedule attached to the return, gifts of 9,000

shares of the Company to Lawrence N. Thompson III, 1,050 shares

to Barbara E. Thompson, and 1,050 shares to Ann W. Jefferson were

reported.   All of the shares were valued at $113.52 per share,

and the valuation was supported by the computations of James M.

Grant, C.P.A. (hereinafter Mr. Grant), the return preparer.

     Mr. Grant valued the Company stock by capitalizing the 1984-

88 yearly average net profit per share at 15 percent, and

comparing the resulting figure of $189.80 to the book value per

share as of August 31, 1988, which was $159.48.   After finding

the average of the two figures, $174.64, Mr. Grant then deducted

a discount of 35 percent for lack of marketability and the

transfer of a minority interest.    The deduction for the discount

of $61.12, from the average of $174.64, resulted in the reported

valuation of $113.52 per share.

     Both gift tax returns were selected for examination by

respondent.   On August 1, 1991, Mr. Thompson and his accountant,

Mr. Grant, met with respondent's examining agent at the Company's

facilities in Milledgeville, Georgia.   Respondent's examining

agent, an estate and gift tax attorney, was primarily interested

in discussing with Mr. Thompson and Mr. Grant the level of the


     6
      Part I, line 16 of Mr. Thompson's Form 709 was marked with
an "X" in the "yes" column indicating that his spouse,
petitioner, intended to file a separate gift tax return for the
calendar year. The parties have stipulated that petitioner, in
fact, filed a Form 709 reporting the subject gifts.
                                  -6-

discount taken in determining the value of the Company's shares

when the 1986, 1987, and 1988 gifts were made to the Thompson

children.

     Respondent's examining agent made his own computation of the

value of the Company stock.   The agent, using what he considered

to be a comparable publicly traded corporation, determined in his

report that the hypothetical market value of the Company on the

valuation date was $300 per share.      He then discounted that value

by 20 percent, or $60 per share, to reflect the lack of

marketability of closely held stock.      To the discounted value of

$240 he applied a "control"7 premium of 20 percent, or $48, which

he added to the marketability discounted value of $240 to arrive

at a figure of $288 per share.    Finally, he rounded to the amount

of $285 as his proposed per-share value of the Company stock to a

hypothetical buyer.

     In August of 1991, Mr. Thompson engaged attorney J. René

Hawkins (hereinafter Mr. Hawkins).      In connection with

representing Mr. Thompson in the examination of the gift tax

return, Mr. Hawkins suggested that Mr. Thompson hire an

independent appraiser to value the shares that Mr. Thompson had

given to the children.   Based upon this advice, Mr. Thompson

hired John O. Batson (hereinafter Mr. Batson) to perform an

appraisal of the Company stock.

     7
      "Control" here represents ownership of more than 50 percent
of the stock of a corporation by a single family.
                                  -7-

     Mr. Batson prepared an appraisal report and submitted it to

the Company.   Mr. Batson's fee was paid by the Company and

charged as compensation to Mr. Thompson.   It was Mr. Thompson's

understanding that both Mr. Batson and Mr. Hawkins, although

formally engaged by him, were also representing his wife, here

petitioner, with respect to her potential gift tax liability.

     In due course, petitioner and Mr. Thompson received the

revenue agent's report and filed a protest.   In May of 1992,

Mr. Hawkins, by letter, submitted the appraisal prepared by

Mr. Batson to the Appeals Office.

     On or about August 11, 1993, statutory notices were issued

to petitioner and Mr. Thompson determining gift tax deficiencies

and additions to tax under section 6660 based on respondent's

valuation of the Company stock.

     The petition was filed on September 1, 1993.   Upon the

filing of respondent's answer on November 1, 1993, the case was

at issue.   A Notice Setting Case for Trial, dated November 5,

1993, set the case for trial on April 11, 1994, and the Standing

Pre-Trial Order directed the parties to file expert witness

reports no later than 30 days prior to the first day of the trial

session.

     On or about February 16, 1994, Mr. Thompson hired attorney

David Aughtry (hereinafter Mr. Aughtry) to represent Mr. Thompson

and petitioner at trial.   A valuation expert, Z. Christopher

Mercer (hereinafter Mr. Mercer), of Mercer Capital Management,
                                 -8-

Inc., was in turn engaged by Mr. Aughtry to prepare an appraisal

of the shares of the Company for use in the gift tax valuation

cases of Mr. Thompson and petitioner.

     Mr. Mercer prepared an appraisal report and submitted it to

Mr. Thompson.    Mr. Mercer's fee was paid by the Company and

charged as compensation to Mr. Thompson.8   Although Mr. Aughtry

and Mr. Mercer were formally engaged by Mr. Thompson, it was

understood that they would also represent petitioner's interests

in her separate gift tax case.    Mr. Aughtry entered his

appearance in petitioner's case on March 15, 1994.

     Petitioner provided a copy of the valuation report prepared

by Mr. Mercer to respondent within the time required under Rule

143(f).    Respondent, on the record at a hearing in Atlanta,

Georgia, on April 22, 1994, accepted the per-share value of the

Company stock as determined by Mr. Mercer, $124.50 for the year

1988, and lesser values for gifts in the 2 previous years.

Respondent also conceded on the record that the addition to tax

under section 6660 would not apply.    It was agreed that the

settlement would apply to both petitioner's and Mr. Thompson's

case.    Since Mr. Thompson had a net worth in excess of

$2 million, he did not file a motion for fees and costs in his

case.



     8
      The Company advanced other litigation costs and charged
them as compensation to Mr. Thompson.
                                  -9-

     The Court ordered the parties to meet and attempt to prepare

a stipulation of agreed facts "relevant to the issue of

petitioner `paying' or `incurring' the costs claimed in

petitioner's motion".   In response thereto, petitioner filed an

affidavit with the Court.   The affidavit, sworn "to the best of

her knowledge and belief" on January 30, 1995, states in

paragraph 5 that petitioner has "incurred and paid" fees and

costs in the amount of $67,371.

     On April 3, 1995, the Court, once again, ordered the parties

to file a stipulation of facts "regarding whether petitioner

`paid' or `incurred' the litigation and administrative costs" at

issue.   On May 2, 1995, the parties filed a stipulation of facts.

Attached to the stipulation, as Joint Exhibit 7-G, is a copy of a

check drawn by petitioner to her husband in the amount of

$67,371, dated February 1, 1995.

     Petitioner is not employed, and although she receives

occasional dividend income, most of her income and assets have

come from Mr. Thompson directly or indirectly.

                            Discussion

     Section 7430(a) provides that, in the case of any

administrative or court proceedings brought by or against the

United States in connection with the determination, collection,

or refund of any tax, interest, or penalty, the "prevailing

party" may be awarded a judgment for reasonable administrative

costs incurred in connection with any administrative proceedings
                               -10-

within the IRS, and reasonable litigation costs incurred in

connection with any court proceeding.    To qualify as a prevailing

party under the statute, petitioner must establish that:     (1) The

position of the United States in the proceeding was not

substantially justified; (2) she substantially prevailed with

respect to the amount in controversy or with respect to the most

significant issue presented; and (3) she met the net worth

requirements of 28 U.S.C. sec. 2412(d)(2)(B) (1994) on the date

the petition was filed.   Sec. 7430(c)(4)(A).

     To recover litigation costs, petitioner must also establish

that she exhausted the administrative remedies available to her

within the Internal Revenue Service and that she did not

unreasonably protract the proceedings.   Sec. 7430(b)(1), (4).

Petitioner bears the burden of proof with respect to each of the

preceding requirements.   Rule 232(e).

     Petitioner's motion in this case seeks litigation and

administrative costs paid or incurred beginning with the

examination of the returns of petitioner and of Mr. Thompson on

which the split gifts were reported through the filing of

petitioner's reply to respondent's response to petitioner's

motion for litigation and administrative costs.

     Respondent agrees in her response to petitioner's motion for

litigation and administrative costs that petitioner has

substantially prevailed with regard to the amount in controversy,

and that petitioner meets the net worth requirement.
                               -11-

     For the reasons stated below, we find it unnecessary to

address the issues of whether the position of respondent was

substantially justified in this matter, whether petitioner

exhausted administrative remedies, and whether petitioner

unreasonably protracted the Court and administrative proceedings.

Petitioner Must Pay or Incur Fees and Costs

     Upon examination of the record in this case, we conclude

that petitioner has not carried her burden of proving that she

has paid or incurred any costs in connection with these

administrative or judicial proceedings as required by statute and

the Rules of this Court.   Sec. 7430(a)(1) and (2) (reasonable

litigation and administrative costs "incurred"); Rule 231(d)

(reasonable litigation and administrative costs "paid or

incurred").

     In Hong v. Commissioner, 100 T.C. 88 (1993), a husband and

wife filed a joint Federal income tax return, were issued a joint

statutory notice, filed a joint petition, and had a combined net

worth greater than $2 million, but less than $2 million each.

This Court held that each petitioner met the net worth

requirements of 28 U.S.C. sec. 2412(d)(2)(B) (1994), incorporated

into section 7430(c)(4)(A)(iii).    The latter section, we said,

speaks in terms of an individual.     However, an individual must

demonstrate that he or she has incurred or paid the costs and

fees for which an award is sought.    See Prager v. Commissioner,

T.C. Memo. 1994-420; cf. Hong v. Commissioner, supra at 92 n.2.
                                -12-

     As an initial matter we note that, like section 7430, the

Equal Access to Justice Act (EAJA), codified at 5 U.S.C. section

504 and 28 U.S.C. section 2412 (1994), allows courts to award

attorney's fees and other expenses to a prevailing party in

actions against the Government.   At times we will draw on the

more extensive case law under the EAJA in order to interpret an

analogous provision in section 7430.   Kenagy v. Unites States,

942 F.2d 459 (8th Cir. 1991) (where wording is consistent, courts

read the EAJA and sec. 7430 in harmony); United States v.

Balanced Fin. Management, Inc., 769 F.2d 1440, 1451 n.12 (10th

Cir. 1985); Powell v. Commissioner, 91 T.C. 673, 682 (1988),

revd. on another issue 891 F.2d 1167 (5th Cir. 1990).

Meaning of "Paid or Incurred"

     By virtue of its requirement that attorney's fees have been

"incurred" by the party, section 7430 differs from some other

fee-shifting statutes.   For example, unlike the Civil Rights

Attorneys Fees Awards Act of 1976, which provides for allowance

of "a reasonable attorney's fee as part of the costs", section

7430 is more narrowly drawn and requires that to receive an

award, attorney's fees must have been paid or incurred.     Frisch

v. Commissioner, 87 T.C. 838, 846 (1986).   This is an important

distinction.   To be eligible for an award of fees under section

7430, petitioner must be able to show that she has paid those
                               -13-

fees or incurred an obligation to pay them.     Id. at 845-846

(plain language of section 7430 indicates that recovery is

limited to actual expenditures).9

     The Court has observed that the meaning of "incurred" in the

context of section 7430 is "'to become liable or subject to:

bring down upon oneself.'"   Id. at 846.    In analogous

circumstances, it has been held that fees are incurred when there

is a legal obligation to pay them.     United States v. 122.00 Acres

of Land, 856 F.2d 56 (8th Cir. 1988) (applying sec. 304(a)(2) of

the Uniform Relocation Assistance and Real Property Acquisition

Policies Act of 1970, 42 U.S.C. sec. 4654(a); fees must be

"actually incurred"); accord SEC v. Comserv Corp., 908 F.2d 1407,

1414 (8th Cir. 1990) (construing the EAJA to a similar effect).

     The fact that petitioner here may have "retained" and was

represented by attorneys and other professionals in the

administrative and judicial proceedings is not sufficient to meet

the requirements of section 7430.     See, e.g., Unification Church

v. INS, 762 F.2d 1077, 1082-1083, 1092 (D.C. Cir. 1985)

     9
      There is a well-recognized exception (not pertinent here)
to this requirement in proceedings under the EAJA. In light of
the legislative history of the Act and for reasons of public
policy, parties who are represented by a legal services
organization or by an attorney pro bono are not precluded from an
award of fees and costs under the EAJA. Awards are routinely
made in those circumstances even though the claiming party did
not pay or incur fees. See, e.g., Phillips v. GSA, 924 F.2d
1577, 1582-1583 (Fed. Cir. 1991); SEC v. Comserv Corp., 908 F.2d
1407, 1415 (8th Cir. 1990); American Association of Retired
Persons v. EEOC, 873 F.2d 402, 406 (D.C. Cir. 1989); Watford v.
Heckler, 765 F.2d 1562, 1567 n.6 (11th Cir. 1985).
                                -14-

(individual plaintiffs "retained" attorney and received

representation, but payment was made by another, the Unification

Church).

Payment of Fees and Costs

     The issues involved in the gift tax deficiency cases of

petitioner and her husband were identical.    The primary question

to be answered was, on the valuation date, what was the value of

stock in the Company given as split gifts by Mr. Thompson and

petitioner to their children.   Both petitioner and her husband

were represented by the same legal counsel.   Under these

circumstances, close scrutiny of the record before us is

warranted to determine what fee arrangement in fact existed.    See

American Association of Retired Persons v. EEOC, 873 F.2d 402,

405-406 (D.C. Cir. 1989) (concern about evasion of party

eligibility requirements is highest where one counsel represents

more than one party, especially where the wealth of one or more

of those parties would likely cause disqualification from

recovering fees).

     Mr. Thompson engaged Mr. Hawkins and hired Mr. Batson.    The

Company, of which Mr. Thompson is chairman and principal

shareholder, paid Mr. Batson's fee, and the payment was charged

as compensation to Mr. Thompson.

     The evidence further shows that Mr. Thompson hired Mr.

Aughtry, who, in turn, hired Mr. Mercer, the valuation expert who

represented petitioner and Mr. Thompson after the filing of the
                                 -15-

petition in this case.     Mr. Mercer's fee was paid by the Company

and the payment charged as compensation to Mr. Thompson.

Moreover, the company advanced other litigation costs in an

unspecified amount and charged them as compensation to Mr.

Thompson.     The only evidence in this record that petitioner paid

any of the fees and costs in this case is her February 1, 1995,

check to Mr. Thompson in the amount of $67,371 that bears the

notation "Reimburse Legal Exp."     As demonstrated by the date,

February 1, 1995, the check was written after the Court's order

requesting stipulated facts concerning whether petitioner had

paid or incurred fees and costs.     We also note that the check is

dated 2 days after the sworn affidavit dated January 30, 1995, in

which petitioner stated that, to the best of her knowledge and

belief, she had incurred and "paid" attorney's fees and costs of

$67,371.

     The date of petitioner's check is not its only questionable

characteristic.     Petitioner submitted a summary of assets as of

the end of the year 1993 attached to her affidavit of May 19,

1994.     An examination of the summary of assets fails to reveal

any apparent source of liquid funds10 from which petitioner could

write a check for $67,371 to Mr. Thompson.    Since petitioner is

not employed and most of her assets have come from Mr. Thompson,

we are reluctant to place much weight on her check to him as

     10
      Petitioner has not stated that she converted any of her
other assets into cash.
                               -16-

evidence that she has "paid" the subject fees and costs.    On the

contrary, the "reimbursement" check written by petitioner to Mr.

Thompson is additional evidence that he is the person who paid

the fees and costs in this case.

     The conduct of petitioner and Mr. Thompson strongly suggests

that it was never intended that petitioner would incur or pay any

fees in this matter.   In our judgment the timing of the

"reimbursement" check and petitioner's lack of liquid funds

strongly suggest an attempt by petitioner and her husband to

circumvent the net worth requirement for a section 7430 award,

rather than her bona fide payment of an obligation.   We must look

to the substance of what occurred.    Allowance of a fee award to

petitioner would effectively allow her to recover costs incurred

by Mr. Thompson, an ineligible litigant, who actually absorbed

the financial burden of the litigation.

     In addition, we need not address petitioner's arguments

sounding in contract, including quantum meruit, at any length.

Suffice it to say that payment to a creditor discharges a

debtor's obligation.   See Ga. Code Ann. sec. 13-4-40 (Michie

1982).   Unlike Christoph v. United States, 931 F. Supp. 1564

(S.D. Ga. 1996), payments of all the litigation costs here at

issue were made by the company and charged as compensation to Mr.

Thompson.

      Based on the record before us, we hold that petitioner has

failed to carry her burden of showing that she paid or incurred,
                                 -17-

within the meaning of section 7430, any fee or cost11 identified

in her motion.

     To reflect the foregoing,

                                        An appropriate order and

                                 decision will be entered.




     11
      We have considered whether petitioner has paid any
miscellaneous administrative or litigation cost. In an attempt
to determine whether petitioner is entitled to recover the fee
for filing her petition, we discovered that petitioner's petition
and that of her husband, Mr. Thompson, were sent to the Court by
Federal Express in a single envelope. The receipt attached to
the envelope indicates the sender to be Mr. Hawkins. The
"internal billing reference" is listed as "L. N. Thompson, Jr."
Also, the parties have stipulated that in addition to the fees
of Mr. Batson and Mr. Mercer, "T & S Hardwoods, Inc. advanced
other [unspecified] litigation costs and charged them as income
to Mr. Thompson".
