                         T.C. Memo. 1997-239



                       UNITED STATES TAX COURT



      REPUBLIC PLAZA PROPERTIES PARTNERSHIP, PFI REPUBLIC
        LIMITED, INC., TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23300-94.                        Filed May 22, 1997.



     Clark Reed Nichols, for petitioner.

     Brenda M. Fitzgerald, for respondent.



                         MEMORANDUM OPINION

     CHIECHI, Judge:    This matter is before the Court on a motion

filed pursuant to Rule 2311 by PFI Republic Limited, Inc. (PFI),

the tax matters partner for Republic Plaza Properties Partnership


1
   All Rule references are to the Tax Court Rules of Practice and
Procedure. All section references are to the Internal Revenue
Code (Code) in effect at relevant times.
                               - 2 -

(Partnership), for an award under section 7430 of reasonable

litigation costs (PFI's motion).   Neither party has requested a

hearing, and we conclude that one is not necessary.    Rule

232(a)(3).   Based on the submissions of PFI and respondent, we

conclude that no litigation costs may be awarded under section

7430.

                            Background

     Respondent determined in the notice of final partnership

administrative adjustment (FPAA) adjustments to the Form 1065

(Federal partnership return) that Partnership filed for 1988 that

related to certain depreciation claimed and to the lease (lease

agreement) of an office building between Partnership as lessor

and BCE Development Properties, Inc. (BCE) as lessee.    The

petition in this case that was filed on December 16, 1994,

contested those adjustments, the parties settled the depreciation

adjustments, and the Court issued an Opinion on the adjustments

relating to the lease agreement in Republic Plaza Properties

Partnership v. Commissioner, 107 T.C. 94 (1996) (Opinion).     We

incorporate herein by reference the portions of our Opinion that

are relevant to our disposition of PFI's motion.

     On June 14, 1988, PFI purchased from BCE an undivided 35-

percent interest in Partnership.   On February 28, 1992, PFI

transferred that interest to Brookfield Development.    However,

PFI retained all financial interest and/or tax liability with

respect to Partnership's 1988 and 1989 Federal partnership
                               - 3 -

returns.   Brookfield Development filed a final Federal partner-

ship return for Partnership that indicated that Partnership

terminated on February 28, 1992.   At the time of its termination,

Partnership had a net worth of less than $7 million and no

employees.

     At the time PFI filed the petition in this case, it had a

net worth of less than $7 million and fewer than 500 employees.

     At all relevant times including the date on which the

petition in this case was filed, petitioner was wholly owned by

Pacific Harbor Capital Inc. (Pacific Harbor) which, in turn, was

wholly owned by PacificCorp Financial Services (PacificCorp

Financial), and PacificCorp Financial was wholly owned by

InnerPacific (now known and herein referred to as Pacific Hold-

ing) which, in turn, was wholly owned by PacificCorp.    At those

times, Pacific Harbor, PacificCorp Financial, Pacific Holding,

and PacificCorp each had a net worth in excess of $7 million.

     Bills for the legal services and expenses at issue in

litigating this case were addressed to Pacific Harbor.   Bills for

the services and expenses at issue of the experts who testified

on behalf of PFI at the trial of this case were addressed to

PacificCorp Financial.   Pacific Harbor paid all of the amounts

billed for legal and expert services and expenses in connection

with this case.   (These amounts shall collectively be referred to

as the litigation costs at issue.)
                                 - 4 -

                              Discussion

     Section 7430(a) authorizes an award to the prevailing

party of reasonable litigation costs incurred in connection with

a court proceeding brought against the United States involving

the determination of any tax, interest, or penalty under the

Code.     In order to qualify for such an award, that party must

(1) show that the costs claimed are reasonable litigation costs

incurred in connection with the court proceeding, section

7430(a)(2); (2) have exhausted the available administrative

remedies, section 7430(b)(1); (3) not have unreasonably protracted

the court proceeding, section 7430(b)(4); and (4) qualify as a

prevailing party, section 7430(c)(4).      PFI has the burden of

establishing that all of the foregoing criteria have been satis-

fied.2    See Rule 232(e); Minahan v. Commissioner, 88 T.C. 492,

496-497 (1987).

        To qualify as a prevailing party under section 7430(c)(4),

PFI must show, inter alia, that at the time the petition in this

case was filed the net worth requirements of 28 U.S.C. sec.

2412(d)(2)(B) (1994) (net worth requirements) were met.      Sec.

7430(c)(4)(A)(iii).




2
   The amendments to sec. 7430 by the Taxpayer Bill of Rights 2,
Pub. L. 104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996)
are effective with respect to proceedings commenced after July
30, 1996, and therefore are not applicable to PFI's motion.
                                 - 5 -

     In respondent's notice of objection to PFI's motion (respon-

dent's notice of objection), respondent concedes that the require-

ments of section 7430(b)(1) (exhaustion of available administra-

tive remedies), 7430(b)(4) (not unreasonably protracting the court

proceeding), and 7430(c)(4)(A)(ii) (substantially prevailing with

respect to the amount in controversy or the most significant issue

or set of issues presented) have been satisfied.   Respondent

disputes that PFI has established that the remaining requirements

of section 7430 have been met.    With respect to their disputes,

PFI and respondent disagree about the identity of the prevailing

party to which the various requirements, including the net worth

requirements, apply.   PFI contends that either Partnership or PFI

is the prevailing party to which section 7430 applies and that

either of those two entities satisfies the net worth requirements.

Respondent contends that the real party in interest and thus the

prevailing party for purposes of section 7430 is either Pacific

Harbor or PacificCorp and that neither of those corporations

satisfies the net worth requirements.

     We need not decide the identity of the prevailing party or

any other dispute between PFI and respondent except whether

Partnership or PFI incurred the litigation costs at issue as

section 7430(a)(2) requires of a prevailing party.3    If PFI were


3
   Although we need not address the other disputes between PFI
and respondent, we note that, in arguing in respondent's notice
                                                    (continued...)
                               - 6 -

correct in contending that either Partnership or PFI is the

prevailing party for purposes of section 7430, respondent would

concede that each of those organizations meets the net worth

requirements.4   However, respondent argues that even if those

requirements were satisfied, neither Partnership nor PFI would be

entitled under that section to the litigation costs at issue

because, inter alia, PFI has failed to establish that either

Partnership or PFI incurred any costs in connection with this

Court proceeding as required by section 7430(a)(2).

     Section 7430(a)(2) provides that the prevailing party may be

awarded "reasonable litigation costs incurred in connection with"

(emphasis added) a court proceeding involving the determination of

any tax, interest, or penalty under the Code.   The term "reason-

able litigation costs" is defined to include, inter alia, (1) the

reasonable expenses of expert witnesses, section 7430(c)(1)(B)(i),

and (2) reasonable fees paid or incurred for the services of

attorneys, section 7430(c)(1)(B)(iii), in connection with such a

court proceeding.


3
 (...continued)
of objection that her "overall position" in this case was sub-
stantially justified for purposes of sec. 7430(c)(4)(A)(i),
respondent misstates and/or mischaracterizes certain of the
Court's findings in its Opinion.
4
   If respondent were correct in contending that either Pacific
Holding or PacificCorp is the prevailing party for purposes of
sec. 7430, PFI would concede that neither would satisfy the net
worth requirements and that therefore no litigation costs at
issue should be awarded under that section.
                                - 7 -

     PFI concedes that Pacific Harbor, and not Partnership or PFI,

paid all of the litigation costs at issue.     However, it asserts

that those litigation costs were "incurred for PFI in its capacity

as tax [matters] partner in bringing its Petition" (emphasis

added) in this case and that therefore either PFI or Partnership

satisfies section 7430(a)(2).   We disagree.

     In addressing the meaning of the word "incurred" in the

context of section 7430, the Court has observed that the common

meaning of the word incur is "to become liable or subject to:

bring down upon oneself."   Frisch v. Commissioner, 87 T.C. 838,

846 (1986).   Fees and expenses are incurred when there is a legal

obligation to pay them.   See Marre v. United States, 38 F.3d 823,

828-829 (5th Cir. 1994); see also 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), Pub. L. 91-646, 84

Stat. 1984, 1906 (1994); attorney's fees were not actually "in-

curred" because the party claiming them had no legal obligation to

pay them); SEC v. Comserv Corp., 908 F.2d 1407, 1414-1415 (8th

Cir. 1990) (construing to a similar effect the Equal Access to

Justice Act, codified at 5 U.S.C. sec. 504 and 28 U.S.C. sec. 2412

(1994)).

     On the record before us, we find that PFI has failed to

establish that either Partnership or PFI was legally obligated to
                                 - 8 -

pay any of the litigation costs at issue.       See Swanson v. Commis-

sioner, 106 T.C. 76, 101-102 (1996).5       We further find that no

litigation costs may be awarded under section 7430.

     To reflect the foregoing,



                                         An appropriate order denying

                                 PFI's motion will be issued.




5
   Indeed, Partnership was not even in existence on the date the
petition in this case was filed.
