ESTATE GRANTED LIMITED LITIGATION COSTS ON FAMILY LIMITED PARTNERSHIP ISSUE.

Richard T. Cummings, for respondent.

[3] By notices dated March 15, 2000, respondent determined Federal gift and estate tax deficiencies relating to the valuation of the FLP interests. At trial, the Court upheld petitioners' discounts and held that there were no deficiencies.

[4] On December 4, 2001, petitioners filed their motion for allowance of claims for litigation and administrative costs. On March 4, 2002, respondent filed an objection to motion for litigation costs and memorandum of points and authorities in support of respondent's objection to the motion for litigation costs. Petitioners then filed an affidavit on June 19, 2002. After a conference call on June 21, 2002, and pursuant to an order dated June 24, 2002, petitioners filed a supplement to motion for allowance of claims for litigation and administrative costs (supplement) seeking only those litigation costs incurred after February 1, 2001, for services provided by Jeffrey A. Schumacher, expert; Harold A. Chamberlain, lead attorney; and Michael C. Riddle, attorney. On July 8, 2002, respondent filed his objection to supplement to motion for allowance of claims for litigation and administrative costs.

[6] Respondent contends that he was substantially justified in challenging the valuation of Mrs. Dailey's FLP (valuation issue). Respondent, however, concedes he was not substantially justified in maintaining his position that Mrs. Dailey's FLP should be disregarded for tax purposes (FLP issue). We must, therefore, decide whether respondent's position relating to the valuation issue was substantially justified, and whether costs relating to the FLP issue are reasonable.

I. Substantial Justification

[7] We may award costs to petitioners where respondent's position was not substantially justified (i.e., did not have a reasonable basis in law and fact). See Pierce v. Underwood, 487 U.S. 552, 565 (1988). In addition, the justification for each of respondent's positions must be independently determined. See Swanson v. Commissioner, 106 T.C. 76, 92, 97 (1996). This Court will determine the reasonableness of respondent's position as to each issue independently and apportion the requested award between those issues for which respondent was, and those issues for which respondent was not, substantially justified. See id. at 87-92; Salopek v. Commissioner, T.C. Memo. 1998-385, affd. without published opinion 210 F.3d 390 (10th Cir. 2000). The fact that respondent loses an issue is not determinative of the reasonableness of respondent's position. Wasie v. Commissioner, 86 T.C. 962, 969 (1986).

[8] To establish that respondent was substantially justified on the valuation issue, respondent must establish that he was reasonable in adopting his expert's analysis. See Smith v. United States, 850 F.2d 242, 246 (5th Cir. 1988); see also Fair v. Commissioner, T.C. Memo. 1994-602 (holding that when deciding if respondent's position on valuation is substantially justified, the Court "must consider the facts of the case, the nature of the asset to be valued, the qualifications of the expert, the soundness of the valuation methods, the reliability of the expert's factual assumptions, and the persuasiveness of the reasoning supporting the expert's opinion").

[9] The values of family limited partnership interests are difficult to determine. See 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). Respondent's expert began with the net asset value of the FLP, then made adjustments reflecting minority and marketability discounts. Regarding the minority discount, he compared the FLP to closed-end mutual funds. Regarding the marketability discount, he relied on studies relating to the value of common stock with legal restrictions impairing transferability (i.e., Restricted Stock Studies) and a study relating to the value of closely held company shares prior to initial public offerings (i.e., Pre-IPO Study).

[10] Problems with the expert's analysis were not revealed until petitioners' counsel conducted voir dire and cross-examination. With respect to the valuation of the FLP interests, this Court held that, "although neither expert was extraordinary, petitioners' expert provided a more convincing and thorough analysis than respondent's expert." Dailey v. Commissioner, supra. The Court upheld petitioners' discounts for the valuation of the FLP interests.

[11] Respondent's expert holds a Ph. D. and M. B. A., has extensive qualifications and expertise, and used sound valuation methods in his report. Cf. Estate of Cervin v. Commissioner, 111 F.3d 1252 (5th Cir. 1997) (holding that respondent was not substantially justified for relying upon the discredited unity-of- ownership valuation theory), revg. T.C. Memo. 1994-550. Despite the expert's performance at trial, respondent's adoption of the expert's report was reasonable. Accordingly, respondent was substantially justified, and petitioner is not entitled to litigation costs related to the valuation issue.

II. Reasonable Costs

[12] Petitioners may recover only litigation costs related to the FLP issue. See sec. 7430(a)(2), (c)(1). Section 7430(c)(1)(B)(iii) imposes a statutory rate for attorney's fees (i.e., $140 per hour relating to calendar year 2001). See Rev. Proc. 2001-13, 2001-1 C.B. 337, 341. In their supplement, petitioners seek litigation costs in the amount of $68,593 (i.e., 489.95 hours), of which petitioners allocated $50,540 (i.e., 361 hours) to the FLP issue.² Respondent contends $39,900 (i.e., 285 hours ) is the appropriate amount allocated to the FLP issue.³ The following chart represents the petitioners' proposed allocation of hours:

                                          FLP        Valuation

[14] Petitioners attributed 59 hours to work performed by Riddle and allocated 57 of these hours to the FLP issue. Riddle served as attorney for the probate of Mrs. Dailey's estate, represented her during the administrative proceedings, and assisted Chamberlain during litigation. Petitioners have adequately set forth the services he performed. We reject respondent's contention that such services were duplicative. Accordingly, petitioners are entitled to 57 hours relating to work performed by Riddle.

[15] Thus, petitioners are entitled to litigation costs in the amount of $42,700 (i.e., 305 hours).

[16] Contentions we have not addressed are irrelevant, moot, or meritless.

[17] To reflect the foregoing,

[18] Appropriate orders and decisions will be entered.

²Petitioners, in their supplement, state that Chamberlain worked 48 hours on the valuation issue, but Exhibit C of the supplement indicates that Chamberlain worked 49 hours on that issue.

³Respondent, however, neglected to exclude 47 hours of time that petitioners allocated to the valuation issue.