HARRY I. SAUL, INDIVIDUALLY AND AS EXECUTOR OF THE ESTATE OF HELEN
M. SAUL, AND JULIAN D. SAUL, CO-EXECUTOR OF THE ESTATE OF HELEN M.
SAUL, PETITIONERS v. UNITED STATES OF AMERICA

   No. 87-1676

   In the Supreme Court of the United States

   October Term, 1987

   On Petition for a Writ of Certiorari to the United States Court of
Appeals for the Eleventh Circuit

   Memorandum for the United States in Opposition

   Petitioners contend that the courts below erred in denying their
request for litigation costs and attorney's fees under Section 7430 of
the Internal Revenue Code.  /1/

   1. On December 2, 1977, Harry I. Saul and Helen M. Saul (the
taxpayers) purchased 20 gemstones for $14,616 (DX 2).  The next day
the taxpayers lent the gemstones to the Smithsonian Institution's
National Museum of Natural History (Tr. 15).  On December 31, 1978,
after the holding period specified by Section 170(e) had expired, /2/
the taxpayers donated the gemstones to the Smithsonian (Tr.22).  The
taxpayers subsequently claimed on their joint income tax return a
charitable deduction in the amount of $75,623 for this donation.  The
Commissioner of Internal Revenue thereafter issued a notice of
deficiency in which he disallowed the claimed deduction on two
alternative grounds:  (1) that the taxpayers had failed to establish
that the fair market value of the gemstones was $75,623, and (2) that
the taxpayers lacked donative intent.

   The taxpayers paid the deficiency and brought this refund suit in
the United States District Court for the Northern District of Georgia.
 During the course of pre-trial preparation, the government abandoned
the second objection made by the Commissioner in the notice of
deficiency, i.e., that the taxpayers lacked the requisite donative
intent.  Thus, the stipulated pretrial order submitted by the parties
stated that the only issue presented was whether the gemstones had a
fair market value of $75,623 when they were donated (see Tr. 23).  The
issue was tried to a jury, which returned a special verdict finding
that the fair market value of the gemstones as of the date they were
donated was the amount claimed by the taxpayers (Tr. 318).

   Petitioners then moved for an award of litigation costs and fees.
The district court denied the motion (Pet. App. 1A-4A).  The court
concluded that the government's contention that the gemstones had a
value substantially less than that claimed by the taxpayers presented
a fair issue for determination by the jury and therefore that the
position was not "unreasonable" under Section 7430 (Pet. App. 2A).
The court of appeals summarily affirmed in a one-line order (id. at
5A-6A).

   2. Petitioners contend (Pet. 7-15) that the court of appeals erred
in affirming the district court's denial of the request for attorney's
fees.  Petitioners maintain that the source of the courts' error is
their failure to look at the reasonableness of the government's
administrative position, instead focusing only on the reasonableness
of the government's litigating position.  Petitioners urge that the
Court should grant certiorari to resolve a conflict in the circuits on
this dispute over the proper interpretation of Section 7430.  This
contention is without merit for two reasons.  First, the conflict
asserted by petitioners has been resolved by Congress for cases
commenced after December 31, 1985, and thus the question presented in
the petition is of little continuing importance.  Second, on these
facts, petitioners would not be entitled to attorney's fees under
either interpretation because the government's administrative position
was not unreasonable.  Accordingly, there is no reason for review by
this Court.

   a. Petitioners are correct in stating that there exists a conflict
in the circuits in interpreting Section 7430(c)(2)(A)(i) of the Code,
as applicable to cases commencing before December 31, 1985.  That
subsection provides that attorney's fees may be recovered under
Section 7430 only by a party who "establishes that the position of the
United States in the civil proceedings was unreasonable." Three
circuits have held that the "position of the United States in the
civil proceeding" includes the IRS's administrative position.  Sliwa
v. Commissioner, 839 F.2d 602, 607 (9th Cir. 1988);  Powell v.
Commissioner, 791 F.2d 385, 391-392 (5th Cir. 1986);  Kaufman v.
Egger, 758 F.2d 1,4(1st Cir. 1985).  Four other circuits have held,
however, that the "position" whose reasonableness is to be analyzed is
only the government's litigating position in court.  Wickert v.
Commissioner, 842 F.2d 1005, 1008 (8th Cir. 1988);  Ewing & Thomas,
P.A. v. Heye, 803 F.2d 613, 615-616 (11th Cir. 1986);  Baker v.
Commissioner, 787 F.2d 637, 641-642 (D.C. Cir. 1986);  United States
v. Balanced Financial Mgmt., Inc., 769 F.2d 1440, 1450 (10th Cir.
1985).  /3/

   This conflict was definitively resolved by Congress in the Tax
Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085.  Section
1551(e) of that legislation amended Section 7430 of the Code to
provide an express definition of the phrase "position of the United
States." See 100 Stat. 2753.  Section 7430(c)(4), which was made
applicable to cases commenced after December 31, 1985 (see Section
1551(h), 100 Stat. 2753), now provides:

         Position of United States -- The term "position of the United
      States" includes --

         (A) the position taken by the United States in the civil
      proceeding, and

         (B) any administrative action or inaction by the District
      Counsel of the Internal Revenue Service (and all subsequent
      administrative action or inaction) upon which such proceeding is
      based.

   Thus, the question presented in this case is relevant only to a
dwindling number of cases commenced prior to 1986, /4/ and there is no
reason for this Court to resolve it.

   b. In any event, application of the interpretation sought by
petitioners would not assist their cause because the administrative
position of the IRS in this case was reasonable.  Petitioners do not
appear to dispute the conclusion of the district court that the
Commissioner acted reasonably in maintaining his principal challenge
to the claimed deduction, namely, that the fair market value of the
donated gemstone was less than $75,623.  The Commissioner's objection
on that point was plainly reasonable inasmuch as petitioners had paid
only $14,646 for the gemstones less than 13 months before they were
donated.  That objection, in itself, was a sufficient basis for
denying the claimed deduction.  Moreover, the alternative position
advanced by the Commissioner in the notice of deficiency, viz., that
petitioners lacked the requisite donative intent, was not
unreasonable.  The particular circumstances of this case, where the
taxpayers "lent" the gemstones to the Smithsonian on the day after
they were purchased and then made a "gift" of the stones 12 months
later, when the full tax benefits of a donation could first be
realized (see note 2, supra), gave ample reason to question the true
motive underlying the transaction.  /5/

   Petitioners also erroneously suggest (Pet. 8-9, 14) that the
Commissioner acted unreasonably in failing to obtain an expert opinion
concerning the value of the gemstones until shortly before the trial.
Petitioners acknowledge (Pet.3) that the Commissioner did value the
gems during the course of the administrative proceedings.  Moreover,
he was entitled to consider the taxpayer's purchase price as probative
evidence of the value of the stones when they were donated.  See,
e.g., Anselmo v. Commissioner, 757 F.2d 1208, 1213 (11th Cir. 1985);
Estate of Kaplin v. Commissioner, 748 F.2d 1109, 1111 (6th Cir. 1984).
 Because a taxpayer bears the burdern of establishing his entitlement
to a deduction, it was the taxpayers' burdern to establish the fair
market value of the gemstones when they were donated.  See, e.g., Orth
v. Commissioner, 813 F.2d 837, 841 n.5 (7th Cir. 1987);  Anselmo v.
Commissioner, 757 F.2d at 1211 & n.2.  Accordingly, it was quite
reasonable for the government to wait until it was apparent that the
case was going to go to trial before undertaking to obtain its own
expert appraisal.

   It is therefore respectfully submitted that the petition for a writ
of certiorari should be denied.

   CHARLES FRIED

      Solicitor General

   JUNE 1988

   /1/ Unless otherwise noted, all statutory references are to the
Internal Revenue Code of 1954 (26 U.S.C.), as amended (the Code).

   /2/ Section 170(e)(1)(A) of the Code provides that the amount of a
charitable contribution deduction resulting from the donation of
appreciated "capital gain property" is reduced by the amount of gain
that would not have been long-term capital gain if the property
contributed had been sold at its fair market value.  The effect of
this provision is to limit the taxpayer's deduction to the amount of
his basis, i.e., his cost, unless gain on the sale of the property at
the time of the donation would qualify for long-term capital gain
treatment.  Because the holding period to qualify for long-term
capital gain treatment in 1978 was one year (see 26 U.S.C.(Supp. I
1977) 1222), petitioners were required to hold the property for at
least that long in order to take a deduction for any claimed
appreciation.

   /3/ Petitioners err in stating (Pet. 10) that the Eleventh
Circuit's rule is that only the proceedings "in the courtroom and
before the judge" are to be examined for reasonableness.  The rule
requiring examination of the litigating position of the United States
encompasses all proceedings after the petition or complaint

   /4/ The instant case was commenced on November 6, 1985.

   /5/ The Commissioner was well aware that, at the time this
deduction was claimed, promoters of tax shelters were marketing
gemstones and similar items to taxpayers with the promise that they
could donate the stones to museums at exaggerated values and take
charitable contribution deductions that would yield tax savings well
in excess of the purchase price of the stones.  See, e.g., Anselmo v.
Commissioner, 80 T.C. 872, 873-875 & n.3 (1983), aff'd, 757 F.2d 1208
(11th Cir. 1985);  Tr. 107-108, 113-118;  DX 4.