United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 96-2896

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D. Sherman and Maxine M. Cox, *

Appellants, *

 v. * Internal Revenue Service.

Commissioner of Internal Revenue, *

Appellee. *

*

* Appeal from the 

*

*

*

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Submitted: March 12, 1997

 Filed: August 5, 1997

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

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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.
The Honorable Helen A. Buckley, Judge, United States Tax Court. 1

The Honorable Stanley J. Goldberg, Judge, United States Tax Court. 2

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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 Court for relief from the 1

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

court denied their motion, concluding that the Coxes were not entitled to 2

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.
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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 
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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 
The Commissioner has not argued that the tax court erred in allowing the Coxes 3

to deduct one half of the rent, and we do not decide that issue.

We assume without deciding that the Coxes substantially prevailed in the tax

4

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.

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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
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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.