United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 96-2896

___________ D. Sherman and Maxine M. Cox, *

Appellants, *

v. * Internal Revenue Service. Commissioner of Internal Revenue, *

Appellee. * *

* Appeal from the

*

*

*

___________ Submitted: March 12, 1997 Filed: August 5, 1997

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

___________ JOHN R. GIBSON, Circuit Judge. D. Sherman and Maxine M. Cox, husband and wife, appeal from tw o orders of the tax cou rt allowing them to deduct only one half of the rent paid by Mr. Cox for his law practice in 1987 and refusing to award th e Coxes the ir attorneys' fees and costs in this proceeding. Mr. Cox pai d rent to himself and Mrs. Cox, as they owned as t enants by the entirety the property in which Mr. Cox operated his law pract ice. 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 no t substantially justifi ed, 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


## -2- Mr. C ox practices law as a sole proprietorship. The Coxes ha d purchased a building in 1980, and held title to that building as tenants bythe 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 hi s 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 an d reported that same amount as rental income. The Commissioner refused to allow the deduction for rent and assessed a tax deficiency against th e Coxes. The Coxes petitioned the United States Tax Court f or 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 th e rent pai d as an expense of Mr. Cox's law practice and as rental incom e 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, concludi ng that the Coxes were not entitled to

2 their attorneys' fees and costs because the Commissioner's initial denial of the rent deductionwas substantially justified. The Coxes appeal from both decisions of the tax court.

## -3- 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 i t involves only questio ns 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 cour t below. See Salve Reg ina College v. Russell , 499 U.S. 225, 231-33 (1991).

A.

Se ction 162(a)(3) of the Internal Revenue Code allows Mr. Cox t o deduct rents paid for his law practice as long as he does not have title to or equ ity in the rented property. The Coxes contend that they ca n deduct all of the ren t 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 marit al community owns all property that they own as tenants by th e entirety. The Coxes argue that this marital community is separate fro m them, and that therefore neither Mrs. Cox nor Mr. Cox has title to o r equity in any property which they own as tenants by the entirety. We reject the Coxes' argument that the building was titled to th e marital community rather than to them. We recognize that decisions by som e 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

## -4-

Cir. 1951), has state d that the estate by the entirety "is built upon the fic tion of the law that a husband and wife are one and only one lega l entity ." Id. at 329. We must follow, however, the Missouri Suprem e 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 Virgi nia 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 Mi ssouri and at common law an estate by the entiret y possesses like characteristics. Unities of interest, time , title and possession exist in the husband and wife. Eac h spouse is seized of the whole or entirety and not a share , moi etyor divisible part. Thus, neither spouse owns a n undi vided half interest in entirety property; the whol e entirety estate is vested and held in each spouse a nd the whole continues in the survivor. Id. (citations omitted). This recent statement of the Missouri Suprem e Court makes clear that each spouse is seized of the whole or entirety, and neith er owns an undivided half interest in the entirety property. Th e whole entirety estate is vested and held in each spouse, and the whol e continues in the survivor. Ronollo makes clear that the ownership interes t is in the spouses, and not in a separate entity. The only conclusion that can be reached from Ronollo is that both Mr. andMrs. Cox had title to the building in question, and not a fictional but separate entity, as the Coxe s argue. The tax c ourt did not base its decision on the principles we hav e discussed above, but rather on the principle that Mr. Cox had equity in th e 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, 172-7 4 (Mo. Ct. App. 1972). These interests give Mr. Cox equity in the building that he rented for his law practice. As sectio n 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 substa ntial justification of the Commissioner's position, the Commissioner concedes that the C oxes have met all other requirements under section 7430 for an award of attorneys' fees and costs. -5- to be deducted when Mr. Cox has no equity in the rented property, we rejec t the Coxes' argument t hat 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 sh ould still be allowed to deduct all of the rent paid because Mr. Cox's law practice rented the space in the building and the la w 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 la w 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 pos ition taken by the Commissioner in the tax court was not substantially justified. The Coxes may collect their attorneys' fees and costs if th e Commissioner's position in the tax co urt was not substantially justified. 4 26 U.S .C. § 7430(c)(4)(A) (1994). The Commissioner's position wa s substantially justified if it had a reasonable b asis in law and fact. See Barton v. United States , 988 F.2d 58, 59 (8th Cir. 1993). We review the taxcourt's decision to deny the Coxes an award of their attorneys' fees

## -6-

and cos ts for an abuse of discretion. See Kenagy v. United States , 94 2 F.2d 459, 463 (8th Cir. 1991).

The Co mmissioner argued in the tax court that the Coxes were no t 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 be cause 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 h e rented. Section 162(a)(3) states that a taxpaye r can only deduct rent for property "in which he has no equity." (Emphasis added). The plai n langua ge of section 162(a)(3) provides a reasonable basis for th e Commissioner's position even though that position did not prevail in the tax court. The tax c ourt 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 res pects.
A true copy.

Attest:
CLERK, U. S. COURT OF APPEAL S, EIGHTH CIRCUIT.