T.C. M em o . 2 0 2 1 -4 5

UNITED STATES TAX COURT

PLENTYW O OD DRUG, INC., ET AL., 1 Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo s . 1 7 7 5 3 -1 6 , 1 7 75 4 -1 6 , Fi l edAp ri l 2 6 , 2 0 2 1
. 1 77 5 5 -1 6
.

W . Sco t t Green , fo r p et i t i o n ers . Ti m o t h y M . Peel , fo r res p o n d en t.

M EM ORANDUM FINDINGS OF FACT AND OPINION
HOLM ES, J u d g e: Pl en t ywo o dDru g , In c., i s a M o n tan a co rp o rat i o n th at
o p erat es th e o n l y p h arm acy i n Pl en t ywo o d , M o n tan a. Th e p h arm acy ren t s s p ace

1 W e co n s o l i d at edtwo cas es wi t h th i s o n e: Ro b ertan d M ari l yn M an n , d o ck etNo . 1 77 5 4 -1 6 ; an dM arv i n an d Kat h ryn Eb erl i n g, d o ck etNo . 1 7 7 5 5 -1 6
. Served 04/26/21- 2
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[* 2 ] i n a b u i ld i n g t h at h as fo u r o wn ers , wh o are al s o i t s fo u r s h areh o l d ers . Th e Co m m i s s i o n er s ay s th atth e co rp o rat i o n h as b een p ay i n g i t s s h areh o l ders t o o h i g h
a ren t , wh i ch wo u ldm ak e s o m e o f t h atren ta n o n d edu ct i b l e d i v i d en d . Th e
s h areh o ld ers d is ag ree. W e m u s td eci d e wh ata fai r m ark etren tfo r t h e b u i l d i n g i s .

FINDINGS OF FACT A. Back g ro u n d Pl en tywo o di s a t o wn o f 1 ,7 0 0 p eo p l e i n n o rt h eas tM o n t an a. Lo cal l eg en d h as i tth atth e n earb y Pl en t ywo o dCreekan dth e t o wn o f Pl en t ywo o dg etth ei r
n am e fro m

a s earch fo r fi rewo o d . Du t ch Hen ry wh o, t ho u gh n o t o ri o us i n M o n t an a h i s t o ry as a s k i l ledh o rs e t h ief, was rep o rt ed ly an o t h erwi s e p l eas an t m an an da t al en ted co wb o y , am

us edh i m s el f o ne d ay

b y wat ch i n g a ch u ckwag o n co o k
s t ru g g l e t o s t arta fi re wi t h d am p b u ffal o ch ip s . He fi n al l y t o o k p i t y o n th e m an
an d t o ldh i m

t o h ik e two m il es up t h e creek wh ere h e co ul dfi n d“pl en t y wo o d .” 2 Th e fi rs t b u s i n es s was o p en edi n th e t o wn i n 1 90 0 , an da p o s t o ffi ce fo l l o wedi n 1 9 0 2 . A b ran ch l i n e o f t h e Great No rt h ern arri v eda few y ears l at er, an d Pl en t ywo o di n co rp o rat ed i n 1 9 1 2
.

2 See Th e Ou t l aw Du tch Hen ry , Th e M o n t an a Pi o neer (J u ly 2 01 0 ), h t tp s : // m o n t an ap i o n eer.co m / t h e-o u t law-du t ch -h en ry

/(l as t v i si t edFeb . 2 4 , 2 0 2 1 ).- 3
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[* 3 ] It w as th e ex pect at io n o f earl y s et tl ers i n th e s t at e t h at“ rai n fo l l o w s th e p l o w.” Th o s e h o m es t ead ers were o ft en d i s ap p o i n t edi n th ei r h op e, b u ti twas d efi n i t el y th e cas e i n Pl en t ywo o dth atdru gg i s ts p reced edi n co rp o rat i on . Pl en t ywo o dDru g o p en edi n 1 9 1 0 an dtwo y ears l at er b ecam e Pl en t ywo o dDru g , In c. Iti s s t i l l , m o re t han a cen tu ry l at er, a fro n t i er p h arm acy . 3 Its erv es p eo p l e i n fo u r co u nt i es th ats p an 7 ,2 0 0 s qu are m i l es , wh ere t h ere are t o th i s d ay o nl y ab o u t2 p eo pl e p er s qu are m i l e. (W as h i n g t o n , D.C., h as m o re th an1 1 ,5 0 0 p eo p le p er
s qu are m i l e.) Pl en t ywo o dDru g i s n o wo wn ed b y Ro bert M an n , h i s wi fe M ari l yn M an n , an d t h e M an n s’ d au g h t er an d s o n -i n -l aw Kat h ry n an dM arv in Eb erl i n g . Th e Eb erl i n g s each o wn 4 9 .4 2 % o f t h e co rp o rat i o n’ s s t o ck , wh i l e th e M an n s each
o wn 0 .5 8 %. Pl en tywo o dDru g h as a s i n g l e s t ore o n M ai n St reet n ear t h e cen t er o f t o wn . It s b u i ld i n g h as 8 ,1 25 s qu are feet o f ret ai l s p ace o n th e m ai n l ev el an d 5 , 2 5 0
s qu are feet o f s up p o rtarea b el ow. Th e s t o re i s a fu ll -l i n e p h arm acy , b uti s al s o
s t ock edas a co n v en i en ce s t o re fo r t h e co m m u n it y --i ts el l s ev ery t h in g fro m

3 “ Fro nt ier p h arm acy ” i s a real t erm i n fed eral l aw. It ’ s a p h arm acy i n wh at t h e Pat i en tPro t ect i o n an dAffo rd ab l e Care Act d efi nes as a “ fro n t i er h eal th p ro fes s i on al s h o rt ag e area,” an area “ wi t h a p op u l at i o n d en s i t y l es s t h an 6 p ers o n s p er s qu are m i l e wi t hi n the s erv i ce area * * * an d* * * wi t h res p ect t o wh i ch th e d i s t an ce o r t i m e fo r t h e p o p u lat i o n t o acces s care i s ex ces s i v e.” Pat i en tPro t ect i o n an d Affo rd ab l e Care Act , Pub. L. No . 1 1 1 -1 4 8 , s ec. 5 0 0 2(b )(2 ), 1 24 St at . 1 1 9 at 5 9 1 (2 01 0 ).- 4
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[* 4 ] g ro ceri es t o t o y s . Itu s es th e b as em en t t o s t o re b o t h i nv en t ory an db u si n es s
reco rd s . Ro b ert M an n b o ug h tth e b u i l d i ng aro u n d1 97 8 , an di ti s n o w co -o wn ed i n fo u r eq u al s hares b y

th e M an n s an dth e Eb erl i ng s . Th atb ri n gs u s t o th e p ro b l em th ati s cen t ral t o th i s cas e. Pl en t y wo o d Dru g p ay s ren tt o th e fo u r o wn ers o f t h e b u i ld i ng . Th e t wo co up l es s etth e t erm s b y o ral ag reem en tat t h e b eg i n ni n g o f each y ear. Th ey d idn o t, fo r t he y ears ati ss u e h ere
o r fo r an y o t h er y ears , p u tthes e t erm s i n t o a fo rm al wri t ten l eas e s i g n edb y t h em s el v es o n ce i n th ei r cap aci t y as o wn ers o f t h e p h arm acy an d t h en ag ai n as
o wn ers o f t h e b ui ld i n g . Bu twe d o kn o w wh atren tth e co rp o rat i o n p ai d i n 2 0 1 1 -1 3 : Year Am o u n t

2 0 1 1 $ 8 3 ,5 8 4 2 0 1 2 1 9 2 ,0 0 0 2 0 1 3 1 9 2 ,0 0 0 Becau s e th e co up l es each o wn edh al f t h e b u i l d i n g , th ey rep o rt edth e s am e am o u n t s
o n th ei r ret u rn s :- 5
-

[* 5] 20 1 1 2 01 2 2 01 3 Ro b ertan d M ari l yn M an n $4 8 ,5 8 4 $ 9 6,0 0 0 $ 9 6,0 0 0 M arv in an d Kat h ryn Eb erl i n g 3 5 ,0 0 0 9 6 ,0 00 9 6 ,0 00 Pl en t ywo o dDru g d edu ct edthi s ren tfro m i ts co rp orat e i nco m e each y ear, wh i ch al l o wed itt o av o i dd o ub l e t ax at i o n o n th o s e am o u n t s. 4 B. Au d itan dTri al Th e Co m m is s i o n er au d i t edPl en t ywo o dDru g fo r t ax y ears 2 0 11 -1 3; h e t h en l as s o edth e M an n s an dth e Eb erl i n g s i n t o an ex pan d edau d itan dfi n al l y i s s u ed
n o t i ces o f d efi ci en cy t o b o t h th em an dth ei r co rp o rat i o n . Th e p art i es were ab l e t o
res o l ve al l th e p ro p o sed ad ju s t m en t s ex cep t fo r t h o se rel at edt o th e ren tp ai dt o the
co upl es as l es s o rs an dd edu ct edb y Pl en t ywo odDru g as l es see. Th e Co m m i s s i o n er d i s al l o wedl arg e p art s o f t h o s e d edu ct io n s o n th e g ro u n dth atth e
ren tp ai dwas g reat er t h anwh ata fai r m ark etren two ul d h av e b een fo r each y ear i n i s su e. Th e Co m

m i ss i o n er al s o rech aract eri zed t h e al l eg ed l y ex ces s ren tas

4 Co rp o rat i o n s are s ub

j ectt o d o ub l e t ax at io n b ecau s e t he Co d e t ax es i n co m e fi rs twh en th e co m

p an y recei v es i tan dth en ag ai n wh en th e co m p an y d i s tri b u t es i t t o i ts s h areh o l d ers . See Pres co t tv . Co m m i s s i o n er, 6 6 T.C. 1 2 8 , 1 3 8 (1 97 6 ), aff’ d , 5 6 1 F.2 d1 2 87 (8 t h Ci r. 1 9 77 ). Fo r a h i s t o ri cal acco u n to f t h e d ev el o p m en to f d o ub l e t ax at i o n, s ee St ev en A. Ban k , “ Is Do ubl e Tax at i on a Scap eg o atfo r Decl i n i n g Di v id en d s ? Ev id en ce Fro m Hi s t o ry ,” 5 6 Tax L. Rev . 4 6 3 , 4 7 9 -5 1 6 (2 0 0 3).- 6
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[* 6 ] co n st ru ct iv e d iv i d en ds an db ran d edal l p et i t i o n ers wi th accu racy -rel at ed p en al t i es u n d er s ect i o n 6 6 6 2 (a). 5 Bo t h co up l es an d Pl en t ywo o dDru g t i m el y fi l edp et i ti o n s . W e co n s o l i d at ed t h e cas es an dtri ed th em

i n St . Pau l . Bo t h p art i es p res en t ed ex p ert t es ti m o n y reg ard i n g th e fai r m ark etren tfo r t h e b u il d i n g . Th e Co m m i s s i o n er d i dn ot i n t ro du ce an y

ev i d en ce duri n g t ri al th ath e’ d co m pl i edwi t h s ect i o n 6 7 5 1 (b )(1 ) b efo re h e d et erm i nedthatPl en tywo o dDru g an di t s o wn ers o wedp en al t i es . See Graev v . Co m

m i s si o ner, 1 4 9 T.C. 4 8 5 , 4 9 3 n .1 4 (2 01 7 ) (ci t i n g Ch ai v . Co m m i s s i o n er, 8 5 1 F.3 d1 9 0 , 2 2 1 (2 dCi r. 2 0 1 7 ), aff’ g i n p art , rev 'g i n p artT.C. M em o. 2 0 1 5 -4 2 ), s upp l em en t i ng an do v erru l i n g i n p art1 4 7 T.C. 4 6 0 (2 0 1 6). Atth e t im e t h e p et i t i on s were fi l edPl en t ywo o dDru g ’ s p ri nci p al o ffi ce was i n Pl en t yw o o dan d b o th t h e M an n s an dth e Eb erl i n gs were M o nt an a res i d en t s . 6

5 Al l s ect i o n referen ces are t o t h e In t ern al Rev en u e Co de i n effect fo r t h e y ears ati s s u e, an dal l Ru l e referen ces are t o t h e Tax Co u rtRu l es o f Pract i ce an d Pro cedure, u n les s we s ay o t h erwi s e. 6 Pres u m p ti v e ap pel l at e v en u e wo u l dth u s l ie i n th e Ni nt h Ci rcu i t. See s ec. 7 4 8 2 (b )(1 )(A) an d(B).- 7
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[* 7 ] OPINION I. Ord i n ary

an dNeces s ary

Bu s i n es s Ex p en s es Th e ru l es we ap p l y t o day are wel l s et t l ed . Sect i o n 1 6 2 (a) al l o ws a t ax p ay er t o d eductth e “ o rd i naryan d n eces s ary ” ex p en ses h e p ay s i n carry i n g o n a t rad e o r b u s i n es s . Th e Co d e s p eci fi cal ly l i s t s th e ren t p ai db y

a b u s i nes s as o n e o f t h es e d educt i b l e ex p en s es . Sec. 1 6 2 (a)(3 ). Bu tfo r an ex pen s e l i k e ren tt o b e o rd i n ary
an d n eces s ary , i tm

us t al s o b e reas o n ab l e i n am o u n t . Un i t edSt at es v . Has k el En g ’ g & Supp l y

Co ., 3 8 0 F.2 d7 8 6 , 7 8 8 (9 t h Ci r. 1 9 67 ). An y p arto f ren tth ati s
u n reas o nab l e i s n o to rd i naryan dn eces s ary an dthu s n o td edu ct i b l e. Vel v etHo rn , In c. v . Co m

m is s io n er, 4 1 T.C.M . (CCH) 1 4 4 5, 1 4 4 9 (1 9 8 1 ). Th e Co m m is s i o n er d o es n o t o ft en qu es t io n th e reas o n ab l en es s o f a ren t ag reed t o b y

p art i es atarm ’ s l en g t h . Bu t h e d o es s o m et im es l o o kcl o s el y t o th e fai rn es s o f ren tch arg edwh enl an d l o rdan dt en an t m i g h tn o th av e an i n cen t i v e t o d ri v e a h ardb arg ai n: Wh en th ere i s a cl o s e rel at i o n s h i p b et ween l es s o r an d l es s ee an di n ad d i ti o n th ere i s n o arm ’ s l en g t h d eal i n g b et ween th em , an i n qui ry i n t o wh atco n st i tu t es reas o n ab l e ren t al i s n eces s ary t o d et erm i ne wh et h er t h e s u m

p ai di s i n ex ces s o f wh at t he l es s ee wo u l d h av e b een req u iredt o p ay

h adh e d eal tatarm ’ s l en g t h wi t h a s t ran g er. * * * Pl ace v . Co m

m is s io n er , 17 T.C. 1 9 9 , 2 0 3 (1 9 5 1), aff’ d, 1 9 9 F.2 d 3 7 3 (6 t h Ci r. 1 9 5 2 ); s ee al so SafwaySt eel Scaffo l d s Co . o f Ga. v . Un i t edSt at es , 5 90 F.2 d1 3 60 ,- 8
-

[* 8 ] 1 3 6 2 (5 t h Ci r. 1 97 9 ). Th e Co m m is s i o n er s o m et im es s u s pect s th ata
co rp o rat i o n m i g htcal l a p aym en tt o i t s s h areh ol d ers s o m eth i n g l i k e ren t , wh i ch i s d educt i b l e, wh en the eco n o m i c real i t y i s th at i t ’ s a d i s t ri b u t i on o f p ro fi t s . If h i s
s u s p i ci o n tu rn s o u tt o b e t ru e, t h e s eem i ng l y d edu ct i b l e ex p en s e i s actu al l y a
n o n d edu ct i b l e d i v i d en d. Tax l aw cal l s s u ch a d i v i d en da “ co n s t ru ct i v e” d iv i d en d b ecau s e th e co rp o rat i o n i t s el f d o es n ’ tcal l i tth ato n i t s b o ok s . See Ro ss er v . Co m m i s s i o n er, 9 9 T.C.M . (CCH) 1 0 3 5 , 1 03 9 (2 0 1 0); Ben s o n v . Co m m i s s i o n er, 8 8 T.C.M . (CCH) 5 2 0 , 5 3 4 (2 0 0 4 ). Sh areh o l d ers h av e t o i n cl u d e co n s t ru ct iv e d i v i d en d s i n th ei r t ax ab le i n co m e u nd er s ect i o n 6 1 (a)(7 ). 7 Th es e k i n d s o f cas es are d i sp u t es ab o utv al u e, an das i n an y v al uat i o n d i s p u t e we m ay u s e t es t i m o n y fro m ex pert s , s ee Harm o n Ci t y , In c. v . Un i tedSt at es , 7 3 3 F.2 d1 3 81 , 1 3 8 3 -8 4 (1 0 t h Ci r. 1 9 8 4 ), an dm ay l oo katal l th e ci rcu m st an ces o f t h e cas e an dth e en t i re h i s t o ry o f tran s act i o ns b etween th e p art i es , Safway St eel Scaffo l d s , 5 9 0 F.2 dat 1 3 6 2
.

7 Pl en t ywo o d Dru g co nt en d s th atth e Co m m i s s i o n er m ay

n o trech aract eri ze t h e ren tth ati t p ay s as qu al ifi edd i v id en d s u n d er s ect i on 4 8 2 . Bu t t h e Co m m i s s i o n er d i dn o trel y o n s ect i o n 4 8 2 t o recl as si fy th e ren t . Sect io n 4 82 cas el aw i s n o t rel ev an t h ere.- 9
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[* 9 ] II. Fai r M ark etRen t A fai r m ark etren ti s o n e atwh i ch “ t h e p ro p ert y wo u l d ch an g e h an d s b et ween a wi l l i n g b u y er an da wi l l i ng s el l er, n ei t h er b ei n g u n der an y co m pu l s i on t o b u y o r s el l an db ot h h av i n g reas o nab l e kn o wl ed g e o f rel ev an t fact s .” Sec. 1 .1 7 0 A-1 (c)(2 ), In co m e Tax Reg s . Th e p art i es i n th es e cas es qui ck l y real i zed t h atfi n d i n g co m

p arab l e p ro p ert i es i n a t o wn o f 1 , 7 0 0 p eo p le i n fro n t ier M o n t an a
an d t h enu si n g th em

t o co m e up wi t h a fai r m ark etren two u ldb e d i ffi cu lt . On e p ro b lem ri g h to u to f t h e ch u t e i s th atM on t an a i s a n o n d i scl o s u re s t at e. Th i s
m ean s t h atreal -es t at e d at a s u ch as s al es p ri ces t h atap p rai s ers can ty p i cal l y fi n di n
o t h er s t at es i s l eg al l y

co n fi d en t i al an ds i m

p l y n otav ai l ab l e. Th i s i ss u e i s
m ag n i fi edi n a t own th e s ize o f Pl en t ywo o d , wh i ch al read y h as a l i m i t edn u m

b er
o f ev en p o ten ti al l y

co m p arab l e b u i l d i n g s . W e h eard en ti rel y cred ib l e t es ti m o n y t h atM o n t an an s--p erh ap s es p eci al l y M o nt an an s i n s m al l co m m u n i t ies --d o n’ t
co m m o n ly s h are d et ai ls o f t h ei r fi n an ci al l i v es v ery read i l y wi t h s t ran g ers . Th e Co m m i s s i o n er’ s ex p ertwas p art i cu l arl y cred i b l e i n h i s s tat em en tth atwh en h e t ri ed to fi n di n fo rm at i o n i n Pl en t ywo o dh e d i dn o ti d en t i fy h i m s el f as an IRS ag en t.- 1 0 -

[* 1 0 ] Des p i t e t h i s v ery

s i gn i fi can tp ro b lem , th e p art i es were ab l e t o m ak e as
reas on ab l e a p res en t at i o n as th ey co u l d
. 8 W e’ l l d es cri b e th e co m p et i n g v al u at i o n s
an d t h eng iv e o u r o w n an al y s i s . A. Pet i t i o ners ’ Val u at i o n Pet i t i o ners i n t ro du ceda ren t -s u rv ey rep o rtp rep ared b y

Crai g M cIv o r, a real -es t at e ap p rai s er cert i fi edi n M on t an a an dNo rth Dak o t a, as wel l as t h e o wn er
o f a p ro p ert y -m an ag em en t co m p an y i n W il l is t o n , No rt h Dak o t a. M cIv o r
co n du ct ed h i s s u rv ey

b y ro un d i n g up wh atd at a h e co u l d fro m a n u m b er o f ren t al p ro p ert i es , i n b o t h Pl en t ywo o d an di n W i l l i s t o n. He al s o t es ti fi ed --an dh ere we
m ak e a s p eci fi c fi n d i n g t h ath e was cred i b l e wh en h e d i d --t hath e d i d n otkn o w th e
ren tthatPl en t ywo o d Dru g h adp ai d b efo re h e fi n i sh edh i s s u rv ey . M cIv o r al s o carefu l l y

m ad e cl ear t h ath i s an al y s is was a s u rv ey an d n o tan ap p rai s al . He s t at ed t h ato n e d o es n ’ tap p rai se ren t , o n e es t im at es ren t , an dh e
v i ewed h i s as s i g n m en tas co l l ect i n g i n fo rm at io n ab o u tren t s i n th e area an datthe t i m e i n qu es t i o n . He g o th i s d at a fro m l eas es o n m

u l t i p l e p ro p ert ies b o t h i n Pl en t ywo o dan dW i l l i s t o n . He fi rs tl oo k edata l eas e fo r t he U.S. p o s t o ffi ce i n

8 W e d o n ’ t n eed t o d eci d e wh et h er t he b u rd en o f p ro o f s h i ft edt o th e Co m m i s s i o n er o n th i s i s s u e b ecau s e we are ab l e t o d eci de t h e m at t er b y a p rep o n d eran ce o f ev id en ce. See Kn u d s en v . Co m m is s io n er, 1 3 1 T.C. 1 8 5 , 1 8 8 -8 9 (2 0 0 8) (ci t i n g Bl o d g et t v . Co m m i ss i o n er, 3 94 F.3 d 1 0 3 0 , 1 0 3 9 (8 t h Ci r. 2 0 0 5 ), aff’ g T.C. M em o . 2 0 0 3 -2 1 2 ).- 1 1 -

[* 1 1 ] Pl en t ywo o d . Th atp o s t o ffi ce i s a fed eral g o v ern m en tfaci l i t y an dth e USPS
m ak es p ub l i c i n fo rm at i o n ab o u tth e ren t i tp ay s . Th i s d at a i s o n e o f t h e few p ub l i c
s o u rces o f i n fo rm at i o n ab ou tco m m erci al ren t al p ro pert i es i n Pl en t yw o o d. It
s h o wedth at t h e USPS h ada t en -y ear l eas e b eg i n ni n g i n 1 9 9 8 fo r $ 1 8 p er s qu are fo o tth atwas ren ewedi n 2 0 0 8 fo r $ 1 5 .9 0 p er s qu are fo ot . M cIv o r al s o l o o k edat b u s i n es s es l o cat edi n W il l i s t o n , an dfo u n d i n fo rm at i o n th ere ab o u tren t s fo r an
o ffi ce b u i l d i n g an d a p harm acy . M cIv or fo un dl eas es ran g i n g fro m $ 1 5 p er s qu are fo o tt o $ 3 0 p er s qu are fo o ti n W i ll i s t o n . He al s o cred i b l y s t at edth atren t s i n W i ll i s t on were i n creas i n g du ri ng the y ears at i s su e b ecau s e t h e t o wn fo u n di t s el f i n t h e m i d d le o f t h e No rt h Dak o t a o i l b o o m o f t h e l at e 2 00 0 s an d earl y 2 0 1 0 s . He
co n cl u d ed a fai r m ark etren tfo r Pl en t yw o o dDru g wo u l db e $ 2 5 p er s quare fo o t fo r t h e m ai n fl o or. Bo t h Pl en t ywo o dDru g an dM cIv o r s t at edth atth e b ui l d i n g ’ s b as em en twas
n eces s ary fo r t he b us i n es s, i f n o tfo r i t s ret ai l o p erat i on . Th e o n l y co m p arab l e M cIv o r co u l d fi ndfo r t hi s s p ace was a fi n i sh edb as em en ti n th e d ru g s t o re b u i l d i n g i n W i ll i s t o n t h at was ren t i n g fo r $ 1 8 p er s qu are fo o t . He tho u g h tth is was t o o h ig h fo r s t orag e s p ace an dco n cl u d edth ata b et t er n um b er i n Pl en t yw o o dwo u l d b e ab o uth al f t h at , o r $ 8 -$ 9 p er s qu are fo o t .- 1 2 -

[* 1 2 ] B. Th e Co m

m is s i o n er’ s Val u at i on Th e Co m m is s i o n er’ s ex p ertwi t n es s was Ho wardBl an d i n g , a s en i o r ap p rai s er fo r t he IRS wh o m we reco g ni zedas an ex p erti n real -es t at e ap p rai s al
. Bl an di n g co rral l edh i s d at a fro m Pl en t ywo o dal o n e. He n o t ed t h atth i s was d i ffi cu l tb ecau se o f t h e s p ars e d at a av ai l ab l e, b u tthath e ch o s e t o s t i ckwi t h
co m p arab l es i n Pl en t ywo odi n s t eado f l o o k in g t o t h o s e i n W i l l i s t o n b ecau s e W i ll i s t on i s a m

u ch l arg er ci ty

wi th wh ath e t h o u g htwas a co m pl et el y d i fferen t
eco n om y . Th atl eftBl an di ng wi t h fo u r p ro p ert i es as h i s co m p arab l es --t wo g o v ern m en t -s ub s id izedm ul t i fam i l y res i d en t ial b u i l d i n g s , th e p os to ffi ce, an da 6 2 5 -s qu are-fo o tco m

m erci al ret ai l p ro p ert y . Fo r each o f t h es e, Bl an d i ng ad ju s t ed t h e ren tactu al l y

ch arg edfo r p o s i t i v e an dn eg at i ve d i fferen ces b etw een th em an d Pl en t ywo o dDru g ’ s b u i l d i n g. Here i s wh ath e co n cl u d ed :

Sub ject Ren tal 1 Ren tal 2 Ren t al 3 Ren t al 4 Ren t am o u nt N/ A $7 4 ,7 6 0 ($ 6 .1 4 / s f) $ 7 8,3 0 0

($ 1 5 .2 6/ s f) $6 ,0 0 0

($ 9 .6 0 / s f) $ 8 6 ,4 0 0

($ 6 .5 5 / s f) Leas e y ear 2 0 1 1 -1 3 2 0 1 1 -1 3 1 9 9 8 -2 0 1 8 2 0 1 3 2 0 1 7 Ag e/ Co n - d i t i o n Rem o d el /

Av g . + 1 97 6 /Av g . 1 9 9 7 /Go o d Ol d er/ Av g .- Rem o d el /

Av g .-- 1 3 -

[* 13 ] Cat eg o ry ty p e Ret ai l M u l t i
fam i l y Po s t o ffi ce Ret ai l M u l t i
fam i l y Si ze (s q . ft .) 8 ,1 25 1 2 , 1 6 8 5 , 1 3 0 62 5 1 3 ,2 0 0 Ut i l i t i es No

(As s u m .) No No No Yes St orag e Part i al

b as em en t No n e No ne Fu l l b as em en t No n e Net ad ju s t . % N/ A 0 % -4 5 % -1 6 % -7 % Ad ju s t ed $ / s f N/ A $ 6 .1 4 $ 8.3 9 $ 8 .0 6 $ 6 .0 9
He m ad e b o t h g en eral an ds p eci fi c ad ju s t m en t s . Hi s g en eral ad ju s t m en twas fo r t h e l eas e y ear o f h i s co m p arab l es . He reas o ned t h ato l d er l eas es b ecam e
s ub m ark etas t i m e wen to n, an ds o h e as s u m edth atfai r m ark etren t s wo u l d , al l
o t h er t hi n g s b ei n g equ al , ri s e each y ear b y th e av erag e Co n s u m er Pri ce In dex (CPI) i n creas e o f 1
. 4 % p er y ear. He al s o m ad e s peci fi c ad ju s t m en t s fo r each o f h i s
co m p arab l e p ro pert ies
. He n o t edth e ag e an dco n d i t i on fro m h i s o wn
o b s erv at i o n s . He ad

j u s t ed fo r d i fferen tty

p es o f p ro pert y

t o refl ectth ei r d ifferen t
co s t s --h e n o t edth atret ai l p ro p ert i es g en eral ly h av e l o wer co n s t ru ct io n co s t s th an ap art m en t s o r o ffi ces b ecau s e o f t hei r l arg e o p en areas .- 1 4 -

[* 1 4 ] He ad

ju s t edfo r t h e d i fferen ts qu are fo o t ag e o f h i s co m p arab l es . He ev en ad ju s t edth e s qu are fo o t ag e o f t h e p o sto ffi ce. Th e l eas e i n fo rm at io n fo r t he p o s t
o ffi ce, p ub li cl y

av ai l ab l e, l i s t s th e s i ze o f t h e p ro p ert y an d t h e ren tp ai d b y

th e g o v ern m en teach y ear. Th e s i ze o f t h e p o s to ffi ce i s 4 ,2 76 s quare feet an dth e ren t p ai db y th e USPS i s $ 6 8 ,0 0 0 p er y ear, o r $ 1 5 .9 0 p er s quare fo o t . Inh i s rep o rt , h o wev er, Bl an d i n g s tat edth e s i ze o f t h e p o sto ffi ce was 5 ,1 3 0 s qu are feet , wh i ch l edt o a l o wer ren t p er s qu are fo o t . Hi s ju s t i fi cat io n was t h atth e s qu are fo o t ag e o n t h e web s it e was a m eas u re o f i t s i n t eri o r s p ace. He s ai dh e n eed edt o ad j u s tth i s
n u m b er t o s qu are fo o t ag e cal cu l at edfro m th e o ut s i d e t o b e co n s is t en twi t h th e
o t h er co m

p arab les u s edi n h i s rep o rt . He al s o rep ort edthe ren t as $ 7 8 ,3 0 0 , wh i ch i s wh atth e USPS p ai d u n der i t s o ri g i n al l eas e i n 1 9 9 8 . When th e USPS ren ewed i t s l eas e i n 2 0 0 8 , th e ren tfel l t o $ 6 8 ,0 0 0 . Bl an di n g d i d n ’ tex p l ai n wh y h e u s ed $ 7 8 ,3 0 0 i n s t ead o f t h e m o re recen tren to f $ 6 8,0 0 0
. He ad ju s t edth e s qu are fo o t ag e o f Pl en t ywo o d Dru g ’ s b u i l d i n g b y en t i rel y l eav i ng o u tth e 5 ,2 5 0 s quare feet o f b as em en ts p ace. He d i d t h i s , h e s ai d , b ecau s e t h e b as em en t was h ardt o acces s , h ad a l o w cei l i n g , an dco n tai n edl arg e i t em s th at
co u ldn o tb e rem o v ed . He i n s t ead m ad e t h e p res en ce o r ab sen ce o f s to rag e
an o th er i t em

i n h i s g ro wi n g h erdo f ad ju s t m en t s fo r t he co m

p arab le p ro p ert i es .- 1 5 -

[* 1 5 ] Al l th is l edh i m

t o fi n dan av erag e ren tp er s qu are fo o to f $ 7 .1 7 . He
ro u n dedth i s t o $ 7 .2 0 fo r 2 0 1 2 . W i t h 8 ,1 2 5 s quare feet as the s i ze o f t h e d ru g s t o re b u i l d i n g (rem em

b er t h ath e o m i t t edth e m o re t h an5 ,0 0 0 s quare feet o f b as em en t
s p ace), h e co n cl ud edthata fai r ren two u ldh av e b een $ 5 8 ,5 0 0 fo r 2 0 1 2 . He th en
u s ed hi s CPI d efl at er t o d ecreas e t h i s n u m b er t o $ 57 ,6 8 1 fo r 2 0 11 , an d i n creas e i t t o $ 5 9 , 3 1 9 fo r 2 01 3
. C. An al y s i s Each p art y

h ads o m e reas o n ab l e cri t i ci s m s o f t h e o t h er p art y ’ s ex p ert . Th e Co m m i s s i o n er arg u edth atM cIv o r s ho u l dh av e fo l l owedth e Un ifo rm St an d ard s o f Pro fes s i on al Ap p rai s al Pract i ce (USPAP) an d , ev eni f h e d id n ’ t , th ath e s h o u l dat l eas t hav e m ad e ad

ju s t m en t s fo r h i s co m

p arab l e p ro p ert i es fro m

W il l i s to n t o refl ectth e d i fferen ces b et ween th atarea an dPl en t ywo o d. M cIv o r cl ai m edth ath e d i dn o t n eedt o fo l l ow USPAP b ecau s e h e p rep ared a ren t s urv ey an dn o tan ap p rai s al , b u t t h e Co m

m i ss io n er i s co rrect th ato p i n i o ns o n m ark etren t fo r
co m m erci al p ro p ert i es are co n si d ered ap p rai s al s s ub jectt o USPAP s t an d ard s . See USPAP 2 0 1 6 -2 0 1 7 ed ., Freq u en t l y As k edQu es t i on s 2 85 , Qu es t io n 1 6 1 “ M ark et Ren t Op i n i o n.” M cIv o r’ s rep o rtwo u l dn o tqu al i fy u n d er t h os e s t an dard s as an

“ ap p rai s al ”. Iti s s i m

p l e i n fo rm

an dl ack s th e u su al th i ck en ers o f an ap p rai s al
-- p ag es ab o u t t h e eco n om

y i n th e s ub

jectarea, a USPAP cert i fi cat i o n , an da- 1 6 -

[* 1 6 ] d efi n i ti o n o f m ark etv al u e, fo r ex am p l e. Bu ti td o es h av e rel ev an td at a, an d t h att o o i s h el p fu l t o a fact fi n d er. Th e Co m m is s i o n er’ s cri t i ci s m

o f M cIv o r’ s u s e o f co m

p arab l e p ro p ert i es i n W i ll i s t on al s o h as s o m e m eri t . W i l li s t o n i s o n l y ab o u ta o n e-h o u r d ri v e fro m Pl en t ywo o d , 9 b u ti th as a p o p u l at i o n m o re than ei g h tt i m es as l arg e. Ital s o h as a
s t ro n g er eco no m

y an da s t ro n g er ren t al m ark etb ecau s e o f i ts l arg er p o pu l at i o n . Pl en tywo o dDru g h ads o m e p o i n tedcri t i ci s m s o f i t s o w n ab o u tBl an d i n g ’ s
wo rk . Wh ena t o w n i s s o s m al l th atan ap p rai s er l o o k i n g fo r co m parab l es fo r ret ai l
s p ace en ds up l oo ki n g atap art m en tb ui l di n g s , p erh ap s i tm i g htb e wi ser t o g o t o t h e n ex tt o wn ov er. In th is cas e, t h att o wn i s W i l l i s t o n --an dPl en t ywo o d Dru g
s ay s Bl an d i n g co ul d h av e fo u ndco m p arab l es t here. It d en i es th atth ere are
m at eri al d i fferen ces i n th e eco n o m i es o f t h e t wo t o wn s . Pl en tywo o dDru g al s o t ak es i s s u e wi th th e ad ju s t m en t s th at Bl an d i n g m ad e. Two i n p art i cu l ar t hati tth o u g htu n ju s t i fi ab l e were a d o wn wardad ju s t m en to f 4 5 % fo r t h e Pl en t ywo o d p o sto ffi ce an d Bl an d i n g ’ s d eci s io n n o tt o co m p u t e a d o l l ar
am ou n tp er s quare fo o tfo r t h e d ru g s t o re’ s b as em en t .

9 Tes t i m o n y

ab o u t t h i s m i n o r p o i n twas u n ch al l en g ed , b u t we n ot e t h ati t d o es im pl y M o n t an an s dri v e up ward s o f 7 5 m .p .h . o n th ei r ro ad s .- 1 7 -

[* 1 7 ] W e are o f co u rs e n ot b o u n db y th e o p i n i o n o f an y

ex p ert wi t n es s an dm ay accep to r reject ex p ert t es t i m o n y i n th e ex erci se o f o u r s o u ndju d g m en t . Hel v eri n g
v . Nat ’ l Gro ceryCo ., 3 0 4 U.S. 2 8 2 , 2 9 5 (1 9 3 8 ); W i l l i am s v . Co m m i s s i o n er (In re W i ll i am s Es t at e), 2 5 6 F.2 d 2 1 7 , 2 1 9 (9 t h Ci r. 1 9 5 8 ), aff’ g T.C. M em o . 1 9 5 6 -2 3 9. W e m ay al so ch o o se wh i ch p arto f an ex p ert ’ s o p i n i o n , i f an y , we wi l l accep t . Park er v . Co m

m i s s i o n er, 8 6 T.C. 5 4 7, 5 6 2 (1 9 8 6 ). W e s t artb y

l o ok i n g atth e Co m

m i s si on er’ s cri ti ci s m

o f M cIv o r. He arg u es t h atM cIv o r’ s fai l ure t o ad h ere t o USPAP m ak es h i s rep ortu n rel iab l e an den t i t l ed t o n o wei g ht . Iti s t ru e, as th e Co m m i s s i o n er p o i n t s o u t s , th atM o n t an a an dNo rt h Dak ot a req u ire l i cen sedap p rai s ers t o fo l l o w USPAP, s ee M o n t. Co d e An n . s ec. 3 7 -5 4-4 03 (2 0 1 7 ); N.D. Cen t . Co de s ec. 4 3 -2 3
. 3 -1 8 (2 0 1 7 ), b u t s tat e l aws are n ot fed eral ru l es o f ev i den ce. Ou r Co u rth as i t s el f fo u n dth atan ex p ert ’ s v al uat i o n
o p i n i o n th atd o es n o t co m p o rtwi t h USPAP i s s t i l l ad m i s si bl e, al th o u g h i tm ay o r
m ay n o t b e h el p fu l . See Ep co , In c. v . Co m m is s i o n er, 7 7 T.C.M
. (CCH) 1 73 1 , 1 7 3 5 (1 9 9 9 ). W e h av e “ d ecl in e[d ] t o ad o p tUSPAP as th e s o l e s t an d ardfo r rel i ab i l i ty o f an ex p ertap p rai s er u n d er Ru l e 7 02 o f t h e Fed eral Ru l es o f Ev i d en ce.” W h it eh o u se Ho t el Lt d . P’ s h i p v . Co m m i s s i o ner, 1 3 1 T.C. 1 1 2 , 1 2 8 (2 0 0 8), rev ’ do n o t h er g ro u n d s , 6 1 5 F.3 d 3 2 1 (5 th Ci r. 2 0 10 ). Th atM cIv o r’ s rep o rtwas n o tan ap prai s al u n d er USPAP m ay affect th e wei g h twe g i v e h i s- 1 8 -

[* 1 8 ] t es t i m o n y

b utd o es n o tb y

i t s el f m ak e i ts o u n rel i ab l e as t o b e i n ad m is s i b l e. See i d
. W e t ak e m o re s eri o u sl y t h e p ro b l em o f u si ng co m

p arab l es fro m

W i l l i s t o n . Al t h o u g h th e p ro p ert i es M cIv o r fo u n dare v ery s i m i l ar t o Pl en t ywo o dDru g ’ s ret ai l
s p ace, we al s o fi n dth atth e d i fferen ce i n m ark etareas i s v ery g reat . W i l li s t o n h as a l arg er p o pu l at i o n t h an Pl en t ywo odan dren ts t h ere h av e b een m u ch affect edb y t h e o i l b o o m . It ’ s p o ss i b l e t h atth e b o o m al s o affect ed Pl en t yw oo d , b u tn ei t h er p art y p u t i n an y

s o l i dp ro o f o f t h at --fo r ex am p l e, ev i d en ce o f a s u rg e i n p o p u l at i o n
o r b u si n es s fo rm at i o n--i n t o th e reco rdo f t h es e cas es . W e t herefo re d o n o t accep t t h e W i l l i st o n p ro p ert i es as b ei n g reas o nab l e co m p arab l es . Bu twe al s o qu es t i on t h e co m p arab i li t y o f t h e p ro p ert ies th atthe Co m m i s s i o n er u s ed . Hi s ex p ertu s edtwo res id en t i al p ro p ert i es i n h is an al y s i s . Go v ern m en t -s ub s i d i zedm ul ti fam i l y res id en t i al h o us i n g i s l i k e a ret ai l dru g s t o re i n t h atb o t h are ren t ed . Bu tn o t i n m u ch el s e. Bl an d i n g t ri edt o d eal wi t h th is b y
m ak i n g ad

ju s t m en t s, b u twe d o n o tb el i ev e t h i s i s a rel iab l e way t o o v erco m e t h e d i fferen ces b et ween th e p ro p ert i es . He al so u s eda s m al l d on u t s h o p as a
co m p arab l e i n h i s an al y s i s . Us i n g a ret ai l s p ace i s an i m p ro v em en t o n u s i n g
res i den t ial h o u s i n g , b u tthi s p art i cu l ar s h o p i s o n l y 6 2 5 s qu are feet , a s m al l- 1 9 -

[* 1 9 ] fract i o n o f t h e s i ze o f Pl en t ywo o dDru g , an d we t herefo re fi n d t h ati ti s n o ta
reas on ab l e co m

parab l e ei t h er. Bl an d i n g al s o s h ran kth e fai r m ark etren t fo r t h e d ru g s t o re b y n o t t ak i n g i n t o
acco u n t th e 5 ,2 50 s qu are feet o f i t s u sedan d u s efu l b as em en ts p ace. W e t h erefo re d o n o t accep th is co n cl u s i o n s o n wh ata fai r m ark etren t fo r t h e d ru g s t o re wo u l d b e. W e t h i nkth atu nd er t h es e u n u s u al ci rcu m st an ces we can u s e t h e o n e p ro p ert y th at b o t h p art i es ag ree i s co m parab l e--t h e Pl en t ywo o d p o s t-o ffi ce b u i l d i n g --t o b eg i n t o fi g u re o u t a fai r m ark et ren tfo r t h e Pl en t ywo odDru g b u i l d i n g . W e fi n d i tm o re l i k el y th an n o tth ati t ’ s t h e p ro p ert y thatwo u ldm o s t
accu rat el y

rep res en t t h e fai r m ark etv al u e o f l arg e ret ai l s p ace i n Pl en tywo o d du ri n g th e y ears ati s su e. Yetev en th o u gh b o t h p art i es ag ree t h atth e p o s to ffi ce i s
co m p arab l e, t h ey

d i s ag ree ab o u tth e n u m

b er o f s qu are feet i th as . Bl an d i n g s t at ed t h atth e s i ze o f t he p o s to ffi ce was 5 ,1 3 0 s quare feet b ecau s e h e m eas u red i t s area fro m th e ex t eri o r. M cIv o r l o o k edatth e USPS web si te an d co p iedd o w n t h e 4 ,2 7 6
s qu are feet th ath e fo u nd . W e’ re n o tg o i n g t o t i n k er wi t h th e web si te’ s n u m b er. Wh en m eas u rem en t s were m ad e an daccep t edb y p art i es o p erat i n g atarm ’ s l en g t h , we m ay rel y o n th o s e fi g u res i n co m

p u t i n g a p ro p er p ri ce p er s qu are fo ot . See- 2 0 -

[* 2 0 ] Learn er v . Co m

m is s i o n er, T.C. M em o . 1 98 3 -1 2 2 , 4 5 T.C.M . (CCH) 9 2 2 , 9 2 8 (1 98 3 ). W e wi l l u s e 4 ,2 7 6 s qu are feet
. Th e p art i es al s o d i sag ree ab o u t ju s t h o wco m p arab l e t h e t wo b ui l d i n g s are. Bl an di n g i n co rp o rat eda n u m b er o f fact o rs t o ad

ju s t t h e p o s to ffi ce’ s ren t p er
s qu are fo o td o wn ward , an d we wi l l t ak e each i n tu rn . He fi rs tas s ert s t h at t h e ag e
an d co n d i t i o n o f t h e p o s to ffi ce, wh i ch was b u il ti n 1 9 9 7 an drem ai ns i n g o o d
co n di t i o n , m ak e i t2 0 % m o re ex p en s i v e t h an Pl en t ywo odDru g . Wh i l e t h e d ru g
s t ore i s qu it e o ld , i twas fu l l y rem o d el edi n 2 0 0 4 , s o we d o n o t fi n d a 2 0 % ad ju s t m en ti s ap p ro p ri at e. Nex ti s “ Cat eg o ry Ty p e.” Bl an d i n g ’ s ap p rai s al s t at es t h at“ ret ai l co n s t ru ct io n co s tt en d s t o b e l o w er due t o i t s l arg e o p en areas as
o p p o s edt o ap art m en t o r o ffi ce wh i ch h av e a h ig h er l ev el o f i nt eri o r fi n i s h .” He t h erefo re g av e Pl en t ywo o d Dru g a 2 5 % d i sco u n t as co m p ared t o th e p o s to ffi ce. M cIv o r d i s ag rees , n o t i n g th atth e p o s to ffi ce i s a “ sh el l ” wh ere t h ey “ m ov e al l t h ei r b ox es an dev ery t h i n g .” W e ag ai n fi n dBl an d i n g ’ s d i s co u n tfo r t hi s fact o r
ex ces s i v e. Th e t h i rdfact or i s s i ze, wh i ch acco u n t s fo r “ cert ai n s t an d ardfi x ed
co s t s i n n ew co n s tru ct i o n , reg ard l es s o f b u i l di n g s i ze,” wh ich m ak e s m al l er b u i l d i n g s m o re ex p en s i v e p er s qu are fo o t . Pl en tywo o d Dru g i s n earl y t wi ce as l arg e as th e p o s to ffi ce, n o t i n cl u d i n g i t s b as em en t, wh i ch we t h i n k m ak es Bl an di n g’ s 5 % ad

ju s tm en tfo r s i ze reas o n ab l e. Bu t Bl an d i n g d i d n ’ tco n si d er o n e- 2 1 -

[* 2 1 ] fact o r rel ev an tt o ren tco s t s : th e cert ai n t y t h atth e l an d l o rd wi l l b e p ai d . As M cIv o r--wh o i s h im s el f t he o wn er o f a p ro p ert y -m an ag em en tco m p an y --cred i b l y t es t i fi ed , ty

p i cal co m m erci al p ro p ert y

l eas es t o p ri v at e p art i es l as ttwo t o fi v e y ears ; m u ch s h o rt er t h anth e t en -y ear l eas e h el d b y the p o s t o ffi ce i n Pl en tywo o d
. Th e g ov ern m en tas a t en an ti s al s o far m o re l i k el y th ana p ri v at e t en an tt o p ay i t s
ren ti n fu l l an do n t i m e. Th i s wo u ldl i kel y l eada l an d l o rdt o accep ta l o wer ren t fo r a p ro p ert y . Onth es e fact s , we fi n dth atth es e reas on ab l e ad ju s t m en t s o ffs et each o t h er. W e wi l l u se t he $ 1 5 .9 0 p er s qu are fo o t ren tp ai d b y the USPS, wi t h o u t
an y d i s co u n to r p rem i u m , as th e fai r m ark etren tfo r t h e m ai n l ev el o f Pl en t ywo o d Dru g. M u l t i p l i ed b y 8 ,1 2 5 s qu are feet , th at m ean s $ 1 2 9 ,1 8 7.5 0. Th i s l eav es the 5 ,2 5 0 s quare feet o f b as em en t s t o rag e area. Th e Co m m i s s i o n er’ s ex p ertd id n o ti n cl ud e t h i s 5 ,2 5 0 s quare feet wh en co m p u t i n g h i s
ren t al v al u e; h e s ai di n st eadth ati ti n creas edthe ren t al v al u e o f t h e m ai n fl o o r b y 5 % p er s qu are fo o tas co m p ared t o s i m i l ar p ro p ert i es wi t h n o s t o rag e s p ace. Th at eq u at es t o ab o u t $ 1 .2 3 ex t ra ren tp er s qu are fo oto f b as em en t . Pl en t ywo o d Dru g ’ s
ex p ertes t i m at edth at i two u l dh av e a v al u e o f $ 8 t o $ 9 p er s qu are fo o t. He cal cu l at edth i s v al u e ats o m ewh atl es s th anh al f t h e v al u e o f a co m p arab l e fi n i s h ed b as em en ti n W i ll i st o n, wh i ch ren t edfo r $ 18 p er s qu are fo o t . W e d o fi n d i t m u ch
m o re l i k el y

th an n o tth ats o m e v al u e s h o ul db e at t ach ed t o th i s 5 ,2 50 s qu are feet o f- 2 2 -

[* 2 2 ] s t o rag e s p ace, as i t w as u s edb y Pl en t ywo o d Dru g fo r h ou s in g b o t h i n v en t o ry an di t s reco rd s. See, e.g ., Dup l i cat i n g Sup p l y Co . v . Co m

m i s s io n er, 6 6 T.C.M . (CCH) 8 5 3 , 8 5 5 (1 9 9 3 ) (fi n d i n g v al u e o f s t o rag e s p ace s ep arat e fro m ret ai l
s p ace). W e al s o fi n dth ata fai r ren tfo r t hi s s p ace i s l o wer t h an th e ret ai l s p ace ab o ve i t . See i d
. (“ Cl earl y , th e ret ai l an do ffi ce s p ace h as m o re ren tal v al u e t h an t h e s t o rag e s p ace.”) W hi le ag ai n ack n owl ed g i ng h o w th i n t he ev i d en ce i s , we d o fi ndth e ren t al v al ue fo r t h e b as em en t s to rag e area es t i m at edb y Pl en t y wo o d Dru g’ s ex p ertt o b e reas o n ab l e. At$ 8 p er s quare fo o t , a fai r ren tfo r t he b as em en t
wo u l db e $ 4 2 , 00 0
. Th i s p u t s th e t o t al fai r m ark etren t fo r th e Pl en tywo o dDru g p ro pert y at $ 1 7 1 ,1 8 7 .5 0 . W e wi ll n o t ad ju s tth i s fi g u re y ear b y

y ear t o refl ectch an ges i n th e CPI. W e kn ow t h atth e Po st al Serv i ce wo n a redu ct i o n i n ren ti n 2 0 0 8 , an dth i s
s u g g es t s t o u s th atth e m ark etfl u ctu at i o n s s p eci fi c t o real es t at e i n Pl en t ywo o d
wo u l do v erwh el m

th e effect o f t h e l o w b u t s tead y i n fl at i o n i n p ri ces o f co n s u m er g o o d s an ds erv i ces t h ro u g h o utth e en t i re n at i o n al eco n om y . III. Pen al t i es Th atl eav es o n l y

th e i s s ue o f p en al t i es . Th e Co m m i s si o n er as s ert edth at Pl en t ywo o dDru g , th e M an ns , an dth e Eb erl i n g s o we accu racy -rel at edp en al t i es
u n d er s ect i o n 6 6 6 2 (a), wh i ch i m p o s es a 2 0 % p en al t y

o n t he p o rt i o n o f an- 2 3 -

[* 2 3 ] u n d erp aym en to f t ax thati s at tri b u tab l e t o an y o f t h e v ari o u s cau s es l i s t edi n
s ect i on 6 6 6 2 (b ). Th e Co m m i s si o n er al leg es th atth e fi rs tcau s e o n th i s l i s t -- n eg li g en ce o r d i sreg ardo f ru les o r reg u l at i o ns , s ec. 6 6 6 2 (b )(1 )--ap p li es t o Pl en t ywo o dDru g , th e M an ns , an dth e Eb erl i n g s , b u to n l y Pl en t ywo odDru g ’ s
u n d erp aym en t i s al s o du e t o a s ub s t an t i al u n ders t at em en to f i ts i n co m e t ax du e,
s ec. 6 6 62 (b )(2 ). Anu n d ers t at em en to f a co rp o rat i o n ’ s i n co m e t ax i s s ub st an t i al i f i t ex ceed s th e l es s er o f $ 1 0 m i ll i o n o r “ 1 0 p ercen to f t h e t ax req u i red t o b e s h o w n
o n th e ret u rn * * * (o r, i f g reat er, $ 1 0 ,0 00 ).” Sec. 6 6 62 (d )(1 )(B). W e m u s tal s o co n s i d er wh et h er t h e Co m m i s s i o ner co m

p l i edwi t h s ect i o n 6 7 5 1 . Th ats ect i o n s tat es th atn o p en al ty i s al l o wedu n l es s t he “ i n i t i al d et erm i n at i o n o f s u ch as s es s m en ti s p ers o nal l y ap p ro v ed(i n wri t i n g ) b y t he i m m ed i at e s up erv i s o r o f t he i n di v i du al m ak i n g s u ch d et erm i n at i o n.” Sec. 6 7 5 1 (b )(1 ). Th is wri t t en ap p ro v al m u s tb e o b t ai n edn o l at er t h an th e d at e t h e
n o t i ce o f d efi ci en cy

i s i ss uedo r t h e d at e t h e Co m m is s i o n er fi l es an an s wer o r
am en d edan s w er i n wh i ch h e as s ert s th e p en al t y . Ch ai , 8 5 1 F.3 dat2 2 1 ; s ee al s o Graev , 1 4 9 T.C. at4 93 . Th ere i s an ex cep t i on t o t he ap p ro val req u i rem en tfo r p en al t i es “ au t o m at i cal l y

cal cu l at edth ro u g h el ect ro n i c m ean s .” Sec. 6 7 5 1 (b )(2 )(B).- 2 4 -

[* 2 4 ] No p art y

p ro duced an y

ev i d en ce t h atth e Co m

m i ss i o ner ei t h er d i do r d i d n ’ t
co m p l y wi t h th e ap p ro v al req u i rem en t s o f s ect io n 6 7 5 1. Sect i o n 7 4 9 1 (c) p l aces t h e b u rd en o f p ro du ct i o n o n th e Co m m i s s io n er wi t h res p ectt o l i ab i l i t y fo r an y i n di vi d u a l fo r an y p en al ty . Th is m ean s t h e Co m m i s s io n er b ears th e b u rd eno f p ro duct i o n wi th res pect t o th e M an n s ’ an dth e Eb erl i ng s ’ cas es . Th e ab s en ce o f
an y ev i d en ce m ean s t h e M an n s an d t h e Eb erl i n g s h av e t h ro wn o ff t h e p en al t i es
as s ert ed ag ai n s tth em , b utwh atab o u tPl en t ywo o dDru g ? It ’ s a co rp o rat i o n , s o i t b ears th e b urd en o f p ro du ct i o n fo r i t s o w n cas e. NT, In c. v . Co m m i s s io n er, 1 2 6 T.C. 1 9 1 , 1 9 5 (2 0 0 6 ). W h en the b urd en l i es o n t h e Co m m is s i o n er, we h av e h el d t h ath e m u s ti n t ro duce ev i d en ce t h ath e co m p l i edwi t h s ect i o n 6 7 51 . See, e.g ., Dynam o Ho l d in g s Lt d
. P’ s h i p v . Co m m i ss i on er, 1 5 0 T.C. 2 2 4 , 2 2 7 (2 01 8 ); Hi g b ee
v . Co m m i s s i o n er, 1 1 6 T.C. 4 38 , 4 4 6 (2 0 0 1). Wh en th e b u rd enl i es o n an es t at e o r
co rp o rat i o n o r s o m e o t h er n o n i n d i vi du al , i tm us ts h o w th atth e Co m

m i s s i o n er d id
n o t g ets up erv i s ory ap p ro v al . Th i s i s a s o m ewh at u n us u al b urd en --t he b u rd en o f p ro duci n g ev i d en ce t h atn o ev i d en ce ex i s t s o f t h e Co m m i s s i o n er’ s co m

p l i an ce wi t h h is o b l i g at i o n t o s h o w s up erv i s o ry ap p ro v al o f p en al t i es . Itcan b e m et , fo r
ex am p l e, b y as k i n g fo r th e p en al t y -ap p ro v al fo rm thro u g h a FOIA req u es to r an i n fo rm al d i s co v ery

req u es t an dth en s h o w i n g t h atth ere was n ’ t o n e. Pl en t y wo o d- 2 5 -

[* 2 5 ] Dru g d i d n ’ t d o thath ere, s o i tcan n ott ak e s h el t er fro m th e p en al t i es u n d er
s ect i on 6 7 5 1
. 1 0 Th atal s o l eav es Pl en t ywo o dDru g t o arg u e i t s way o u to f a p en al t y o n th e
m eri t s , wh i ch i t can d o i n a co up l e way s . Th e fi rs tb eg i n s wi th o u r fi n d i n g th at t h e fai r ren tfo r al l th ree y ears was $ 1 7 1 ,1 8 7 .5 0 . Pl en t ywo o dDru g p ai do n l y $ 8 3 ,5 84 i n 2 0 1 1, m ean i n g th ere was n o ex ces si v e ren tth atl edt o an u n d erp aym en to f t ax t h aty ear. No p en al t y

ap p l i es . In2 0 1 2 an d2 0 1 3 Pl en t ywo o dDru g d i do verp ay i t s
ren tb y ab o u t$ 2 0 ,0 0 0 an dwro n g fu l l y cl ai m edd educt i on s o n t h ato v erp aym en t . Bu t t h e co n s eq u en tu nd erp aym en to f t ax du e i s al m o s tcert ai nl y l es s t han $ 1 0 ,0 0 0 , ev en w i t h t h e s ev eral m

u ch s m al l er ad

ju s t m en t s th atPl en t ywo o dco nced ed
. On l y th e p en al ty

fo r n eg l i g en ce rem ai n s . Tax pay ers , b o t h co rp orat e an d i n d i v i du al , can b u ckag ai n s tth e Co m m i s s i o ner’ s effo rt t o s ad d l e th em wi th b o t h
n eg li g en ce an ds ub s t an t i al -u n d ers t at em en t p en al t i es i f t h ey can s h ow t h ei r
u n d erp aym en t s were d u e t o reas o nab l e cau s e an dth ey act edi n g o o dfai t h. Sec. 6 6 6 4 (c)(1 ). W e s tart o u tb y n o t i n g ju s t h o w d i ffi cu l ti twas fo r t h e p art i es ’ p ro fes s i on al ap p rai s ers t o cal cu l at e a fai r ren t t h em s el ves . An dwh i le t h e m et h o d s

1 0 Th e Co m

m i s s i o n er arg u es th atth e p en al t y fo r s ub s t an ti al u n d ers t at em en t o f t ax ats ect i o n 6 6 6 2 (b )(2 ) fal ls wi t h i n th e au t o m at i c-co m p u t at io n ex cep ti o n t o s ect i on 6 7 5 1 . Becau s e Pl en tywo o dDru g i s the o n ly p art y al l eg edt o h av e u n d ers t at edi t s i n co m e t ax an d fai l edt o carryi t s b u rd en o f p ro duct i on fo r th e s ect i o n 6 7 5 1 i ss u e, t h e Co m

m i s si o ner’ s arg u m en ti s m o o t an dwe wi ll n o tad d res s i t .- 2 6 -

[* 2 6 ] th e Eb erl i ng s an d t h e M an n s u s edt o es t i m at e wh atth e ren ts h o u l db e were i n fo rm al --t h ey

cal l edup s o m e s h o p s i n Pl en t ywo o dan dW i l l i s t o n an dl o o k ed
o n l i n e fo r wh atl i t t l e i n fo rm at i o n was av ai l ab l e t h ere--t h ey weren ’ tal l t h at d i fferen t fro m

wh atth e ap p rai s ers u s edt o co ll ectth ei r d at a. Th e ren tth ey s et t l ed
o n was n ’ tfar fro m

wh atwe’ v e fo u n di s fai r, ei th er. W e t h erefo re fi n dth atth ey act edo n b eh al f o f t h ei r co rp o rat i o n i n a reas o n ab l e way an dreach eda reas o n ab l e
res u l t i n g o o dfai t h . See Es t at e o f Th o m p s o n v . Co m

m i s s i o n er, 8 8 T.C.M
. (CCH) 4 8 , 6 4 -6 5 (2 00 4 ) (s to ckv al u at io n i n g o o dfai t h wh ere n o co m p arab l e co m

p an i es
an d “ d i ffi cu l tju d g m en tcal l s ” l edt ax p ay er t o v al u at i o n cl os er t o Co u rt ’ s th an Co m m i s s i o n er’ s ), v acat edan d rem an d ed , 4 9 9 F.3 d1 2 9 (2 dCi r. 2 0 0 7). No p en al ti es ap p ly , an d
Deci s i o n s wi l l b e en t ered u n der Ru l e 1 5 5
.