T .C. Mem o. 2021-127

UNITED STATES TAX COURT

LOUIS P. SMALDINO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 5437-18. Filed November 10, 2021.

Lavonne D. Lawson and Charles W. Morris, for petitioner. Jenny R. Casey, Em e rald G. Sm ith, and Kim -Khanh Nguyen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION THORNTON, Judge: Petitioner owned and operated num erous rental properties in southern California. He placed 10 of these properties in Sm aldino Investm e nts, LLC (LLC), which he owned through a revocable trust. In 2013 he transferred about 8% of the LLC class B m em ber interests to the Sm aldino 2012 Dynasty Trust (Dynasty Trust), an irrevocable trust that he had created a few

Served 11/10/21-2-

[*2] m onths earlier for the benefit of his children and grandchildren. Around the

sam e tim e, petitioner purportedly transferred about 41% of the LLC class B

m em ber interests to his wife, Agustina Sm aldino, who purportedly retransferred them to the Dynasty Trust the next day. On petitioner’s 2013 gift tax return, he reported as a taxable gift only the approxim ately 8% of the LLC class B m em bership interests he had transferred directly to the Dynasty Trust. Respondent determ ined that petitioner had m ade a taxable gift to the Dynasty Trust of 49% of the class B m em bership interests, including the approxim ately 41% interest that assertedly had passed from petitioner to the Dynasty Trust indirectly through Mrs. Sm aldino. After revaluing the LLC interests, respondent determ ined that petitioner had a $1,154,000 gift tax deficiency for 2013. The issues for decision are: (1) the proper characterization for gift tax purposes of petitioner’s purported transfer of LLC class B m e m ber interests to Mrs. Sm a ldino followed by her purported retransfer of these sam e interests to the Dynasty Trust and (2) the fair m arket value of the LLC class B m em ber interests that petitioner transferred, directly or indirectly, to the Dynasty Trust.-3-

[*3] FINDINGS OF FACT 1 The parties have stipulated som e facts. We incorporate by this reference the parties’ stipulation of facts and the attached exhibits. When he tim ely petitioned this Court, petitioner resided in California. Petitioner’s Background and Estate Planning After practicing for a tim e as a certified public accountant and serving as the treasurer of a com

puter com

pany, petitioner purchased his father’s liquor store business, which he then operated for over 35 years. He eventually expanded his business holdings to include apartm ent buildings, which he m anaged as a sole proprietor. By 2008 he had sold all his liquor stores, and his only rem aining business was owning and m anaging what ultim ately becam e an $80 m illion portfolio of real estate. Petitioner has been m arried to Mrs. Sm aldino since 2006. She has a

m aster’s degree in econom ics and since about 1995 has worked alm ost continuously in petitioner’s businesses--first in his liquor-store business and, after a three-year interval, in his property-m anagem ent business.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect at all relevant tim es, and all Rule references are to the Tax Court Rules of Practice and Procedure.-4-

[*4] Petitioner has 6 children from a prior m arriage and 10 grandchildren. Two of the children work in petitioner’s property-m anagem ent business. In 2012, when he was 69, a health scare m otivated petitioner to get his estate planning in order. He and Mrs. Sm aldino agreed that she should have security in her own assets; they did not want her assets and his children’s assets com m ingled as part of the estate plan. Petitioner wanted to pass his business to his children and grandchildren and to give m any of his rem aining assets to Mrs. Sm a ldino. Sim ilarly, she wanted petitioner’s progeny to have the property-m anagem e nt business. Petitioner and Mrs. Sm a ldino developed a plan to provide his progen y a bundle of assets comprising certain properties in the property-m anagem ent

com pany and to provide her a separate group of assets that would far exceed any share that the children received. As explained below, this plan involved placing certain of petitioner’s business properties in the LLC and then transferring interests in the LLC to a trust for the benefit of his children and grandchildren. Petitioner resolved to transfer up to 50% of the LLC interests, the m aximum he could transfer without triggering reassessm ent of property taxes on the LLC’s assets.-5-

[*5] Sm a ldino Investm ents, LLC Petitioner created the LLC in 2003, but it rem ained inactive until late 2012, when he transferred 10 of his real estate holdings to it. As trustee of the Sm aldino Fam ily Trust (a revocable trust that petitioner had created on the sam e day in 2003 as the LLC), he held all the ownership interests in the LLC and served as its

m anager. The LLC’s operating agreem e nt distinguishes a “Mem ber” froman “Assignee”. A “Mem

ber” has both an econom ic interest in the LLC and the right to participate in the LLC’s affairs. By contrast, the operating agreem e nt defines an “Assignee” as a person who is assigned all or part of a m e m ber’s econom ic interest but who lacks other rights accorded to m em bers, such as the right to vote or participate in m anagem ent or the right to obtain inform ation about the LLC’s business and affairs. The operating agreem ent expressly states: “‘Member’ as defined herein does not include an Assignee.” It further states:

11.5 Transfer and Assignm ent of Mem bership Interests. No Mem ber shall be entitled to transfer, assign, convey, sell, encum ber or in any way alienate all or any part of such Member’s Mem bership Interest, and no Assignee shall be adm itted as a substituted Member, except as expressly provided for in Section 11.5(c) herein. * * * * * * * (b) Substitution of Mem bers. An Assignee of a Mem bership Interest shall have the right to becom e a substituted Member only if-6-

(i) the requirem ents of this Section 11.5 are m et, (ii) such Assignee executes an instrum ent satisfactory to the Board accepting and adopting the term s and provisions of this Operating Agreem ent, and (iii) such person pays any reasonable expenses in connection with such substituted Member’s adm ission as a new Mem ber. The adm ission of an Assignee as a substituted Mem ber shall not result in the release of the Mem

ber who assigned the Membership Interest fromany liability that such Member m ay have to the Com pany. (c) Perm itted Transfers. Subject to the provisions of Subparagraph 11.5(f)(iii), the Mem bership Interest of any Mem ber m ay be transferred, and the Assignee thereof shall be adm itted as a substituted Member, without the prior Written consent of the Board to: (i) any other Member or (ii) a revocable or irrevocable trust for the benefit of the Mem

ber or the Mem

ber’s children, grandchildren or other fam ily m em

bers who are descendents [sic] of Louis P. Sm aldino (or, where the Mem

ber is a trust, a revocable or irrevocable trust for the benefit of any beneficiary of the Member’s trust who is otherwise a perm itted transferee). * * * * * * * (f) No Effect to Transfers in Violation of Agreem ent. Upon any transfer of a Mem

bership Interest in violation of this Section 11.5: (i) The transferee shall have no right to vote or participate in the m anagem ent of the business, property, and affairs of the Company, or to exercise any rights of or to becom e a Mem

ber; and (ii) Such transferee shall be an Assignee and thereafter shall only receive the allocation of the Com pany’s Net Incom e and Net Loss and shall receive those Distributions to which the transferor of such Econom ic Interest would otherwise be entitled under this Operating Agreem ent. [*6]-7-

[*7] The LLC’s operating agreem e nt provides for class A voting units and class B nonvoting units, as “identified as such on Exhibit ‘A’”. Initially, exhibit A of the operating agreem ent identified 40 class A voting units and 960 class B nonvoting units, all held by petitioner as trustee of the Sm a ldino Fam ily Trust. On April 1, 2013, exhibit A was am ended to restate the m em bership interests as 10 class A voting units and 990 class B nonvoting units, all held by petitioner as trustee of the Sm aldino Fam ily Trust. This am endm e nt indicates that petitioner executed it on April 1, 2013. Sm aldino 2012 Dynasty Trust Petitioner created the Dynasty Trust to provide for his heirs. His son Allen Douglass Sm aldino is the trustee. The trust’s beneficiaries are five of petitioner’s children and their children. Mrs. Sm aldino is not a beneficiary of the trust. The trust agreem ent indicates that petitioner and Allen Douglass Sm a ldino executed it on Decem

ber 21, 2012. Transfers of LLC Interests The following docum ents were executed as part of petitioner’s fam ily estate plan. 1. Petitioner, as trustee of the Sm a ldino Fam ily Trust, executed a docum ent captioned “ASSIGNMENT SEPARATE FROM CERTIFICATE”, which states-8-

[*8] that he “assigns and transfers” to Mrs. Sm aldino a “sufficient num ber” of nonvoting units in the LLC “so that the fair m arket value of such nonvoting units as determ ined for federal gift tax purposes shall be Five Million Two Hundred Forty Nine Thousand One Hundred Eighteen and 42/100ths Dollars ($5,249,118.42)”. Petitioner and Mrs. Sm aldino decided upon this am ount on the basis of her then-available Federal estate and gift tax exemption. 2 This docum ent, which is signed by both petitioner and Mrs. Sm aldino, states that it is “Effective: April 14, 2013” but does not indicate the date it was executed. 2. Mrs. Sm a ldino executed an “ASSIGNMENT SEPARATE FROM CERTIFICATE”, which states that she “assigns and transfers” to Allen Douglass Sm aldino, as trustee of the Dynasty Trust, nonvoting shares of the LLC that are described identically as in the certificate whereby petitioner had purportedly assigned these sam e LLC interests to her. This docum ent, which is signed by both Mrs. Sm a ldino and Allen Douglass Sm aldino, states that it is “Effective: April 15, 2013” but does not indicate the date it was executed. 3. Petitioner, as trustee of the Sm a ldino Fam ily Trust, executed a docum ent captioned “ASSIGNMENT SEPARATE FROM CERTIFICATE”, which states that he “assigns and transfers” to Allen Douglass Sm aldino, as trustee of the

2 For tax year 2013 the basic exclusion am ount was $5,250,000. Sec. 2010(c)(3); Rev. Proc. 2013-15, sec. 2.13, 2013-5 I.R.B. 444, 448.-9-

[*9] Dynasty Trust, a “sufficient num ber” of nonvoting units in the LLC “so that the fair m arket value of such nonvoting units as determ ined for federal gift tax purposes shall be One Million Thirty One Thousand Eight Hundred Eighty One and 58/100ths Dollars ($1,031,881.58).” This docum ent, which is signed by both petitioner and Allen Douglass Sm a ldino, states that it is “Effective: April 15, 2013” but does not indicate the date it was executed. When the dust settled, the Dynasty Trust wound up with 49% of the LLC class B m em

ber interests that previously had belonged to petitioner. 3 Petitioner hired Jam es A. Biedenbender to value a 49% ownership interest in the LLC class B units. In a report dated August 22, 2013, Mr. Biedenbender opined that “a 49% Class B units nonvoting m em ber’s interest in the Company [the LLC] as [of] April 15, 2013 for certain tax reporting requirem ents on Form709, US Gift Tax Return” was $6,281,000. In exchange for the use of Mrs. Sm aldino’s available Federal estate and gift tax exem ption, on June 10, 2013, petitioner am ended the Sm aldino Fam ily Trust to provide her additional m oneys and properties. The LLC’s operating agreem ent

3 More precisely, the Dynasty Trust ended up with 49% of the aggregated 1,000 class A voting units and class B nonvoting units, or 49.49% of just the class B nonvoting units. In this proceeding, perhaps rounding down 49.49% to 49%, the parties and their experts uniform ly refer to the transfers in question as ultim ately resulting in the Dynasty Trust’s holding a 49% class B m em ber interest. For sim plicity, we refer to the subject interest in the sam e m anner.-10-

[*10] w as never am ended to account for any transfer of units to Mrs. Sm aldino. However, exhibit A of the operating agreem ent was am ended “as of April 15, 2013” to show the Dynasty Trust as holding a 49% ownership interest in the LLC (consisting of two blocks of class B nonvoting units--one of 409.5 units and the other of 80.5 units, representing 40.95% and 8.05%, respectively, of the 1,000 aggregated voting and nonvoting units) and to show petitioner, as trustee of the Sm aldino Fam ily Trust, as holding the rem aining 51% ownership interest (consisting of 500 class B nonvoting units as well as the 10 class A voting units). This am endm ent is signed by petitioner as the LLC’s m anager but does not indicate the date on which it was executed. Creation and Elim ination of Guaranteed Paym ent As originally drafted, the LLC’s operating agreem ent provided that its

m anager, i.e., petitioner, was entitled to annual com pensation of 10% of the LLC’s annual net cashflow, subject to decrease at the m anager’s sole discretion. Before 2013 petitioner received no annual com pensation from the LLC. On April 15, 2013, the LLC’s operating agreem ent was am e nded to delete the provision for m anager com pensation and instead to provide the class A voting

m em ber, i.e., petitioner, with guaranteed paym ents. The am ended operating agreem ent states:-11-

[*11] “Guaranteed Paym ent” shall m ean a guaranteed paym ent to be m ade to the Class A Voting Mem ber in the am ount of $10,000 per m onth, which is intended to constitute a guaranteed paym ent within the m eaning of Code Section 707(c) and shall not be treated as a Distribution for purposes of com puting the recipient’s Capital Account. The am endm ent further states that the LLC shall m ake m onthly guaranteed paym ents beginning May 15, 2013, but that if the LLC is unable to m ake any paym ents because of insufficient funds, the class A voting m em ber (i.e., petitioner) “shall promptly m ake Additional Capital Contributions sufficient to enable the Com pany to m ake such paym ents on a tim ely basis”. This am endm ent indicates that it was executed on April 15, 2013, by petitioner as trustee of the Sm a ldino Fam ily Trust, which is identified, directly above his signature, as the LLC’s “SOLE MEMBER”. On Decem

ber 31, 2013, the LLC operating agreem ent was am ended to delete the guaranteed paym e nt provision and to restore the previously deleted provision for m anager com pensation (except increased from 10% to 20% of annual net cashflow). The am endm ent indicates that petitioner and Allen Douglass Sm aldino executed it on Decem ber 31, 2013.-12-

[*12] T he LLC’s Partnership Returns In 2014 the LLC filed its initial partnership tax return on Form 1065, U.S. Return of Partnership Incom e, for tax year 2013. 4 On the Schedules K-1, Partner’s Share of Incom e, Deductions, Credits, etc., attached to this Form1065, the LLC listed petitioner as a 51% partner and the Sm a ldino Fam ily Trust as a 49% partner for the whole year. 5 Mrs. Sm aldino was not listed as a partner for any part of 2013. On its 2013 Form 1065 the LLC also reported that in 2013 it had paid petitioner $40,000 in guaranteed paym ents and as of yearend 2013 had accrued a yearend liability of $40,000 “DUE TO MANAGER”. Gift Tax Returns On his 2013 Federal gift tax return, petitioner reported a taxable gift to the Dynasty Trust of $1,031,882, described as “INTEREST IN SMALDINO

4 Before 2013 the LLC was treated as a disregarded entity for incom e tax purposes. Unless it elects otherwise, an LLC with only one m em ber is treated for incom e tax purposes as the m em ber’s sole proprietorship--otherwise known as a “disregarded entity”. See sec. 301.7701-3(a) and (b)(1), Proced. & Adm in. Regs.

5 The listing of the Sm aldino Fam ily Trust as a 49% partner appears to have been in error. For subsequent years the LLC’s Schedules K-1 listed the Dynasty Trust as the 49% partner.-13-

[*13] INVESTMENTS, LLC”. He did not elect to split the gift, 6 and he did not report any gift to Mrs. Sm aldino. 7 On her 2013 Federal gift tax return, Mrs. Sm a ldino reported a taxable gift to the Dynasty Trust of $5,249,118, described as “INTEREST IN SMALDINO INVESTMENTS, LLC”. Mrs. Sm aldino allocated against this transfer $5,249,118 of her $5,250,000 available Federal estate and gift tax exem ption, resulting in zero reported gift tax due. She did not elect to split the gift. Notice of Deficiency By notice of deficiency respondent determ ined that for 2013 petitioner had a $1,154,000 deficiency in gift tax. The notice explained that respondent had determ ined that in 2013 petitioner had m a de taxable gifts totaling $8,180,000,

m ade up of: (1) a $2,157,071 gift of the LLC interests that petitioner had m ade directly to the Dynasty Trust and (2) a $6,022,929 gift of the LLC interests that petitioner assertedly had m ade indirectly to the Dynasty Trust through Mrs. Sm aldino.

6 The gift-splitting election of sec. 2513 allows m arried couples to treat gifts to third parties as though m ade one-half by each spouse.

7 Pursuant to sec. 6019(2) taxpayers are not required to file gift tax returns for transfers between spouses.-14-

[*14] OPINION I. General Legal Principles Section 2501 imposes a tax for each calendar year “on the transfer of property by gift” by any taxpayer. Section 2511(a) provides that this gift tax “shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible”. If a donor transfers an interest in property to his or her spouse as a gift, the value of the property interest is generally allowable as a deduction in com puting the donor’s taxable gifts for the year. Sec. 2523(a). II. The Parties’ Contentions The parties agree that the total LLC units transferred to the Dynasty Trust as of April 15, 2013, constituted a 49% class B m em ber interest in the LLC. 8 The parties disagree about the extent to which these transfers should be characterized as gifts from petitioner to the Dynasty Trust and the value of the transferred interests for gift tax purposes.

8 Each of the transfer docum ents describes the transferred LLC interests not in term s of percentage interests but rather in term s of a defined value, i.e., a “sufficient num ber” of nonvoting units in the LLC “so that the fair m arket value of such nonvoting units as determ ined for federal gift tax purposes shall be” a specified dollar am ount. Petitioner concedes that these defined value clauses do not define or lim it the am ount of his taxable gifts to be determ ined in this proceeding.-15-

[*15] Petitioner contends that he gave to the Dynasty Trust only an 8.05% LLC class B m em

ber interest. He contends that the Dynasty Trust received the 40.95% LLC class B m em

ber interest as a gift from Mrs. Sm aldino and not from him . He further contends that his 2013 gift tax return correctly reported the value of the 8.05% gift interest as $1,031,882, according to Mr. Biedenbender’s appraisal, which opined that the fair m arket value of a 49% class B m e m ber interest in the LLC as of April 15, 2013, was $6,281,000. 9 Respondent contends that petitioner m ade a taxable gift to the Dynasty Trust of a 49% class B m em

ber interest in the LLC, including an indirect gift of the 40.95% class B m em

ber interest that he purportedly transferred to Mrs. Sm aldino and that she purportedly retransferred to the Dynasty Trust a day later. Although respondent determ ined in the notice of deficiency that the fair m arket value of the 49% class B m em

ber interest (the subject interest) was $8,180,000, in this proceeding he contends, on the basis of his expert’s report and testim ony, that the fair m arket value of the subject interest was actually $8,421,000. III. Sufficiency of Pleadings At the conclusion of the trial, respondent’s counsel m ade an oral m otion to conform the pleadings to the proof to increase respondent’s valuation of the subject

9 The m ath is off slightly, presum ably because of rounding.-16-

[*16] interest to $8,421,000, in accordance with his expert’s report and testim ony. On brief petitioner objects to the granting of respondent’s m otion on the ground that “respondent has not m oved for leave to increase the deficiency.” Pursuant to Rule 41(b), respondent’s failure to form ally am end his pleadings to assert an increased deficiency is not necessarily fatal if the issue giving rise to an increased deficiency was tried with petitioner’s express or im plied consent. As the Court explained in McGee v. Comm issioner, T.C. Mem o. 2000-308, 2000 Tax Ct. Mem o LEXIS 366, at *19-* 20:

Section 6214(a) provides that this Court shall have jurisdiction to redeterm ine the correct am ount of the deficiency even if the am ount so redeterm ined is greater than the am ount determ ined by the Comm issioner in the notice of deficiency if the Com m issioner asserts a claim at or before the hearing or rehearing. Consistent with the general m andate of section 6214(a), this Court generally will only exercise its jurisdiction over an increased deficiency where the m atter is properly pleaded. See Estate of Petschek v. Com m issioner, 81 T.C. 260, 271-272 (1983), affd. 738 F.2d 67 (2d Cir. 1984); Markwardt v. Comm issioner, 64 T.C. 989, 997 (1975). Rule 41(b)(1), however, provides that when an issue not raised in the pleadings is tried with the express or im plied consent of the parties, that issue is treated in all respects as if it had been raised in the pleadings. Thus, where respondent raises an issue that could result in an increased deficiency without form ally am ending his pleading and that issue is tried with petitioner’s express or im plied consent, the requirem e nt in section 6214(a) that respondent m ake a claim for the increased deficiency is satisfied. See Woods v. Com m issioner, 91 T.C. 88, 93 (1988).-17-

[*17] In his pretrial m em orandum filed about two weeks before trial respondent advised that his expert witness would testify that the fair m arket value of the subject interest was $8,421,000 and that respondent m ight m ove to conform the pleadings to the proof at trial. Petitioner received respondent’s expert witness report well before the trial and never objected at trial to the introduction intoevidence of the higher values found by respondent’s expert. Petitioner crossexam ined respondent’s expert witness about his m ethodology. Petitioner has not expressly argued prejudicial surprise, and we see none. We conclude that the issue of a value for the subject interest higher than that determ ined in the notice of deficiency was tried with at least petitioner’s implied consent, m aking form al

am endm ent of the pleadings unnecessary, see Rule 41(b), and satisfying the requirem ent in section 6214(a) that respondent m ake a claim for the increased deficiency, see Woods v. Com m issioner, 91 T.C. 88, 93 (1988). Accordingly, we will deny respondent’s m otion as m oot. IV. Burden of Proof Respondent bears the burden of proving that petitioner is liable for any increased deficiency. See Rule 142(a)(1). The burden of proof is otherwise on petitioner to show that respondent’s determ inations are incorrect. 1 0 See id.; Welch

1 0 Petitioner does not contend and the record does not establish that he has (continued...)-18-

[*18] v. Helvering, 290 U.S. 111, 115 (1933). For the m ost part, however, we decide this case on the basis of the preponderance of evidence in the record rather than by placem ent of the burden of proof. V. The Purported Transfer to Mrs. Sm aldino It is well established that the substance of a transaction, rather than the form in which it is cast, determ ines the tax consequences unless it appears from an

exam ination of the statute and its purpose that form was intended to govern. Comm issioner v. P.G. Lake, Inc., 356 U.S. 260, 265-267 (1958); Com m issioner v. Court Holding Co., 324 U.S. 331, 334 (1945); Stewart v. Com m issioner, 714 F.2d 977, 988 (9th Cir. 1983), aff’g T.C. Mem o. 1982-209. Section 2511(a) im plicitly

em bodies principles of substance over form by including “indirect” transfers in the definition of a taxable gift. Sather v. Com m issioner, 251 F.3d 1168, 1174 (8th Cir. 2001), aff’g in part, rev’g in part T.C. Mem o. 1999-309. Heightened scrutiny is appropriate in cases, such as this one, where all the parties to the transactions in question are related. See Brown v. United States, 329 F.3d 664, 673 (9th Cir. 2003); Kuney v. Frank, 308 F.2d 719, 721 (9th Cir. 1962) (“Transactions between persons in a close fam ily group, whether or not involving partnership interests,

1 0 (...continued) m et the requirem ents of sec. 7491(a) to shift the burden of proof to respondent as to any relevant factual issue.-19-

[*19] a fford much opportunity for deception and should be subject to close scrutiny.” (quoting H.R. Rept. No. 82-586, at 33 (1951), 1951-2 C.B. 357, 381)); Estate of Bongard v. Com m issioner, 124 T.C. 95, 119 (2005) (“A transaction between fam ily m e m

bers is * * * subjected to heightened scrutiny to ensure that it is not a shamor disguised gift.”). Respondent contends that the doctrine of substance over form dem ands that we disregard petitioner’s purported transfer of the LLC m em ber interests to Mrs. Sm aldino and her purported retransfer of these sam e interests to the Dynasty Trust a day later because these actions were “part of a prearranged plan between all parties involved to effectuate the transfer of the ownership of the LLC” from petitioner to the Dynasty Trust. Respondent urges us to treat the two purported transfers, in accordance with their asserted substance, as an indirect gift from petitioner to the Dynasty Trust. In support of his position, respondent relies on a line of cases in which the courts have em

ployed substance over form principles to recharacterize multistep property transfers am ong related parties as indirect gifts between the persons who were determ ined to be, in substance, the actual donors an d donees. See, e.g., Heyen v. United States, 945 F.2d 359 (10th Cir. 1991) (treating the decedent’s inter vivos transfers of stock shares to m ultiple nonfam ily m em bers, who-20-

[*20] imm ediately reconveyed the shares to m em bers of the decedent’s fam ily, as indirect transfers from the decedent to the ultim ate donees); Estate of Bies v. Comm issioner, T.C. Mem o. 2000-338 (treating the decedent’s inter vivos transfersof closely held corporation stock to her daughters-in-law and granddaughter-inlaw, each of whom

imm ediately transferred the stock to her husband, as indirect transfers from the decedent to those husbands); Estate of Cidulka v. Com m issioner, T.C. Mem o. 1996-149 (treating the decedent’s inter vivos transfers of stock to his daughter-in-law, who im m ediately transferred the stock to her husband, as gifts of

m inority stock interests to the decedent’s son for purposes of valuing blocks of shares). Petitioner counters that those cases are not controlling because none involved an interspousal transfer like the one at issue here. He does not expressly dispute, however, that the transactions in question were part of a prearranged plan to transfer ownership of 49% of the LLC class B m em ber interests to the Dynasty Trust while using Mrs. Sm aldino’s estate and gift tax exemption. Indeed, petitioner testified that he intended for the properties in the LLC to be divided

am ong five of his children, as beneficiaries of the Dynasty Trust, while Mrs. Sm aldino would receive a larger share of assets that were “outside the LLC”. Mrs. Sm aldino testified that before the purported transfer in question she had already-21-

[*21] m ade “a comm itm ent, prom ise” to her husband and fam ily that she would transfer the LLC units to the Dynasty Trust. When asked on direct exam ination whether she could have changed her m ind if she had wanted to, she responded: “No, because I believe in fairness.” Petitioner nevertheless urges that we should respect his purported transfer of the LLC m em

ber interests to Mrs. Sm aldino because, he says, it was sanctioned by section 2523(a), which generally exempts interspousal transfers from gift tax. Petitioner cites the legislative history of section 2523(a), which indicates that in enacting this exem

ption of spousal gifts from the gift tax in 1981 (replacing a prior deduction lim ited to one-half of spousal gifts), Congress intended that a “husband and wife should be treated as one econom ic unit for purposes of estate and gift taxes, as they generally are for incom e tax purposes”, so that “no tax * * * [is] im posed on transfers between a husband and wife.” S. Rept. No. 97-144, at 127 (1981), 1981-2 C.B. 412, 461. Petitioner suggests that the legislative policies inform ing section 2523(a) negate the substance over form doctrine as respondent seeks to apply it in this case. 1 1 Consequently, petitioner urges, we should reject

1 1 To be clear, the allowance of the m arital deduction under sec. 2523(a) is not directly at issue in this case. Petitioner’s 2013 gift tax return did not claim any m arital deduction inasmuch as he did not report any gift to Mrs. Sm aldino. Sim ilarly, respondent’s determ ination does not expressly address the allowability of any m arital deduction inasm uch as it treats the transfer in question as an indirect (continued...)-22-

[*22] respondent’s recharact erization of the purported interspousal transfer of the LLC m em

ber interests as an indirect gift from petitioner to the Dynasty Trust. Pursuant to its term s, however, section 2523(a) applies in the first instance only if the donor “transfers * * * an interest in property” to his or her spouse. For the reasons discussed below, we conclude that petitioner’s actions were ineffective to transfer m em

bership interests in the LLC to Mrs. Sm a ldino. Consequently, section 2523(a) is inapplicable, and we agree with respondent that in substance the Dynasty Trust received all its m em bership interests from petitioner. As a threshold m atter, we observe that petitioner’s execution of a certificate of assignm ent to Mrs. Sm a ldino, although a factor to be considered, is n ot controlling. The courts have “never regarded ‘the sim ple expedient of drawing up papers,’ * * * as controlling for tax purposes when the objective econom ic realities are to the contrary.” Kerr v. Comm issioner, 113 T.C. 449, 464 (1999) (quoting Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1979)), aff’d, 292 F.3d 490 (5th Cir. 2002). “[E] xecution of a gift docum ent, alone, is not a sufficient objective m anifestation of an intent to donate. * * * Circum stances surrounding the writing must show that the writing was m eant to be effective.” Linton v. United States, 630 F.3d 1211, 1218-1219 (9th Cir. 2011).

1 1 (...continued) gift frompetitioner to the Dynasty Trust.-23-

[*23] Consonant with these principles, “courts have often recognized that the tax consequences of a transaction involving a nom inee or straw party must be determ ined with regard to the true beneficial interests involved. ‘[Transactions] which do not vary, control or change the flow of econom ic benefits, are to be dism issed from consideration’”. Snyder v. Com m issioner, 66 T.C. 785, 791 (1976) (quoting Higgins v. Sm ith, 308 U.S. 473, 476 (1940)); cf. sec. 1.704-1(e)(2)(i), Incom e Tax Regs. (“The reality of the transfer and of the donee’s ownership of * * * [an interest in a partnership] attributed to him are to be ascertained from the conduct of the parties with respect to the alleged gift and not by any m echanical or form a l test.”). The LLC’s operating agreem e nt distinguishes the assignm ent of econom ic rights in the LLC fromthe transfer of m em bership interests. It states that “[n] o

m em ber” shall be entitled to transfer or assign any part of the m em ber’s ownership “except as expressly provided for in Section 11.5(c)”. Section 11.5(c), captioned “Perm itted Transfers”, expressly provides for transfers of m em bership interests, without prior board approval, only to (1) other m em bers and (2) to trusts created for the benefit of petitioner’s descendants (e.g., the Dynasty Trust). Petitioner’s purported transfer to Mrs. Sm a ldino is not am ong the types of transfers “expressly provided for” in section 11.5(c).-24-

[*24] Under section 11.5(f) of the operating agreem ent, captioned “No Effect to Transfers in Violation of Agreem ent”, upon any transfer of a m em bership interest in violation of section 11.5, the transferee is treated not as a m em ber but as an assignee, lacking the full rights and privileges of a m em ber. Under section 11.5(b), the assignee of a m em

bership interest can becom e a “substituted m e m ber” only if certain conditions are m et, including the assignee’s execution of an instrum ent adopting the term s and provisions of the operating agreem ent. Nothing in the record suggests that Mrs. Sm aldino ever executed any such instrum ent or otherwise suggests that under the term s of the operating agreem ent she would have received anything m ore than an assignee’s interest in the LLC as a result of the purported transfer in question. Cf. McCord v. Com m issioner, 120 T.C. 358, 371-373 (2003) (finding that for gift tax purposes the donors assigned only econom ic rights with respect to a lim ited partnership rather than all their rights as partners), rev’d on other grounds, Succession of McCord v. Com m issioner, 461 F.3d 614 (5th Cir. 2006). The record does not suggest that petitioner, in his dual roles as trustee of the Sm aldino Fam ily Trust and as m anager of the LLC, gave express or im plied consent for the adm ission of Mrs. Sm aldino as a m em ber in disregard of the operating agreem ent’s restrictions. To the contrary, the record shows that on April-25-

[*25] 15, 2013--a day after h e purportedly transferred the LLC m em ber interests to Mrs. Sm a ldino--petitioner executed an am endm ent to the LLC operating agreem ent (providing for guaranteed paym ents to him self) which identified the Sm aldino Fam ily Trust as the LLC’s “SOLE MEMBER”. The LLC’s operating agreem e nt defines class A voting units and class B nonvoting units as those units “identified as such on Exhibit ‘A’”. Exhibit A was

never am ended to show that Mrs. Sm aldino held any class B nonvoting units (or any other m em

ber interest). Instead, exhibit A of the operating agreem ent was

am ended only to show that as of April 15, 2013, the Dynasty Trust held a 49%

m em ber interest in the LLC (consisting of two blocks of class B nonvoting units-- one of 409.5 units and the other of 80.5 units, representing 40.95% and 8.05%, respectively, of the 1,000 aggregated class A voting units and class B nonvoting units) and to show petitioner, as trustee of the Sm a ldino Fam ily Trust, as holding the rem aining 51% m em

ber interest (consisting of 500 class B nonvoting units as well as the 10 class A voting units). Notably, this am endm e nt to the LLC’s operating agreem ent, although purporting to be effective April 15, 2013, is undated (unlike all the other operating agreem ent am endm ents in the record). Also undated are the certificates of assignm ent frompetitioner to Mrs. Sm aldino, purporting to be effective April 14,-26-

[*26] 2013, and frompetitioner to the LLC and fromMrs. Sm aldino to the LLC, each purporting to be effective April 15, 2013. The m issing dates take on added significance when we consider that the dollar am ounts stated in the certificates of assignm ent, as well as the ownership percentages stated in the LLC operating agreem ent am endm ent, all depend directly on the Biedenbender valuation of a 49% class B nonvoting m em

ber interest. 1 2 The Biedenbender valuation report, however, is dated August 22, 2013--over four m onths after the transfers purportedly occurred. On the basis of all the evidence in the record we find it m ore likely than not that the undated certificates of assignm ent and associated operating agreem ent

1 2 Mr. Biedenbender’s report opined that the fair m arket value of “49%, Class B nonvoting” units was $6,281,000. This am ount equals (rounded to the nearest dollar) the sumof the dollar values reported on the two certificates of assignm ent whereby petitioner purportedly transferred $5,249,118.42 of class B units to Mrs. Sm aldino on April 14, 2013, and $1,031,881.58 of class B units to the Dynasty Trust on April 15, 2013. Consequently, the fair m arket values stated on the certificates of assignm ent are clearly based on Mr. Biedenbender’s valuation. Moreover, these sam e valuations necessarily determ ined the LLC ownership percentages represented by these two blocks of the LLC class B units (40.95% and 8.05%, respectively) as stated in the LLC operating agreem ent am endm ent. In this regard, we note that the parties have stipulated that petitioner and Mrs. Sm a ldino decided on the $5,249,118.42 am ount stated in the certificate of assignm ent fromhim to her “by determ ining Mrs. Sm aldino’s available [F] ederal estate and gift tax exem

ption.” We do not view this stipulation as contrary to our conclusion that the exact dollars-and-cents value stated in the certificate of assignm ent was derived fromthe Biedenbender valuation by allocating to Mrs. Sm aldino an LLC ownership percentage that would result in a value approxim ating but not exceeding her available $5,250,000 estate and gift tax exem ption.-27-

[*27] am endm ent were executed no earlier than August 22, 2013. 1 3 Given that this date is m ore than four m onths after the stated effective dates of the purported transfers of the LLC m em bership interests to both Mrs. Sm aldino and the Dynasty Trust, as a practical m atter there was never a tim e when Mrs. Sm a ldino would have been able to effectively exercise any ownership rights with respect to any LLC

m em bership interests. Moreover, for the reasons previously discussed, we do not believe that petitioner ever intended for her to do so. Finally, the LLC’s 2013 partnership return reported that in 2013 the only partners were petitioner with a 51% interest (ostensibly by virtue of his role as trustee of the Sm aldino Fam ily Trust) and the Sm aldino Fam ily Trust with a 49% interest. 1 4 The LLC did not report Mrs. Sm aldino as being a partner at any tim e. On the basis of all the evidence in the record, we conclude that petitioner never effectively transferred any m em bership interest in the LLC to Mrs. Sm aldino and consequently that the Dynasty Trust received its entire 49% of the class B

m em bership interests as a gift from petitioner. Accordingly, we sustain

1 3 This conclusion aligns with the fact that the Sm aldino Fam ily Trust was identified as the LLC’s “SOLE MEMBER” on April 15, 2013, when (as previously noted) petitioner signed an am endm ent to the LLC operating agreem ent.

1 4 This seem ingly erroneous attribution of a 49% interest to the Sm aldino Fam ily Trust was corrected on the LLC’s 2014 partnership return to show the 49% interest as belonging to the Dynasty Trust.-28-

[*28] respondent’s determ ination that for tax year 2013 petitioner m ade a taxable gift to the Dynasty Trust of a 49% class B m e m ber interest in the LLC. VI. Valuation of the 49% Class B Mem ber Interest A. General Valuation Principles We m ust now determ ine the value of the 49% class B m e m ber interest in the LLC as of April 15, 2013, when it was transferred to the Dynasty Trust. A gift of property is valued as of the date of the transfer. Sec. 2512(a). If property is transferred for less than adequate and full consideration, then the excess of the value of the property transferred over the consideration received is generally deem ed a gift. See sec. 2512(b). A gift is m easured by the value of the property passing from the donor, rather than by the property received by the donee or upon the m easure of enrichm ent to the donee. See sec. 25.2511-2(a), Gift Tax Regs. Typically, we consider inform ation available on or close to the valuation date and facts that were reasonably known on the valuation date. Estate of Gilford v. Comm issioner, 88 T.C. 38, 52-53 (1987). For gift tax purposes, the value of the transferred property is generally the “price at which the property would change hands between a willing buyer and a willing seller, neither being under any com pulsion to buy or to sell and both having reasonable knowledge of relevant facts.” United States v. Cartwright, 411 U.S.-29-

[*29] 546, 551 (1973) (quot ing section 20.2031-1(b), Estate Tax Regs.); see sec. 25.2512-1, Gift Tax Regs. The determ ination of property value for gift tax purposes is an issue of fact, and all relevant factors m ust be considered. See Anderson v. Com m issioner, 250 F.2d 242, 249 (5th Cir. 1957), aff’g in part and

rem anding T.C. Mem o. 1956-178; LeFrak v. Com m issioner, T.C. Mem o. 1993- 526. For gift tax purposes, transfers of interests in a single-m em ber LLC are valued as transfers of interests in the LLC rather than as transfers of proportionate shares of the underlying assets. See Pierre v. Com m issioner, 133 T.C. 24 (2009), supplem e nted by T.C. Mem o. 2010-106. B. Expert Opinions The parties rely on expert opinions to value the subject interest. We evaluate expert opinions in the light of all the evidence in the record and m ay accept or reject the expert testim ony, in whole or in part, according to our own judgm e nt. See Helvering v. Nat’l Grocery Co., 304 U.S. 282, 295 (1938); Estate of Mellinger v. Com m issioner, 112 T.C. 26, 39 (1999). “The persuasiveness of an expert’s opinion depends largely upon the disclosed facts on which it is based.” Estate of Davis v. Comm issioner, 110 T.C. 530, 538 (1998). We m ay be selective in our use of any part of an expert’s opinion. See id.-30-

[*30] 1. The Biedenbender Report Petitioner relies on the expert opinion of Mr. Biedenbender, a certified public accountant and appraiser at BizValPlus, Inc. Mr. Biedenbender opined that the fair m arket value of a 49% class B m em ber interest as of April 15, 2013, was $6,281,000, calculated as follows. Mr. Biedenbender first determ ined the LLC’s net asset value (NAV) as of April 15, 2013, to be $26,795,639. On this basis he estim ated the fair m arket value of a 49% class B m em ber interest in the LLC (before discounts and other adjustm ents) to be $13,130,000. 1 5 Fromthis am ount he subtracted $2,928,000, which he estim ated to be the present value of petitioner’s rights to guaranteed paym e nts under the LLC’s operating agreem e nt as in effect on April 15, 2013. To the resulting $10,202,000 he applied a 38.43% com bined discount for lack of control and lack of m arketability to conclude that the net fair

m arket value of a 49% class B m em ber interest in the LLC was $6,281,000. 2. The Eichorst Report Respondent relies on the expert opinion of Jared Eichorst, a principal at AltaView Advisors, LLC, and form erly a m anager with Deloitte Transactions and

1 5 The m ath appears to reflect rounding. Although Mr. Biedenbender’s report suggests at various places that the guaranteed paym e nt am ount was subtracted after application of discounts, his cover letter calculation can be duplicated only by applying the discounts after subtracting the guaranteed paym ent as described above.-31-

[*31] B usiness Analytics, LLP, where he was the national practice leader for estate and gift tax valuations of closely held investm ent holding entities. Mr. Eichorst opined that the fair m arket value of a 49% class B m em ber interest as of April 15, 2013, was $8,421,000, calculated as follows. Using the adjusted NAV m ethod, Mr. Eichorst first determ ined the LLC’s fair m arket value as of April 15, 2013, to be $26,852,186. To this value he applied a 36% com bined discount for lack of control and lack of m arketability to arrive at an aggregate equity value of $17,185,399. Multiplying this value by 49% he determ ined that the fair m arket value of a 49% class B interest was $8,421,000 (rounded). Mr. Eichorst opined that the class A guaranteed paym e nt rights did not affect the value of the class B

m em ber interests. C. Net Asset Value Both experts agree that the preferred approach to valuing the subject interest begins with determ ining the LLC’s NAV, calculated by subtracting the m arket value of its liabilities from the m arket value of its assets. Indeed, the experts are only $56,547 apart in their opinions as to the LLC’s NAV: $26,795,639 according to Mr. Biedenbender versus $26,852,186 according to Mr. Eichorst. The experts agree about the values of the LLC’s 10 real estate properties, which are the LLC’s principal assets. The Eichorst report also includes, however, certain incidental-32-

[*32] a ssets that are om itted fromthe Biedenbender report, e.g., $200,000 of fixtures, furniture, and equipm ent. Other differences, such as slightly higher

m ortgage balances reflected in the Eichorst report as compared to the Biedenbender report, cut in petitioner’s favor. Mr. Eichorst’s report indicates, and petitioner does not dispute, that he identified and valued the LLC’s assets and liabilities on the basis of the LLC’s internally prepared balance sheets, adjusting the reported values to April 15, 2013. Mr. Biedenbender’s report does not

com pletely explain how he identified the LLC’s assets and liabilities or why certain incidental assets appear to have been om itted. Finding the Eichorst report

m ore reliable than the Biedenbender report in this regard, we accept its conclusion that the LLC’s NAV as of April 15, 2013, was $26,852,186. D. Guaranteed Paym ents On April 15, 2013, the LLC’s operating agreem ent was am e nded to provide petitioner, as the sole class A m em ber, a guaranteed paym ent of $10,000 per m onth beginning May 15, 2013. The record indicates that the LLC paid or accrued $80,000 in guaranteed paym ents to petitioner during 2013 ($10,000 per m onth for eight m onths). On Decem ber 31, 2013, the LLC’s operating agreem e nt was

am ended to delete the provision for guaranteed paym ents. The parties and their experts disagree prim arily on whether the provision for guaranteed paym e nts-33-

[*33] should be separately taken into account in valuing the subject interest and, if so, in what m anner. Mr. Biedenbender treated the guaranteed paym ent as an annuity of $10,000 per m onth for 40 years. He calculated the present value for this “annuity” to be $2,928,000 using a risk-free long-term m onthly applicable Federal rate (AFR) of 2.67% as in effect in April 2013. He subtracted this am ount from what he determ ined to be the fair m arket value of a 49% class B m em ber interest in the LLC before applying discounts. By contrast, Mr. Eichorst concluded that the guaranteed paym ent rights should not be taken into account in valuing the transferred class B m em ber interests because, he opined, the guaranteed paym e nts would not affect the fair

m arket value of the LLC using the NAV approach and would not change the discounts needed to properly value the LLC. He opined that the guaranteed paym ents are com

parable to asset m anagem ent fees paid by com parable real estate investm ent holding companies, the values of which would not ordinarily be affected by asset m anagem e nt fees within the range indicated by the am ounts of the guaranteed paym ents. Petitioner counters that Mr. Eichorst has m istakenly equated guaranteed paym ents and m anagem ent fees. Petitioner asserts that “any buyer of the m inority-34-

[*34] interest at issue in this case would fully understand that the operating agreem ent requires Mr. Sm aldino, as the voting m em ber, be paid the guaranteed paym ent whether or not entity level m anagem ent fees are paid.” Petitioner further asserts that “it rem a ins com m on sense that the m inority interest in question is less

m arketable than a sim ilar interest not constrained by the guaranteed paym ent required and payable to the voting m e m ber” under the LLC operating agreem ent. In support of his position petitioner points to chapter 14 of the Code, which im poses special rules for valuing retained interests in m ultitiered fam ily partnerships. Section 2701 (which is in chapter 14) applies when a parent--such as petitioner--transfers certain partnership interests to fam ily m e m bers while retaining an interest in the partnership after the transfer. Specifically, if the parent retains an “applicable retained interest”, including a “distribution right”, it is usually valued at zero. 1 6 See sec. 2701(a)(3)(A), (b)(1)(A). The statute expressly provides,

1 6 As an exception to this general rule, an applicable retained interest is not valued at zero if it is a qualified paym ent right. For this purpose, a “qualified paym ent” is defined as a cum ulative dividend payable periodically at a fixed rate or a com parable paym ent under a partnership interest. Sec. 2701(c)(3)(A). Qualified paym ents rights are generally valued under norm al valuation procedures using appropriate m arket discount rates. See Boris I. Bittker & Lawrence Lokken, Federal Taxation of Incom e, Estates, and Gifts, para. 136.2.8 (2021), Westlaw FTXIEG. The sim ilarity between guaranteed paym ent rights and qualified paym ent rights has led one com m entator to observe that “even if a guaranteed paym ent were governed by § 2701, it would constitute a qualified paym ent right and thus would be subject to the sam e fair m arket value principles as a guaranteed (continued...)-35-

[*35] however, that “any rig ht to receive any guaranteed paym e nt described in section 707(c) of a fixed am ount” is not a “distribution right”. Sec. 2701(c)(1)(B)(iii). Hence, such a right is not an “applicable retained interest” within the m eaning of section 2701(b)(1), and chapter 14 does not m andate that it be valued at zero. Petitioner asserts, and respondent does not expressly dispute, that the guaranteed paym ent rights in question were designed specifically to qualify under section 707(c). Hence, petitioner reasons, under chapter 14 these guaranteed paym ent rights are not to be disregarded in the valuation process. Neither party has otherwise argued the applicability of chapter 14 to this case, and we surm ise that petitioner does not m ean to suggest that chapter 14 should apply to this case other than to support his favored treatm ent of guaranteed paym ents. It is instructive, however, to consider the valuation m ethodology of chapter 14 m ore com

prehensively. For those situations in which section 2701 applies, the value of the junior interest transferred is generally calculated by subtracting the value of the senior interests (including rights to distribution of

1 6 (...continued) paym ent not subject to § 2701, with a couple of exceptions.” Louis S. Harrison, “Special Valuation Rules Can Save Transfer Taxes”, 11 J. Partnership Tax’n 239, 247 n.29 (1994). Neither party has argued that the guaranteed paym ents at issue in this case constitute qualified paym ent rights under sec. 2701.-36-

[*36] incom e or capital that are preferred to rights of the transferred interest) from the aggregate value of all fam ily-held equity interests and then allocating the

rem aining value am ong the transferred interest and other interests of the sam e or junior classes. See sec. 25.2701-3(b)(1) through (3), Gift Tax Regs. The am ount thus allocated to the transferred interest is then reduced to take into account

m inority and sim ilar discounts, as appropriate. Id. subpara. (4); see Boris I. Bittker & Lawrence Lokken, Federal Taxation of Incom e, Estates, and Gifts, para. 136.2.8 (2021), Westlaw FTXIEG (describing subtraction m ethod under section 2701). We conclude that it is appropriate, in valuing the transferred class B units for gift tax purposes, to subtract from the LLC’s NAV (before applying any discounts) the value of the class A units retained by petitioner, including the value of his priority claim s, i.e., the guaranteed paym ents; to then allocate the rem a ining value

am ong the transferred and retained class B units; and to then apply appropriate

m inority and m arketability discounts to the transferred class B units. That approach is consistent not only with chapter 14 but also with this Court’s decision in McCord v. Comm issioner, 120 T.C. at 376--a case that did not involve the application of chapter 14. McCord involved the valuation for gift tax purposes of gift class B lim ited partner interests in a lim ited partnership. The class A lim ited partners’ sole econom ic interest consisted of a guaranteed paym ent for the use of-37-

[*37] their capital. Id. n.12. In valuing the gift class B lim ited partner interests, the Court first subtracted from the partnership’s NAV (before applying any discounts) the class A lim ited partners’ priority claim s against the partnership’s assets under the term s of the partnership agreem ent. 1 7 Id. at 376. In keeping with this m ethodology, we agree with petitioner that the guaranteed paym ents should be taken into account in valuing the gift class B interests. We are unable, however, to agree with Mr. Biedenbender’s m ethodology in all respects. For one thing, as respondent points out, Mr. Biedenbender has not

m eaningfully explained why his calculation applies the risk-free AFR rate. 1 8 On brief, petitioner suggests that the AFR rate is appropriate because, he says, “[t] he guaranteed paym ent is payable in all circum stances, whether the LLC has cash flow or profit or not.” Petitioner’s argum e nt ignores, however, that under the term s of the operating agreem ent, if the LLC is unable to m ake any guaranteed

1 7 In McCord v. Com m issioner, 120 T.C. 358, 376 (2003), rev’d on other grounds, Succession of McCord v. Com m issioner, 461 F.3d 614 (5th Cir. 2006), the Court stated that it concurred with the m ethodology of the taxpayer’s expert who “subtract[ed] $20,000 from * * * [the lim ited partnership’s] NAV to reflect the class A lim ited partner’s $20,000 priority claim against * * * [the lim ited partnership’s] assets under the term s of the partnership agreem e nt.” The Opinion does not otherwise discuss the term s or valuation of the guaranteed paym ent.

1 8 Respondent has not otherwise expressly disputed Mr. Biedenbender’s treatm e nt of the guaranteed paym ents as an annuity payable for 40 years. We deem respondent to have waived or conceded any argum ent in this regard.-38-

[*38] paym ents because of insufficient funds, the class A voting m em ber (i.e., petitioner) “shall prom ptly m ake Additional Capital Contributions sufficient to enable the Com

pany to m ake such paym ents on a tim ely basis.” In effect, then, petitioner bore the risk of the LLC’s inability to m ake guaranteed paym ents because of insufficient funds. In his rebuttal expert report, Mr. Eichorst opines that a 6.75% discount rate is appropriate because, as he explains and petitioner does not expressly dispute, it is consistent with capitalization rates used in valuing the LLC’s underlying assets. We find Mr. Eichorst’s m e thodology m ore reliable than Mr. Biedenbender’s in this regard. Accordingly, we accept Mr. Eichorst’s use of a 6.75% discount rate. According to Mr. Eichorst’s rebuttal expert report, adjusting Mr. Biedenbender’s present value calculations to use this 6.75% discount rate yields a present value for the guaranteed paym ents of $1,647,412. 1 9 We also agree with respondent that Mr. Biedenbender has incorrectly--and inconsistently with the m ethodology of chapter 14 on which petitioner selectively relies--deducted the full present value of the guaranteed paym ents against the 49% transferred class B m em

ber interest rather than against the entirety o f class B

1 9 More precisely, Mr. Eichorst calculated the present value of 49% of the guaranteed paym ents to be $807,232. This is m athem atically equivalent to a present value of $1,647,412 ($807,232/.49) for 100% of the guaranteed paym ents.-39-

[*39] m em

ber interests. We will m ake appropriate adjustm ents in this regard in our calculations below. The LLC’s operating agreem e nt was am ended on Decem ber 31, 2013, to elim inate the provision for guaranteed paym ents. Respondent argues that this is a reason to disallow any reduction in value of the subject interest by the present value of the future guaranteed paym ents. Generally, however, subsequent events are not considered in fixing fair m arket value, except to the extent that they were reasonably foreseeable at the date of valuation. Olson v. United States, 292 U.S. 246, 257 (1934) (“Elem ents affecting value that depend upon events or

com binations of occurrences which, while within the realm of possibility, are not fairly shown to be reasonably probable should be excluded from consideration for that would be to allow m ere speculation and conjecture to becom e a guide for the ascertainm ent of value[.] ”); First Nat’l Bank of Kenosha v. United States, 763 F.2d 891, 894 (7th Cir. 1985); Propstra v. United States, 680 F.2d 1248 (9th Cir. 1982); Estate of Gilford v. Com m issioner, 88 T.C. at 52. Respondent has not asserted that the elim ination of the provision for guaranteed paym ents was reasonably foreseeable as of April 15, 2013, and has not otherwise advanced any m eaningful argum ent as to why or how the eventual elim ination of the provision for guaranteed paym ents should be factored into the valuation of the gift of the subject-40-

[*40] interest as of April 15, 2013. Nor has respondent argued that the elim ination of the provision for guaranteed paym ents on Decem ber 31, 2013, gave rise to a separate gift frompetitioner to the other class B m em bers at that tim e. We deem respondent to have waived any such argum ents. 2 0 E. Discounts for Lack of Control and Marketability In valuing the transferred class B m em ber interests, Mr. Biedenbender applied a 38.43% combined discount for lack of control and lack of m arketability. Mr. Eichorst applied a sim ilar com bined discount rate of 36%. On brief petitioner asserts that Mr. Biedenbender’s slightly higher com bined discount rate is explained by his taking into account the guaranteed paym ent, which is not taken into account in Mr. Eichorst’s analysis. Petitioner states: “The only significant difference between the appraisal reports as presented is the treatm e nt of the required guaranteed paym ent.” As discussed supra, in valuing the transferred class B m e m ber interests we will m ake an appropriate adjustm ent for the value of the guaranteed paym ent rights

2 0 For the sake of completeness, we note that sec. 2701(d) provides a lookback rule that requires an addition to be m a de to the transferor’s taxable gifts or taxable estate if a qualified paym ent right is valued at an am ount other than zero at the tim e of the sec. 2701(a) transfer but paym ents under the qualified paym ent right are not m a de as projected in the sec. 2701(a) valuation. See Bittker & Lokken, supra, para. 136.2.9. Respondent has not argued that sec. 2701(d) has any applicability to this case, and we deem any such argum ent to be waived.-41-

[*41] retained by petitioner. Consequently, it would be inappropriate to m ake redundant adjustm e nts to the discount rate for these sam e guaranteed paym ent rights. See Shepherd v. Com m issioner, 115 T.C. 376, 398 n.20 (2000), aff’d, 283 F.3d 1258 (11th Cir. 2002). Consequently, petitioner having advanced no other

m eaningful argum ent for Mr. Biedenbender’s slightly higher com bined discount rate, we will apply Mr. Eichorst’s 36% combined discount rate. VII. Sum m ary and Conclusion On the basis of all the evidence in the record, we conclude and hold that petitioner m ade a gift to the Dynasty Trust of 49% of the class B m em bership interests in the LLC. The value of this gift is $7,820,008, calculated as follows:-42-

LLC’s NAV as of 4/15/13 $26,852,186 Less: Value of retained class A m em ber interests, including guaranteed paym ent rights 1 (1,915,934) Value allocated to aggregate class B m em ber interests 24,936,252 Value allocated to 49% class B m em ber interest before discounts 2 12,218,763 Less: 36% com

bined discount (4,398,755) Value of transferred 49% class B m em ber interest 7,820,008

1 The indicated value of the retained class A m em ber interests is the sumof $1,647,412, representing the guaranteed paym ents’ present value as of April 15, 2013, and $268,522, representing a 1% allocable share (10 class A units divided by 1,000 total LLC m em bership units) of the LLC’s NAV of $26,852,186.

2 Calculated as 49% of $24,936,252. We have considered all other argum ents the parties have advanced for different results. Argum ents not expressly addressed herein we conclude are irrelevant, m oot, or without m erit.

Decision will be entered under Rule 155. [*42]