T.C. Mem o. 2 01 5- 23 7

UNITED STAT ES TAX COURT
SUMNER REDSTONE, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 80 97 -1 3. Fi le d Dec em be r 9, 2 01 5.

Dav idR. And el m an , Ju li et te M. Gali ci a, Lawren ce M ic ha el Hil l, an d Ri ch ardA. Ness le r, fo r pe ti ti on er. Cari naJ. Ca m

po ba ss o a ndJan etF. App el , forres po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION LAUBER, Ju dg e: The In te rn al Rev enue Serv ic e (IR S o r res po nd en t) d et erm in edag ai ns t p et it io ne r a g ifttax de fic ie nc y of $ 73 7,6 25 forth e cal en da r qu art er en di ng Sep te m

be r 30 , 19 72 . Res po nd en t al so de te rm in edanad di ti on to tax of $3 68 ,81 3 u nd er s ect io n 6 65 3( b) forfrau d a nd(al te rn at iv el y ) anad di ti onto tax of- 2 -

[* 2] $3 6,8 81 un de r se ct io n 6 65 3( a) fo r ne gl ig en ce an d a n a dd it io n t o t ax of $1 84 ,40 6 u nd er s ect io n 6 65 1( a)(1 ) fo r fai lu re t o fi le a ti m el y gi ft t ax return. The 1 fo cu s o f th e p art ie s’ di sp ut e is whethe r pe ti ti on er’s 1 97 2 t ran sf er o f st oc k t o h is ch il dr enwas a“ gi ft” forFed eral gi ft t ax pu rp os es or wa s (a s p et it io ne r co nt en ds ) a tra ns fer fo r an“ ad equa te an d fu ll co ns id erat io n i n m on ey or m on ey ’s worth.” See se c. 25 12 (b ). W e fi ndth atth is tra ns fer was a ta xabl e g iftan d d et erm in e it s v al ue on th e tr an sf

er d at e. W e co nc lu de th atpe ti ti on er i s n otli ab le foran y ad di ti on s t o ta x. FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io ns of fact s an d t he att ach edex hi bi ts are i nc or po rat edby thi s re fere nc e. Whe n h e p et iti on edth is Co urt, Su m

ne r Red st on e (Su m

ne r orpe ti ti on er) re si de d i n C al ifo rn ia . Fam il y an d B us in es s B ack gr ou nd Mi ch ael “ Mi ck ey ” Red st on e was bo rnon Apri l 1 1, 1 90 2. He m arri edBel le Red st on e, an d t he co up le ha d t wo ch il dr en , Sumne r an d Edward . Sumne r gr adua te d fr om Harv ardCo ll eg e in 19 44 an d Harva rdLaw Sch oo l i n 1 94 7. He p ract ic ed All st atut ory

refe ren ces are t o t he Int ern al Rev enue Co de (Co de ) ineffe ct 1 fo r th e ta x p eri odinis su e, an d a ll Ru le refe ren ces are t o t he Tax C ou rt Rul es of Prac ti ce an d P ro cedur e. W e ro un d a ll do ll ar am ou nt s t o t he ne ares t d ol la r. Duri ng 19 72 , th e ta x p eri odinis su e, wha t ar e n ow “pe na lt ie s” for frau d a ndne gl ig en ce were d en om in at ed“ ad di ti on s t o t ax .”- 3 -

[* 3] la w forsev eral y ears , in cl ud in g ast in t i n t he Tax Di vi si on of the U.S. Departm en t o f Ju st ic e, be fo re s ta rti ng workin19 54 forth e fam il y bu si ne ss . Sumne r m arri edPh y ll is , andth ey ha d t wo ch il dr en , Bren t an d S ha ri. Edwardatt en de d co ll eg e an d b us in es s s ch oo l b efo re joi ni ng th e fam il y bu si ne ss in19 52 . He m arri edLeil a, an d the y

li ke wis e h adtwo ch il dr en , Mic ha el an d R uth An n. 2 Mi ck ey en te redth e driv e-i n m ov ie th eat er b us in es s i n 1 93 6. Be twee n 1 93 6 an d 1 95 4, M ic ke y

bo ug htreal est at e th ro ug ho utth e North eas t an d b ui ltnu m ero us dr iv e-i n t he at ers . He in co rp or at edNort he as t Th eatre Co rp or at io n (No rth eas t) i n 19 54 , anditbe cam e th e m an ag em en t co m pa ny for the Red st on e fam il y bu si ne ss . Fo r eac h driv e-i n t he at er, Mi ck ey typic al ly inc or

po rat edth ree s ep arat e en ti ti es : on e to ownth e rea l es tate , on e to op erat e th e th eat er, an d o ne to m an ag e ref res hm en ts . Mic ke y , Edward , andSu m ne r ev en tu al ly cam e to ownva rio us pe rcen ta ge s of th es e v ari ou s co rp or at io ns , with M ic ke y ’s agg reg at e sh are b ei ng th e la rg es t. As the fam il y

bu si ne ss gre w, th is co m

pl ex co rp or at e st ru ctur e m ad e itcu m be rs om e to ob ta in fin an ci ng . To so lv e th is pro bl em an d t o c on so li da te th e in te res ts of M ic ke y , Edward , andSu m ne r ina si ng le en ti ty, Nati on al Am us em en ts , Inc . Edwar d d ie d i n 2 01 1, an d h is est at e is th e p et it io ne r in Est at e o f Red st on e 2 v. Co m m is si on er, 1 45 T.C. __

(Oct . 26 , 20 15 ). Whi le th atcas e an d t he in st an t cas e sh are aco m

m on factua l b ack gr ou nd , th ey pre se ntdi ffer en t i ss ue s an d t he res ol ut io n o f th es e is su es de pe nd s t o s om e d eg ree o n d iff eren t ev id en ce.- 4 -

[* 4] (NAI) was in co rp or at edas aho ld in g c om pa ny onAug us t 2 8, 1 95 9. It s art ic le s o f in co rp or at io n n am edMi ck ey , Edward , andSu m ne r as th e o rig in al di rect or s; Mic ke y

was e le ct edpre si de nt , Sumne r vi ce p res id en t, an d Edward se cret ary-treas ur er. At the ti m e o f tr ia l, NAI was a cl os el y he ldco rp or at io n h ead
qu art eredinNorwo od , Mas sa ch us et ts . Upo n NAI’s i nc or

po rat io n, M ic ke y , Edward , andSu m ne r eac h c on tri bu te d to itth ei r st oc k i n t he pre -ex is ti ng m ov ie co m pa ni es . The b oo k v al ue of t he st oc k th ateach co nt rib ut edwas $ 30 ,32 8, $ 17 ,84 5, an d $ 18 ,44 5, re sp ect iv el y . Mic ke y al so co nt rib ut ed$3 ,00 0 i n c as h. Acco rd in g t o t he m inut es of t he fir stm eet in g o f di rect or s d at edSep te m

be r 1, 1 95 9, a t ot al of 3 00 sh ares of c la ss A vo ti ng co m m on st oc k wer e to be is su ed : 1 00 sh ares eachto Mi ck ey , Edward , andSu m ne r. It was Mi ck ey ’s dec is io n t o d iv id e th e sh ares ev en ly. Co ns is te nt ly w it h t he se de ci si on s, th e st oc k c ert ifi cat es in di cat edth atMi ck ey , Edward , andSu m ne r were e ach reg is
te redown ers of 1 00 un res tri ct edsh ares of NAI c omm on st oc k. Al l o f th e p hysic al st oc k c ert ifi cat es were re ta in edinNAI’ s co rp or at e o ffi ce. The de ci si on s t ak enat NAI’s o rg an iz at io na l m eet in g c on ta in edth e se ed s o f th e p ro bl em

th atwou ldbl os so m

in to th e ta x d is pu te no w bef or e u s. Where as Mi ck ey , Edward , andSu m ne r were e ach reg is te redown ers of 3 3.3 3% o f NAI’s- 5 -

[* 5] st oc k, the va lu es of t he ir c on tri bu ti on s t o NAI wer e d is pr op orti on at e to th ei r sh areh ol di ng s, as fol lo ws: Ite m Mi ck ey Su m ne r Edward Tot al Cas h c on tri bu te d $3 ,00 0 -0- -0- $3 ,00 0 Pro pe rty con tri bu te d 30 ,32 8 $1 8,4 45 $1 7,8 45 66 ,61 8 Tot al 33 ,32 8 18,4 45 17 ,84 5 69 ,61 8 Perc en ta ge 47 .88 % 26 .49 % 25 .63 % 10 0% The 19 68 Red em

pt io n As h e ap pr oa ch edag e 7 0, M ic ke y de ve lo pe d apl anto ret ire gra du al ly from act iv e in vo lv em en t i n NAI’s o pe rat io ns . To im pl em en t thi s p la n, h e d eci de d t o tra ns fer apo rti on of h is co m m on st oc k t o h is grand ch il dr enan d t o e xc ha ng e th e ba la nc e o f hi s s ha res for

pre ferr edst oc k. On M ay 6, 1 96 8, M ic ke y

as s et tl orex ecu te d a n a gr eem en t o f trus t fo r th e be ne fitof h is fou r gr an dc hi ldren(Gran dc hi ldren ’s Trus t). Th e th ree t ru st ees were Bel le , Edward , andSu m

ne r. Thatsame day , Mic ke y tra ns ferr ed50 sh ares of NAI co m m on st oc k t o t he Gran dc hi ldren ’s Trus t. His acco un ta nt s atJ.K. Las se r & Co m pa ny (J.K. Lass er) p rep aredan d fi le d o n h is be ha lf ati m el y Fed eral gi ft t ax return v al ui ng th es e sh ares at $ 56 4,0 75 , andMi ck ey pa idth e res ul ti ng gi ft t ax du e.- 6 -

[* 6] Bel le li ke wis e fi le d aFed eral gi ft t ax return c on se nt in g t o h av e Mi ck ey ’s gi ft tre at edas h av in g b eenm ad e o ne -h al f by her. Mi ck ey th enex ch an ge d h is rem ai ni ng 50 sh ares of NAI c omm on st oc k fo r pr eferredst oc k. InDecem be r 19 68 NAI’ s ch art er was am en de d t o p ro vi de fora cl as s o f pr eferredst oc k, an d i n M arch 19 69 Mi ck ey ’s 50 sh ares of c omm on st oc k were re de em edinex ch an ge for86 ,78 0 s ha res of NAI p refe rredst oc k. Thus , as o f Mar ch31 , 19 69 , NAI hadou ts ta nd in g 2 50 sh ares of v ot in g c omm on st oc k t ha t were o wne d b y

Su m ne r (1 00 sh ares ), Edwar d (1 00 sh ares ), an d t he Gran dch il dr en ’s Trus t (5 0 s ha res ). 19 71 Dis pu te As t im e wen t o n Edwardbe cam e in crea si ng ly dis sa ti sf ie d wi th hi s ro le at NAI an d wi th cert ai n d eci si on s tha t M ic ke y an d S umne r ha d m ad e. Als o dur in g th is pe rio d, o ne of Edward ’s chi ldrenwas e xp eri en ci ng ser io us pro bl em s tha t wer e a so ur ce o f fru st rat io n anddi st ract io n t o h im . For ava rie ty of reas on s, h e d eci de d in Ju ne 19 71 to term in at e h is em pl oym en t wi th NAI. Upo n l eav in g, Edwardde m an de d b utdi d n otrece iv e p os se ss io n o f th e 1 00 sh ares of c omm onst oc k re gi st eredinhi s n am e. To h el p s ecu re p os se ss io n o f th es e sh ares , Edwardhi redatt orne y James R. DeGia co m o. Edwardto okth e p os iti onth athe was l eg al ly ent it le d t o, an d h adanun res tri ct edrig htto sel l, the sh ares- 7 -

[* 7] reg is te redinhi s n am e. He th reat en edto sel l the sh ares to anou ts id er i f NAI di d n otred eem

th em at a n app ro pr ia te pri ce. Edwar d’s thr eatto sel l h is sh ares to anou ts id er was an athe m a to Mi ck ey an d S um ne r be cau se th ey

wis he d t o k eep co nt ro l o f th e Red st on e b us in es se s withi n t he fam il y . Mic ke y refu se d t o g iv e Edwa rdhi s s to ck cert ifi cat es , con te nd
in g t ha t NAI h ada ri gh t o f fi rs t re fu sa l t o re pu rch as e th e sh ares . Mic ke y an d h is at to rn ey s al so de ve lo pe d a n a rg um en t tha t a p orti on of Edward ’s st oc k, tho ug h reg is te redinhi s n am e, ha d a ctua ll y be enhe ldsi nc e NAI’s in cep ti on inan“ or al tru st ” fo r th e b en efi t o f Edwar d’s ch il dr en . This arg um en t b ui lton th e fac t tha t Mi ck ey in19 59 ha d c on tri bu te d 4 8% o f NAI’s cap it al y etha d re cei ve d o nl y 33 .33 % of i ts st oc k. Ineffe ct , Mic ke y co nt en de d t ha t h e h adgra tu it ou sl y acco rd edEdwardm or e st oc k t ha n h e was en ti tl edto , andth at , to effe ctua te Mi ck ey ’s in te ntin19 59 , th e “ ex tra ” sh ares sh ou ldbe reg ard edas b ei ng he ldin tru stforEdward ’s chi ldren . Mic ke y to okth e p os it io n t ha t atlea stha lf o f Edwar d’s s ha res were co ve redby thi s al le ge d o ral tru st . The pa rti es ne go ti at edforsi x m on th s i n s earc h o f a res ol ut io n. Th ey ex pl or ed , witho utsu cces s, v ari ou s o pt io ns wher eb y Edwardwou ldrem ai n i n t he bu si ne ss as a n e m

pl oyee orco ns ul ta nt . Edwardoff eredto sel l h is 10 0 s ha res ba ck to NAI, andth e p art ie s ex pl or edva rio us pri ci ng sce na rio s u nd er wh ic h t hi s m ig ht- 8 -

[* 8] oc cu r. As the fam il y patri arch , ho wev er, Mi ck ey ha d m os t o f th e le ve rag e, an d h e in si st edth atEdwardackno wled ge th e ex is te nc e o f anora l tru stfor th e be ne fitof Edward ’s two ch il dr en . Mic ke y ’s in si st en ce o n a n o ral tru stwas a“ li ne in th e sa nd ” an d a“ de al bre ak er.” Upo n re ach in g a n i m

pa ss e, Edwar d aut ho riz edMr. DeGi aco m o t o fi le in Mas sa ch us et ts Supe rio r Co urt two l aws ui ts ag ai ns t M ic ke y , Sum ne r, an d t he Red
st on e fam il y

co m pa ni es : Re ds to ne v. Nat ’l Am us em en ts , Inc ., No. 94 57 5 EQ (NAI Acti on ), an d R ed st on e v . Northe as t Th eatre Co m ., No. 94 57 6 EQ (No rth eas t Acti on ). The NAI Act io n, fi le d i n Dec em be r 19 71 , all eg edth atEdwardown ed10 0 sh ares of v ot in g c omm on st oc k, tha t the se sh ares were “ un en cu m be redan d un res tri ct edas t o t he ir t ran sf erab il it y ,” an d t ha t the 10 0 s ha res sh ou ldbe de li ve red imm ed ia te ly to Edward . Mic ke y an swe redth athe ha d p os se ss io n o f al l the st oc k reg is te redinEdward ’s nam e an d t ha t a p orti on of t he sh ares so reg is te redwere

“ he ldintru stforth e b en efi t o f * * * [Edward ’s] ch il dr en .” Thi s l it ig at io n b ecame qu it e adve rs ari al , andit s p ub li c n atur e was ex tre m el y di st res si ng to th e Red st on e fam il y , esp eci al ly Mick ey ’s wife, Be ll e. Sh e im pl or ed Edwar d t o re ach so m e acc omm od at io n wi th hi s fa th er. Inth e co ur se of n eg ot ia
ti on s, i t b ecame app aren t t o M r. DeGia co m o t ha t Edwardha d t o s ep arat e co m -- 9 -

[* 9] pl et el y

fro m NAI andth atMi ck ey

wou ldno t b e sa ti sf

ie d u nl es s s om e o f Edwar d’s d is pu te d s hares were p la cedintru stforhi s ch il dr en , Mic ha el an d R ut h Ann . A set tl em en t was ul ti m at el y reac he d a lo ng th es e li ne s. No twi th st an di ng th at 10 0 s ha res of NAI v ot in g c omm on st oc k wer e reg is te redinEdward ’s nam e, th e pa rti es ag reedth atEdwardwas the own er “ free an d c le ar o f al l tru st s, re st ric ti on s an d e nc um

br an ces ” o f on ly 66 2 /3 sh ares of s uc h s to ck . They furth er ag reedth at th e rem ai ni ng 33 1/ 3 s ha res of NAI s to ckreg is te redinEdward ’s nam e were t he n he ld , andha d a lways be enhe ldby E dwa rd , “ fo r th e b en efi t o f hi s ch il dr en* * * i n tru stan d n otas b en efi ci al own er.” Th is set tl em en t was a co m pr om is e o f th e p arti es ’ res pe ct iv e p os it io ns . It ref le ct ed , onth e o ne ha nd , Mic ke y ’s des ire to en su re th e fi nanc ia l s ecu rit y

of Edward ’s chi ldrenan d, o n t he othe r ha nd , Edward ’s des ire to co nc lu de th e li ti ga ti on by secu rin g p aym en t fo r atlea stso m e o f hi s s ha res . The set tl em en t ag reem en t d at edJune 30 , 19 72 (Set tl em en t Ag reem en t) p ro vi de d t ha t NAI wo ul d re pu rch as e th e 6 6 2 /3 sh ares of s to ckth atEdwardwas de em edto own . The p art ie s ag reedth atEdward ’s 66 2/ 3 s ha res were t o b e v al ue d at$5 m il li on an d t ha t a r ed em pt io n a gr eem en t wo ul d b e ex ecu te d s im ul ta ne ou sl y . Edwar d a ndNAI exe cu te d t he Red em pt io n Ag reem en t, wh ic h p ro vi de d t ha t the $5
m il li on purch as e p ric e wou ldbe pa idas 4 4 qua rte rly ins ta ll m en ts of $ 12 5,0 00- 10 -

[* 10 ] (in cl ud in g p rin ci pa l an d i nt eres t), p lu s a f in al pa y m en t o f al l p rin ci pa l an d in te res t the n re m ai ni ng du e. NAI exe cute d a n i ns ta ll m en t n ot e th atbo re i nt eres t at th e “ flo at in g p rime rate” ch arg edby the Bo st on ba nkfro m whi chNAI hadob ta in ed
m os t o f it s fi na nc in g. Inex ch an ge forth is stream of p aym en ts , Edwardex ecu te d anass ig nm en t tran sf

erri ng 66 2/ 3 s ha res of v ot in g c omm on st oc k t o NAI. The Set tl em en t Ag reem en t re qu ire d Edwardto ex ecu te irr ev oc ab le de cl arati on s o f trus t, l ik ewis e d at edJu ne 30 , 19 72 , forth e b en efi t o f hi s ch il dr en . Thes e tru st s wer e st y le d t he Ru th AnnRed st on e Tru st(Ru th AnnTrus t) a ndth e Mi ch ael Dav idRed st on e Tru st(Mi ch ael Trus t). Su m ne r was na m edth e so le tru st ee o f eac h tru st . Edwardex ecu te d t wo as si gn m en ts , each tra ns ferr in g 1 6 2 /3 sh ares of NAI st oc k t o S umne r as tru st ee o f th e res pe ct iv e trus ts . Fi na ll y , th e Set tl em en t Ag reem en t re qu ire d t he pa rti es to ex ecu te va rio us rel eas es . All p art ie s ex ecu te d m utua l re le as es res pe ct in g c la im s co nc ern in g Ed
ward ’s own ers hi p i nt eres ts inNAI andNort he as t. Edwa rdres ig ne d fr om all po si
ti on s h e h adhe ldinth e Red st on e fam il y bu si ne ss es an d re si gn edas t ru st ee (o r reli nqui sh edth e ri gh t t o s erv e as su cces so r trus te e) o f al l Re ds to ne fam il y tru st s. Th e Set tl em en t Ag reem en t al so res ol ve d c ert ai n d is pu te s i n t he Nort he as t Act io n t ha t are n otrel ev an t h ere.- 11 -

[* 11 ] On J ul y

19 , 19 72 , th e p art ie s fi le d wi th th e Ma ss ach us et ts Supe rio r Co urt a St ip ul at io n i n t he NAI Acti on set ti ng forth th e te rm s o f th is set tl em en t. Tha t s am e da y , th e Ma ss ach us etts Supe rio r Co urt i ss ue d aFin al Decree in co rp or at in g t he te rm s o f th e Set tl em en t Ag reem en t as setforth inth e St ip ul at io n. Su m ne r’s Tran sf

er o f St oc k t o Tru st s fo r His Ch il dr en On J ul y 21 , 19 72 , th ree wee ks aft er the Set tl em en t Ag reem en t was si gn ed , Su m ne r ex ecu te d i rrev oc ab le de cl arat io ns of tru stforth e b en efi t o f hi s two ch il
dr en . Thes e trus ts were s tyledth e Bre ntDale Red st on e Tru st(Bre ntTrus t) andth e Sh ari Ell inRed st on e Tru st(Sh ari Trus t). Su m ne r was na m edth e so le tru st ee o f each tru st . Thatsame day , 16 2/ 3 o f th e NAI sh ares ori gi na ll y reg is te redinSu m ne r’s na m e were r e-i ss ue d t o t he Bren t Tru st ; 1 6 2 /3 sh ares were re -is su edto th e Sh ari Trus t; an d t he rem ai ni ng 66 2/ 3 s ha res were re -is su edto Su m ne r. Neithe r Su m ne r no r hi s wi fe fi le d agi ft t ax return fo r th e cal en da r qu art er en di ng Sep te m be r 30 , 19 72 . Su m ne r’s tra ns fers of NAI s to ckto th e Bre ntan d S ha ri Tru st s wer e v ol un ta ry . Each t ran sf

er was m ot iv at edby don at iv e in te ntto wardth e n atur al ob jects of Su m ne r’s affe ct io n. By creat in g t he se tru st s an d t ran sf erri ng 33 1/ 3 s ha res of NAI st oc k t o t he m , Sumne r m ad e a g es tu re o f go od wil l t owa rdhi s fa th er, wh o d es ire d t o en su re the fin an ci al sec ur it y of h is fou r gr an dc hi ldrenon equa l t erm s. Ho wev er,- 12 -

[* 12 ] Su m

ne r was no t re qu ire d t o t ak e th es e act io ns by the Set tl em en t Ag reem en t th atres ol ve d Edward ’s laws ui ts . The o nl y ob li ga ti on th atth e Set tl em en t Agr eem en t i m

po se d o n S umne r was th e requi rem en t tha t h e ex ecu te cert ai n rel eas es inco ns id erat io n o f m utua l re le as es ex ecu te d b y th e o th er co nt ract in g pa rti es . The Bren t an d S hari Tru st s, l ik e th e Ru th Annan d M ic ha el Trus ts , reci te th at th e st oc k t ran sf

erre d t o t he m

ha d b eenhe ld“un de r anora l tru st ” si nc e 1 95 9. Pe ti
ti on er p res en te d n o e vi de nc e th atan y “ or al tru st ” actua ll y

ex is te d wh ereb y

Edward orSu m ne r he ldintru stforhi s ch il dr ena po rti onof t he NAI sh ares in it ia ll y reg is
te redinhi s n am e. Rathe r, th e co nc ep t o f an“ or al tru st ” d ev el op edlat er an d was ag reedup on as am ech an is m for set tl in g Edward ’s li ti ga ti on an d i m pl em en ti ng Mi ck ey ’s des ire to en su re the fin an ci al sec ur it y of Edward ’s chi ldren . 19 84 Red em

pt io n On M arch 8, 1 98 4, NAI re de em edth e 8 3 1 /3 sh ares he ldco ll ect iv el y by the Gran dc hi ldren ’s Trus t (5 0 s ha res ), th e Ru thAnnTrus t (1 6 2 /3 sh ares ), an d t he Mi ch ael Trus t (1 6 2 /3 sh ares ). The ag gr eg at e red em pt io n p ric e was $2 1,4 28 ,57 1, orap pr ox im at el y

$2 57 ,14 3 p er s ha re. Fo ll owi ng th is red em pt io n, NAI h ad ou ts ta nd in g o nl y

10 0 s ha res of v ot in g c omm on st oc k. Th es e sh ares were o wne d b y- 13 -

[* 13 ] Su m

ne r in di vi du al ly (66 2/ 3 s ha res ) an d b y th e two Trus ts forhi s ch il dr en (3 3 1 /3 sh ares ), of

whi chhe was the so le tru st ee. The O’ Co nn orLit ig at io n Lit ig at io n c omm en cedin20 06 sh ed s fu rth er l ig hton th e ev en ts in vo lv edin th is cas e. See O’Con no r v. R ed st on e, 89 6 N.E.2d59 5 (M as s. 2 00 8) . Mic ha el Red st on e an d the tru st ees of c ert ai n R ed st on e fam il y tru st s s ue d S umne r, Edwar d, an d NAI, ad va nc in g two m ajor co nt en ti on s. Fi rs t, the y

all eg edth atSu m

ne r in 19 84 ha d i m

pr op erl y cau se d NAI t o re de em , forles s tha n fa ir m ark etva lu e, th e sh ares he ldby the Ru th AnnTrus t, the Mi ch ael Trus t, an d t he Gran dc hi ldren ’s Trus t. The Mas sa ch us et ts Supr em e Co urt ev en tu al ly hel d t ha t thi s cl ai m was t im e ba rred . See i d. at61 6. Se co nd , th e p la in ti ffs all eg edth at , in19 72 , add it io na l s to ck sh ou ldha ve be entra ns ferr edto th e v ari ou s Tru st s b as edon th e p ur po rte d e xi st en ce of a pr io r “ or al tru st .” The “ or al tru st ” is su e was th e subjec t o f ex te ns iv e d ep os iti onan d t ria l t es ti m on y . The tria l co urt co nc lu de d t ha t the pl ai nt iff s h adfai le d t o 3 pr ov e th atanora l tru stwas e ve r cre at ed . O’ Co nn orv. Re ds to ne , No. 2 00 6- 46 06 (Ma ss . Sup . Ct. No v. 2 5, 2 00 9) .

The tri al tra ns cri ptof t he O’ Co nn orli ti ga ti on an d t he trans cri pt s o f certa in 3 de po si ti on s ar e in cl ud edam on g the ex hi bi ts to th e p art ie s’ st ip ul at io n o f fac ts in th e in st an t ca se .- 14 -

[* 14 ] Inde po si ti on an d a t tria l o f th e O’Con no r cas e, Su m ne r te st ifi edth athe ha d tra ns ferr edth e 3 3 1 /3 sh ares of NAI s to ckto th e Bre ntan d S ha ri Tru st s v ol un ta ril y . At h is de po si ti on , he e xp la in edth athe “ vo lu nt ari ly w en t thr ou gh th e sa m e p ro cedu re” a s h is bro th er an d “ ga ve * * * [h is ] own ch il dr en ” th e st oc k. Whil e itwas Mi ck ey ’s po si ti on “ th atat l eas t 5 0 p erce nt ” o f Edwar d’s s ha res were h el d fo r Edwar d’s ch il dr en , Sumne r te st ifi edth atMi ck ey ha d n ev er ex pr es se d t he same rese rv at io n re ga rd in g S umne r’s own sh ares . He con ti nu ed : “ I vo lu nt ari ly set up a n arra ng em en t-- cal l i t wh aty ouwil l-- whe re m y ownch il dr enwou ldge t a t hi rdof t he st oc k. * * * I wan te d t o d o t he same thi ng th atm y bro th er d id , on ly he d iditas a res ul t o f li ti ga ti on . I di d i t v ol un ta ril y .” At tria l i n t he O’ Co nn orcas e Su m ne r m ai nt ai ne d t he same po si ti on : “Nobo dy sue d m e. I ga ve m

y ki ds a th irdof t he st oc k v ol un ta ril y , no t as th e res ul t o f a la wsu it . In [s ]o do in g, I d idwhatI wan te d a ndap pe as edm y fathe r to o.” He tes ti
fie d t ha t “ [t]he re was a bi g d iff eren ce b etweenEdd ie ’s po si ti onan d m in e” b ecau se Edwar d “ was res is ti ng do in g wh atm y fathe r wan te d,” wher eas Su m ne r was si m

pl y tryin g t o m ai nt ai n g oo d fam il y rel at io ns . He lat er t es ti fie d t o the same effect :

“ Edd ie was s ue d. I was no t. An d Ed di e h adto fin d ajus ti fic at io n fo r wha t h e was do in g i n t ran sf

erri ng . I wasn ’t su ed . I justm ad e anou tri gh t g ift .”- 15 -

[* 15 ] Co nt em

po ran eo us Tax Ad vi ce Dur in g t he 19 60 s Sa m

ue l Ro se n was a partn er atJ.K. Las se r, an d P et er Is en be rg was acert ifi edpubl ic acco un ta ntth ere. (J .K. Lass er s ub se qu en tl y m erg ed with To uc he Ro ss & Co ., no w Delo it te .) Afterth e 1 97 2 t ran sa ct io n, M es sr s. Ro se n an d Is enbe rg form edth ei r own firm (Ro se n P C) thr ou gh whi chMr. Ro se n s erv ed as th e Red st on e fam il y

acco un ta nt . He work edforSu m ne r an d NAI b efo re the 19 72 tra ns act io ns an d c on ti nu edto do so form an y y ears aft erwar ds . Mr. Is enbe rg de sc rib edMr. Ro se n, wh o was de ceas edat t he ti m e o f tr ia l, as a kn owl ed ge ab le an d c aref ul pro fes si on al who alwa y s en de av or edto ge t the rig htan swe r. Su m ne r so ug htan d re cei ve d a dv ic e fro m Mr. Ro se n abo utth e ta x c on se qu en ces of h is tra ns fer o f st oc k t o t he Bren t an d S ha ri Tru st s. Mr . Ise nb erg cred ib ly test ifi ed : (1 ) th atMr. Ro se n h adob ta in edadvi ce fr om J.K. Las se r’s na ti on al off

ic e ab ou t thi s tran sa ct io n; (2) th atth is advi ce was m em or ia li zedina le tt er o r m em or an du m

whi chco nc lu de d t ha t Su m ne r was no t re qu ire d t o fi le a gi ft ta x re turnbe cau se he ha d m ad e n o t ax ab le gi ft; an d (3 ) th atMr. Ro se n, wh o was th or ou gh ly fam il ia r with t he 19 71 li ti ga ti on an d i ts aft erm ath, ex pr es se d h is ag reem en t wi thJ.K. Las se r’s co nc lu si on . Mr. Is enbe rg pe rs on al ly han dl edpe ti ti on er’s 4 Mr. Is enbe rg was u nabl e to lo cat e a co py of th e advi ce d oc um en t fr om J.K. 4 Lass er’s n at io na l o ffi ce. The Co urt fo un d t hi s u ns ur pr is in g b ecau se th atdo cu m en t

(co nt in ue d...)- 16 -

[* 16 ] in co m e an d g ifttax fil in gs . He cred ib ly test ifi edth atif J .K. Lass er h ad be li ev eda gi ft t ax return was du e fo r th e quarte r en di ng Sep te m be r 30 , 19 72 , a return wo ul d h av e b eenfil ed . The tax co ns eque nc es of S umne r’s 19 72 tra ns fer wer e li ke wis e ad dr es se d du rin g t he O’ Co nn orli ti ga ti on . Mr. DeGia co m o t es ti fie d i n d ep os it io n t ha t J .K. Lass er p ro vi de d atax op in io n fo r th e tr an sa ct io n. Su m ne r te st ifi edth atMr. Ro se n

“ wou ldha ve m ad e th e d et erm in at io n” whet he r a g ifttax return was requi redto be fil ed . “ If the re were a gi ft t ax du e an d g ifttax return, i t wo ul d h av e b eenfil ed . If th ere was a gi ft t ax * * * due , itwou ldha ve be enpa id .” Co ns is te nt ly w ith t ha t pr ev io us tes ti m on y , Sum ne r te st ifi edinth e in st an t ca se th athe ha d re li edon hi s ac co un tant s an d l awy ers to de te rm in e whe th er g ifttax ha d t o b e p ai d i n 1 97 2 a nd

“ [t]he y ap pa ren tl y

co nc lu de d t ha t the re was no tax du e.” Su m ne r ha s fi le d 3 4 F ed eral gi ft t ax returns du rin g t he co ur se of h is li fe. He fil edth e fi rs t s uc h re tu rnin19 70 ; the ne xttwo in19 80 ; an d 3 2 a dd it io na l re tu rn s fo r va rio us pe rio ds be twee n 1 98 2 a nd20 12 , all rep orti ng tax ab le gi fts . On th e ba si s o f th e advi ce h e rec ei ve d fr om Mr. Ro se n a ndJ.K. Las se r, ho wev er, Su m ne r di d n otfil e a Fed eral gi ft t ax return fo r th e qua rte r en di ng Sep te m be r 30 , 19 72 . (...co nt inue d) 4 wou ldha ve be endra fte d 4 3 years a go . Mr. Is enbe rg cred ib ly test ifi edth athe recal le d s eei ng th is do cu m en t co nt em po ran eo us ly w it h t he ev en ts inqu es ti on .- 17 -

[* 17 ] IRS Sc ru ti ny of Pet it io ne r Dur in g 1 97 4, i n t he wake of t he W at erg at e in ve st ig at io n, the IRS i ni ti at ed wha t was cal le d the Po li ti cal Cam pa ig n C on tri bu ti onCo m

pl ia nc e Pro

ject ( Co m

pl ian ce Pr ojec t). A Sen at e Sel ectCo m m it te e o n P res id en ti al Cam pa ig n Act iv it ie s h ad ex pr es se d c on cern th atso m e d on or s m ig htbe ev ad in g the law b y m ak in g d on ati on s, i n a m ou nt s s m al le r th anth e $ 3,0 00 an nu al gi ft t ax ex cl us io n, t o m ul ti pl e cam pa ig n c omm it te es th atwere n om in al ly sep arat e b utinfactsupp orte d t he same can di da te . Con gr es s as ke d t he IRS t o i nv es ti ga te th es e co nc ern s. Th e Co m pl ia nc e Pro ject s ou gh t t o d et erm in e whe th er tran sf ers of t hi s ty

pe in vo lv edtax ab le “ gi fts ” fo r Fed eral gi ft t ax purp os es . The Sen at e Sel ectCo m

m it te e p ro vi de d t he IRS wi th li st s o f co nt rib ut io ns th atwere t o b e rev ie wed . Sumne r’s na m e ap pe aredon a li stof 1 2 t o 1 4 c on tri
bu to rs inth e North Atl an ti c reg io n wh o h adm ad e p ol it ic al co nt rib ut io ns du rin g 19 70 -1 97 2; th is li stwas a ss ig ne d t o IR S Rev enue Agen t Co rb et t fo r rev ie w. Agen t Co rb et t t es ti fie d t ha t the sco pe of h is rev ie w was l im it edto th e p ol it ic al cam pa ig n co nt rib ut io ns m ad e b y

th es e in di vi du al s. He was un su re wh ethe r he tec hn ic al ly ha d autho rit y , un de r th e sc op e o f th e Co m pl ia nc e Pro

ject, t o i nv es ti ga te ot he r gi ft ta x i ss ue s tha t m ig htha ve co m e to hi s at te nt io n.- 18 -

[* 18 ] InApri l 1 97 5 Ag en t Co rb et t m ai le d S umne r a l et te r cap ti on ed“ Po ss ib le 19 71 an d 1 97 2 Gi ft Tax Liab il it y .” The l et te r as ke d S umne r to id en ti fy all tra ns fers he ha d m ad e to po li ti cal co m m it te es du rin g 1 97 0- 19 72 an d t o p ro vi de co pi es of can cel edch eck s d oc um en ti ng an y su chtra ns fers . Sum

ne r pr om pt ly pro vi de d t he reque st eddo cu m en ta ti on , in cl ud in g s ch edul es of h is trans fers to po li ti cal co m m it te es durin g 1 97 0- 19 72 , cop ie s o f al l re le va ntcan cel le d c he ck s, an d c op ie s o f pr om is so ry

no te s h e h adrece iv edfortwo lo an s ex ecu te d i n 1 97 1. Onth e b as is of th is in fo rm at io n t he IRS co nc lu de d tha t “ th ere was no ne ces si ty to s ol ic ita gi ft t ax return fo r 19 72 .” In20 10 , app aren tl y

as ares ul t o f th e O’Con no r li ti ga ti on , Sumne r’s 19 72 tra ns fer o f st oc k t o the Bren t an d S ha ri Tru st s ca m e to th e IRS ’ at te nt io n. Itacco rd in gl y co m m en ced , inMay 201 1, a g ifttax ex am in at io n c ov eri ng pe ti ti on er’s 19 72 cal en da r y ear. IR S Rev enue Agen t Ch a was ass ig ne d t o c on du ctth is ex am ina ti on . The fo cu s o f hi s ex am in at io n was pe ti ti on er’s p ot en ti al gi ft t ax li ab il it y rel at edto th e 1 97 2 s to ck

tra ns fer. Ag en t Ch a was no t awa re, wh enco nduc ti ng th is ex am in at io n, tha t the IRS h adpe rfo rm edanearl ie r rev ie w of Su m ne r’s 19 72 po li
ti cal cam pa ig n c on tri bu ti on s. Age ntCh a’s ex am in at io n l as te d m or e th ana y ear. Onsev eral oc cas io ns , he reque st eddo cu m en ts th atth e IRS di d n otpo ss es s, an d S umne r th ro ug h h is att or -- 19 -

[* 19 ] ne y s co m

pl ie d wi theachof t he se do cu m en t re qu es ts . Sumne r di d n ot co m pl ai n, atan y

ti m e dur in g the au di t, o f a p ot en ti al “ se co ndex am in at io n” in vi ol at io n o f se ct io n 7 60 5( b) . He firs t ra is edth e p os si bi li ty of a “ se co nd ex am in at io n” inearl y

20 14 , nea rly a y ear a fte r th e IRS ha d i ss ue d t he no ti ce o f de fic ie nc y . Thatno ti ce was is su edon Jan ua ry 11 , 20 13 , andSu m

ne r ti m el y pe ti ti on edth is Co urt o n Ap ril 10 , 20 13 . Exp ertValu at io n Tes ti m on y At tria l re sp on de ntoff

ered , andth e Co urt re co gn iz ed , Ste ve n C . Hast in gs as anex pe rt i n v al ui ng clo se ly hel d c om pa ni es an d s to ckin te res ts inclo se ly hel d co m pa ni es . Mr. Has ti ng s re li edpri nc ip al ly on a“ m erg ers an d a cqui si ti on s” ap pr oa ch . Em

pl oyin g t hi s m etho d, h e v al ue d t he 33 1/ 3 s hares of NAI s to ckth at Su m ne r tr an sf erre d o n J ul y

21 , 19 72 , pri nc ip al ly by

refe ren ce t o t he pri ce atwhi ch NAI ha d re de em edEdward ’s 66 2/ 3 s hares th ree wee ks pre vi ou sl y . InMr. Has ti ng s’ op in io n, the $5 m il li on red em pt io n p ric e th atNAI agr eedto pa y Edwardwas n eg ot ia te d a t arm ’s len gt h, was ess en ti al ly con te m po ran eo us with Su m ne r’s tra ns fer, an d yiel de d ava lu e o f $7 5,0 00 pe r NAI co m m on sh are. Mr . Has ti ng s o pi ne d t ha t NAI’s red em pt io n o f Edwar d’s s ha res “ was a pr iv at e tr an sact io n fo r a m in or it y

in te res t” an d t ha t the red em pt io n p ric e th us est ab li sh edth e pe r-s ha re v al ue of NAI’s co m m on st oc k “ on a m in or it y , no n- m ark et ab le in te res t- 20 -

[* 20 ] ba si s.” M r. Hast in gs acco rd in gl y co nc lu de d t ha t the 33 1/ 3 s ha res th at Su m ne r tr an sf erre d t o h is ch il dr en ’s Trus ts inJu ly 197 2 wer e worth $2 .5 m il li on (3 3 1 /3 x $ 75 ,00 0) . Mr. Has ti ng s al so va lu edth e tr an sf erre d s ha res us in g t he “ di rectcap it al iz ati on ” an d “ gu id el in e p ub li c co m pa ny” m etho ds . In p erfo rm in g the se va lu at io ns , Mr. Has ti ng s co nc lu de d t ha t a d is co un t fo r la ckof m ark et ab il it y was n eces sa ry ; h e de te rm in edth e ap pr op ria te di sc ou ntto be 34 %. App lying th is di sc ou nt , he d et erm in edva lu es forth e 3 3 1 /3 sh ares of $ 2,4 33 ,60 8 and$2 ,99 7,0 54 , res pe ct iv el y . Pet it io ne r of

fere d, an d t he Co urt re co gn iz ed , Gord onKlei n a s an expe rt i n th e fi el d o f bu si ne ss va lu at io ns . He det erm in edth e v al ue of t he tra ns ferr edsh ares us in g t he so -cal le d e ng raft in g m etho d. As hi s s ta rti ng po in t fo r va lu in g the NAI sh ares th atSu m

ne r tr an sf erre d i n J ul y

19 72 , Mr. Kle in us edth e p er-s ha re p ric e, $2 57 ,14 3, tha t NAI p ai d t o re de em th e Tru st s’ sh ares inMarc h 1 98 4. He co m pu te d rat io s b etweenth e 1 98 4 re de m pt io n p ric e an d (1 ) NAI’s av erag e n etin co m e fo r 19 81 -1 98 3 a nd(2) th e b oo k v al ue of NAI’s co m m on sh areh ol de rs ’ equi ty in 1 98 4. He th en“ ap pl ie d t he se same rati os to co m pa rab le NAI dat a ex is ti ng at o r ab ou t the ti m e” o f Su m

ne r’s trans fer. Onth e b as is of the se rat io s, M r. Klei n c on cl ud edth at th e 3 3 1 /3 sh ares th atSu m ne r tr an sf erre d t o h is ch il dr en ’s Trus ts inJu ly 197 2 wer e worth$7 35 ,98 1 (3 3 1 /3 x $ 22 ,07 9) .- 21 -

[* 21 ] OPINION I. Thre sh ol d Is su es A. Bu rd enof P ro of The Co m m is si on er’s d et erm in at io ns ina no ti ce o f de fic ie nc y are g en eral ly pr es um edco rrec t, an d t he tax pa y er b ears th e b ur de n o f pr ov in g tho se de te rm in ati on s erro ne ou s. Ru le 14 2( a); W el chv. Hel ve rin g, 2 90 U.S. 11 1, 1 15 (19 33 ). Pet it io ne r do es no t co nt en d t ha t the bu rd enof p ro of sh ift s t o re sp on de ntun de r se ct io n 7 49 1( a) as to an y is su e o f fac t. B. Peri odof Li m it at io ns Sect io n 6 50 1( c)(3 ) pr ov id es th at , “ [i]n t he cas e o f fai lu re t o fi le a return, the ta x m ay be ass es se d * * * at any tim e.” Su m ne r di d n otfil e a Fed eral gi ft t ax return rep orti ng th e 1 97 2 t ran sf er o f st oc k t o t he ch il dr en ’s Trus ts . The n ot ic e o f de fici en cy , th ou gh is su ed41 y ears aft er the tra ns fer, was th us ti m el y . See Est at e o f Bro wn v . Comm is si on er, T.C. Mem o. 2 01 3- 50 , at * 8- *9 . See g en eral ly E st at e o f San de rs v. Co m

mis si on er, T.C. Mem o. 2 01 4- 10 0, at*5 . Pet it io ne r m ov edbe fo re tria l fo r jud gm en t o n the pl ead in gs . Adm it ti ng th at th e p eri odof l im it at io ns onass es sm en t was “ te ch ni cal ly sti ll op en ,” he co nt en de d th atres po nd en t was ba rredby lach es fro m de te rm in in g i n 2 01 3 agi ft t ax de fic ie nc y fo r th e th irdqu art er o f 19 72 . Peti ti on er n ot edth athe is “ no w 90 y ears ol d; m at eri al- 22 -

[* 22 ] witne ss es ha ve be ende adforde cad es ; d oc um en ts ha ve lo ng si nc e b een di sc ard edor h av e d is in te gr at ed ; m em or ie s h av e unque st io nabl y ero de d.” Und er th es e ci rcu m st an ces , pet it io ne r de sc rib edth is cas e as in vo lv in g “ anunpr eced en te d ab us e * * * of t he rul e th atno st atut e o f li mit at io ns ap pl ie s.” W e d en ie d t hi s m ot io n b y ord er d at edDecem

be r 5, 2 01 3, co nc lu di ng as fo ll ows : It i s wel l s et tl edth atth e Uni te d S ta te s i s n otsubjec t t o t he de fen se of l ach es inen fo rci ng it s ri gh ts . See Un it edSta te s v . Sum
m erl in , 31 0 U.S. 4 14 , 41 6 (1 94 0) ; Gu aran ty T ru stCo . v. Un it ed St at es , 30 4 U.S. 1 26 (19 38 ); Un it edSta te s v . Men at os , 92 5 F .2d33 3, 33 5 (9 th Cir . 19 91 ); Wrig htv. Co m m is si on er, T.C. Mem o. 2 00 5- 5, 8 9 T.C.M. (CC H) 66 2, 6 66 . The i napp li cab il it y of the lac he s d oc tri ne is es pe ci al ly clearwher e (as he re) the Gov ern m en t s eek s t o e nf or ce t ax cl ai m s tha t ar e g ov ern edby an ex pr es s s ta tu te of l im it at io ns . In s uc h cas es , th e “ ti m el in es s o f Gov ern m en t cl ai m s i s g ov ern edby the st atu te of l im it at io ns en act edby Con gr es s.” Fe inv. Un it edSta te s, 2 2 F.3 d 6 31 , 63 4 (5 th Cir . 19 94 ). Acco rdKoh le r v. C omm is si on er, T.C. Mem o. 2 00 8- 12 7, 9 5 T.C.M . (CCH) 1 49 4, 1 49 6- 97 ; Wrig htv. Co m m is si on er, 8 9 T.C.M . at 6 66 . A party ass ert in g l ach es m us t es tabl is h c ert ai n fa ct s. If thi s equi tabl e d efen se were av ai labl e to pe ti ti on er, h e wou ldne edto de m on st rat e (fo r ex am pl e) tha t the IRS was aware o f th e 1 97 2 g ift s b utsaton it s ri gh ts an d t ha t p et it io ne r su ffer ed

“un du e p reju di ce” a s a r es ul t. See , e.g., Fri do vi chv. Co m m is si on er, T.C. Mem o. 20 01 -3 2, 8 1 T.C.M . (CCH) 1 14 3, 1 14 6. Pe ti ti on er m ad e n o e ffo rt t o e st ab li sh su ch fact s attri al . Qui te th e co nt rary: th e ev id en ce i nd ic at edth atth e IRS di d n otbe
-- 23 -

[* 23 ] co m e aware of t he 19 72 trans fers un ti l 2 01 0, af te r th e O’Con no r li ti ga ti on ha d e nd ed , andres po nd en t co m m en cedhi s g ifttax ex am in at io n re as on ab ly pr om pt ly the reaf

te r. In a ny even t, p et it io ne r di d n otadva nc e arg um en ts ba se d o n la ch es or o th er equi tabl e d efen se s i n h is pre tri al m em or an du m or i n h is po st -tr ia l br ie fs . See Me nd es v. Co m m is si on er, 1 21 T.C. 30 8, 3 12 -3 13 (20 03 ) (h ol di ng th at arg um en ts no t ad dr es se d i n p os t-t ria l b rie f m ay be co ns id eredab an do ne d) . C. Seco ndExam in at io n Sect io n 7 60 5( b) pro vi de s tha t a t axpa y er s ha ll no t b e subjec te d t o “un ne ces sa ry ex am in at io n o r in ve st ig at io ns , andon ly one in sp ect io n o f a t axpa y er’s b oo ks of acco un t s ha ll be m ad e fo r eac h t ax ab le y ear unl es s the tax pa y er re qu es ts ot he rwis e o r un le ss th e Sec ret ary, aft er i nv es ti ga ti on , no ti fie s the tax pa y er i n wri ti ng th at anad di ti on al in sp ect io n i s n eces sa ry .” Co ng res s en act edsec ti on 76 05 (b ) to pro te ct ta xp ay ers fro m

ha ras sm en t b y

“ lo w-ech el on rev enue ag en ts * * * b y requi rin g s uc h ag en ts to cle ar an y

rep et it iv e ex am in at io n wi tha supe rio r.” Uni te d S ta te s v . Po well , 37 9 U.S. 4 8, 5 5- 56 (19 64 ). “ The re i s n o i nt im at io n i n t he leg is lati ve hi sto ry [of sec ti on 76 05 (b )] tha t Co ng res s i nt en de d t he co urts to ov ers ee the Co m m is
si on er’s d et erm in at io ns to in ve st ig at e.” Ib id . The Co urt o f App eal s fo r th e Nin th Ci rcu it , to whi chanap pe al inth is cas e wou ldli e ab se ntst ip ul at io n t o t he co nt rary, ha s ac co rd in gl y

“ is su edstro ng adm on it io ns ag ai ns t anex pa ns iv e rea di ng of s ect io n- 24 -

[* 24 ] 76 05 (b ).” Cu rti s v . Comm is si on er, 8 4 T.C. 1 34 9, 1 35 2 (1 98 5) (ci ti ng DeMas te rs v. Aren d, 3 13 F.2d79 , 87 (9t h C ir. 1 96 3) ). Pet it io ne r co nt en ds th atth e “ de fic ie nc y sh ou ldbe setasi de be cau se res po nde nt* * * v io la te d t he ‘ on e ex am in at io n’ rul e o f se ct io n 7 60 5( b) .” Acco rd in g t o pe ti ti on er, the rev ie w per fo rm edby A ge ntCo rb et t i n 1 97 5 p ur su an t t o t he Co m pl ia nc e Pro

ject c on st itut edan“ in sp ect io n o f * * * [p et it io ne r’s] boo ks of a cco un t,” with t he supp os edres ul t tha t the 20 11 -2 01 3 g ifttax ex am in at io n was anim pe rm is si bl e “ se co ndin sp ect io n” un de r se ct io n 7 60 5( b) . By way of r em edy , pet it io ne r ur ge s tha t we fo ll ow the an al y si s i n R ei ne m anv. Un it edSta te s, 3 01 F.2d26 7 (7 th Ci r. 19 62 ), an d s etasi de th e g ifttax de fic ie nc y init s en ti rety . W e d ecl in e to do so . At the ou ts et , itis far fr om cle ar tha t Ag en t Co rb et t’s 1 97 5 re vi ew co ns ti
tu te d a n “ in sp ect io n o f [the ] ta xp ay er’s b oo ks of a cco un t” withi n t he m ean in g o f se ct io n 7 60 5( b) . “ To i ns pe ctth e ‘bo ok s o f acc ou nt ’ wou ldrequi re, ata m in im um , th atth e res po nd en t h av e acc es s t o a ndph y si cal ly vie w a tax pa y er’s b oo ks an d re
co rd s.” B en

jam in v. Co m

m is si on er, 6 6 T.C. 1 08 4, 1 09 8 (1 97 6) , aff’d, 5 92 F.2d 12 59 (5t h C ir. 1 97 9) . The IR S h as lo ng tak enth e p os it io n t ha t n arro w, li m it edco nta ct s b etweenth e IRS an d t ax pa y ers , su chas “ co m pl ia nc e ch eck s” an d “ co m pl ia nc e in it ia ti ve pro

jects ,” do no t co ns ti tu te “ ex am in at io ns .” See R ev . Pro c. 20 05 -3 2, 20 05 -1 C.B. 1 20 6, 1 20 7; Rev . Pro c. 94 -6 8, 1 99 4- 2 C .B. 80 3; Int ern al Rev enue- 25 -

[* 25 ] Man ua l (I RM) pt . 4.2 3.3 .6 (J an . 25 , 20 11 ) (co m pl ia nc e ch eck s) ; IR M p t. 4.1 7.1 .2(3 ) (Feb . 25 , 20 10 ) (co m pl ia nc e in it ia ti ve pro

jects ). Co m

pl ia nc e in it ia ti ve pr ojec ts in vo lv e “ co nt actwith s pe ci fic tax pay ers an d c ol le ct io n o f ta xp ay er d at a withi n agro up , us in g e it he r in te rn al or e xt ern al da tato id en ti fy po te nt ia l ar eas of no nc om pl ia nc e wit hi n t he gro up , forth e p ur po se of c orrect in g t he no n- co m pl ian ce.” IR M p t. 4 .17 .1.2 (3 ); s ee M ic ha el Sal tz m an , IRS Pra ct ic e an d P ro cedur e pa ra. 8 .08 [3 ], at 8 -6 9 (J ul y 13 , 20 13 ) (“ Co m

pl ia nc e ch eck s ar e o ne sp eci fic type o f co nt actno t co ns id eredby the Serv ic e to be anex am in at io n[ .] ”). Age ntCo rb et t co nt act edpe ti ti on er i n 1 97 5 a s p artof the Co m pl ianc e Pro ject, wh ic h t he IRS u nd ert oo k at the reque stof t he Sen at e Sel ectCo m m itte e. The pu rp os e o f th is pro

ject was to de te rm in e th e ex te ntto whi chtax pa y ers were m ak in g po li ti cal co nt rib ut io ns th atdi d n otco m pl y with ru le s g ov ern in g the an nu al gi ft t ax ex cl us io n. Ag en t Co rb ett fo cu se d s ol el y on th is is su e; he ex ch an ge d t wo l et te rs with p et it io ne r an d, af

te r rec ei vi ng co pi es of c an cel le d c he ck s an d t wo p ro m is so ry no te s, was sat is fie d t ha t p et it io ne r was inco m pl ia nc e. Res po nd en t co nt en ds th at Age ntCo rb et t’s co nt act , gi ve n i ts li m it edna tu re, d idno t am ou ntto an“ ex am ina ti on ” o f pe ti ti on er’s b oo ks of a cco un t. Cf. El li s v . Comm is si on er, T.C. Mem o. 20 07 -2 07 , 94 T.C.M. (CCH) 1 12 , 11 6 (h ol di ng th atIRS l et te r reque st in g s pe ci fic , li mit edin fo rm at io n was no t an “ ex am in at io n” ev enth ou gh th e ta xp ay er fu rn is he d- 26 -

[* 26 ] co pi es of r eco rd s i n re sp on se ), aff’d i n p art , rev ’d inpa rt o n o th er g ro un ds , 34 6 F . App ’x 34 6 (1 0t h C ir. 2 00 9) . Eve n i f th e 2 01 1- 20 13 ex am in at io n c on st itut eda “ se co ndin sp ect io n,” itis far fr om cle ar tha t the rem edy

wou ldbe to ex pu ng e th e g ifttax de fic ie nc y th atth e IRS d et erm in eddu rin g t hi s ex am in at io n. Th e p ur po se of s ect io n 7 60 5( b) is to reli ev e th e ta xp ay er fro m

un ne ces sa ry

an no y an ce, n otfro m

pa ym en t o f ta xe s l eg al ly owe d. Th e IRS is free to co nduc t a s eco ndex am in at io n s o l on g a s i t “ no ti fie s the ta xp ay er i n wri ti ng th atanad di ti on al in sp ect io n i s n eces sa ry .” Sec. 7 60 5( b) . To in va li da te a no ti ce o f de fic ie nc y be cau se th e IRS ne gl ect edto sen d t hi s ex pl an at ory le tt er wo ul d “ subs ta nt ia ll y ov ers ho otth e g oa l wh ic h t he leg is lato rs so ug htto atta in .” Uni te d S ta te s v . Powe ll , 37 9 U.S. at55 . Accor di ng ly, “ [i]t h as lo ng be en es tabl is he d b y

th is Co urt an d o th ers th atfai lure o f th e Co m m is si on er t o c om

pl y with t he pro vi si on s o f se ct io n 7 60 5( b) * * * d oe s n otin va li da te a de fic ie nc y de te rm in edfro m

in fo rm at io n d eri ve d fr om su chanex am in at io n.” Flynnv. Co m m is
si on er, 4 0 T.C. 7 70 , 77 4 (1 96 3) . Butsee Rei ne m an , 30 1 F .2dat 2 72 . If th e ta xp ay er o bjec ts to anIRS co nt actas an i m pe rm is si bl e “ se co ndex am in at io n,” he
m ay “ refu se to pe rm itth e ex am in at io n and , sh ou ldth e Servi ce s eeken fo rcem en t o f a su m m on s, o pp os e th e ap pl ic at io n fo r en fo rcem en t.” Sa lt zm an , supr a, pa ra. 13 .02 [5 ], W es tl aw (2 01 3) .- 27 -

[* 27 ] Inan y

ev en t, i t i s wel l s et tl edth at“ if atax pa y er fa il s t o o bjec t t o areex am ina ti on or s eco ndin sp ect io n o r vo lu nt ari ly con se nt s t o o ne , he wai ve s an y rig ht s co nf erre d b y sec ti on76 05 (b ).” Id . As we n ot edso on aft er the pre de ces so r of se ct io n 7 60 5( b) was e na ct ed : “ He m ig hthave refu se d t o p erm itth e in ve st ig at io n witho utno ti ce i n wri ti ng [fro m th e IRS ], bu t n otha vi ng do ne so th e p ro te ct io n affo rd edby the st atut e wil l b e d eem edto have be enwaiv ed .” Est at e o f Barke r v. Co m m is si on er, 1 3 B .T.A. 562 , 56 6 (1 92 8) ; ac co rd , e.g., Mo lo ne y v. Un it edSta te s, 52 1 F .2d49 1, 5 01 (6t h C ir. 1 97 5) ; Un it edSta te s v . O’ Co nn or , 23 7 F .2d46 6, 4 76
- 47 7 (2 d C ir. 1 95 6) ; Cr ed itBureauof Eri e, In c. v. Co m m is si on er, 5 4 T.C. 7 26 , 72 9 (1 97 0) ; Fl ynn v. Co m

m is si on er, 4 0 T.C. at77 4; Ph il ip Man go ne Co . v. Un it ed St at es , 54 F.2d16 8, 1 72 (Ct . Cl. 1 93 1) . Age ntCh a b eg anhi s g ifttax ex am in at io n i n 2 01 1, an d i t l as te d fo r m or e th an a y ear. He re qu es te d d oc um en ts fro m pe ti ti on er o n s ev eral oc cas io ns , andpe ti ti on er thr ou gh hi s l awy ers co m pl ie d wi th each su chreque st . Peti ti on er d idno t co m pl ai n a t an y

ti m e dur in g t he au di t o f a p ot en ti al “ se co ndex am in at io n” invi ol at io n of sec ti on 76 05 (b ). He fir strai se d t hi s i ss ue inearl y 20 14 , nea rly a y ear a fte r th e IRS h adm ai le d the no ti ce o f de fic ie nc y on whi chth is cas e is ba se d. Un de r th es e ci rcu m st an ces , we con cl ud e th atpe ti ti on er co ns en te d t o t he 20 11 -2 01 3 e xam ina ti on an d t hu s wai ve d a ny rig ht s tha t s ect io n 7 60 5( b) m ig hthave affo rd edhi m .- 28 -

[* 28 ] W e th us fin d i t unn eces sa ry to de ci de whet he r Age ntCh a’s ex am in at io n was in facta “ se co ndin sp ect io n” of p et it io ne r’s bo ok s o f acc ou ntor wh atrem edy wou ldbe av ai labl e to hi m if tha t que st io n wer e an swe redinth e aff irmativ e. II. App li cat io n o f GiftTax A. Gov ern in g Leg al Pri nc ip le s Dur in g 1 97 2 t he gi ft t ax was i m po se d fo r eac h c al en da r qu art er “ on th e tra ns fer o f pr op erty

by gift ” dur in g tha t qua rte r. Sec. 2 50 1( a)(1 ). “ Whe re p ro pe rty is trans ferr edforles s than a n a de qu at e an d fu ll co ns id erat io n i n m on ey or m on ey ’s worth , th enth e am ou ntby whi chth e v al ue of t he pro pe rty exce ed edth e v al ue of th e co ns id erat io n s ha ll be de em eda gi ft.” Sec. 2 51 2( b) . A nece ss ary co ro ll ary of th is pro vi si on is th ata tr an sf er o f pr op erty

inex ch an ge for“ anad equa te an d fu ll co ns id erat io n” do es no t co ns ti tu te a “ gi ft” forFed eral gi ft t ax purp os es . See, e.g ., Co m m is si on er v . W em

y ss , 32 4 U.S. 3 03 (19 45 ). The re gu la ti on s co nf irm th at

“ [t]he gi ft t ax is no t ap pl ic ab le to a tr an sf er fo r a fu ll an d a de qu at e co ns id erat io n i n m on ey or m on ey ’s worth, o r to ord in ary bu si ne ss tra ns act io ns .” Sec. 2 5.2 51 1- 1( g) (1 ), GiftTax R eg s. The reg ul at io ns de fin e a “ tra ns fer o f pr op erty m ad e in th e o rd in ary co ur se of bu si ne ss ” as “ a tr an sa ct io n wh ic h i s b on a fi de , at arm ’s len gt h, an d fr ee fr om an y do na ti ve in te nt .” Sec. 2 5.2 51 2- 8, Gi ft Tax Reg s.; see W el le r v. C omm is si on er, 3 8- 29 -

[* 29 ] T.C. 79 0, 8 06 (19 62 ). A tran sa ct io n m eet in g t hi s s ta nd ard“ wil l b e co ns id eredas m ad e fo r anad equa te an d fu ll co ns id erat io n i n m on ey or m on ey ’s worth .” Sec. 2 5.2 51 2- 8, Gi ft Tax Reg s. A tr an sf er o f pr op erty

withi n afam il y gr oup n orm al ly recei ve s cl os e sc ru ti ny. See, e.g ., Fraze e v . Comm is si on er, 9 8 T.C. 55 4, 5 61 (19 92 ). Howev er, a tran sa ct io n b etweenfam il y m em be rs m ay be tre at ed as on e “ in th e o rd in ary co ur se of b us in es s” if i t co ns ti tu te s an arm ’s-le ng th tra ns fer of pro pe rty in s et tl em en t o f a g enui ne di sp ut e o r ot he rwis e m eet s the cri te riaset fo rth ab ov e. See St ernv. Un it edSta te s, 4 36 F.2d13 27 , 13 30 (5t h C ir. 1 97 1) ; Ro se nt ha l v . Comm is si on er, 2 05 F.2d50 5, 5 09 (2dCir . 19 53 ), rev ’g 17 T.C. 10 47 (1 95 1) ; Es ta te of F rie dm anv. Co m m is si on er, 4 0 T.C. 7 14 (19 63 ); B ev eri dg e v . Co m m is si on er, 1 0 T.C. 9 15 , 91 7- 91 8 (1 94 8) ; Es ta te of An de rs on v. Co m mis si on er, 8 T.C. 7 06 , 72 0 (1 94 7) . B. Su m

ne r’s Tran sf

er as a “ Gift ” InEst at e o f Red st on e v . Comm is si on er, 1 45 T.C. __ , __(sl ip op . at 3 1) (Oct . 26 , 20 15 ), we he ldth atEdward ’s Ju ne 19 72 tra ns fer o f st oc k t o h is ch il dr enpu rsu an t t o t he Set tl em en t Ag reem en t was no t a g iftbu t was a “ tra ns fer o f pr op erty m ad e in th e o rd in ary co ur se of b us in es s.” Se c. 25 .25 12 -8 , GiftTax R eg s. We fo un d tha t a g enui ne di sp ut e ex is te d c on cern in g Edward ’s own ers hi p o f NAI st oc k an d t ha t h e was for cedto rel in qu is h h is cla im to own ers hi p o f 33 1/ 3 s hares in- 30 -

[* 30 ] ord er t o o bt ai n fr om Mi ck ey an d S umne r anackno wled gm en t o f hi s own ers hi p o f th e rem ai ni ng 66 2/ 3 s ha res . W e h el d t ha t Edward ’s trans fer o f th e di sp ut edsh ares to tru st s fo r hi s ch il dr en , at M ic ke y ’s in si st en ce, was th us m ad e fo r a “ fu ll an d a de qu at e co ns id erat io n i n m on ey or m on ey ’s worth.” Est at e o f Red st on e v . Comm is si on er, 1 45 T.C. at _ _ (s li p o p. at31 ) (ci ti ng sec ti on 25 .25 12
- 8, Gi ft Tax Reg s.). Thre e week s af

te r Edwar d’s l it ig at io n was set tl ed , Sumne r li ke wis e tr an sferr ed33 1/ 3 NAI s ha res to tru st s fo r hi s o wn ch il dr en . In co nt en di ng th atth is tra ns fer s ho ul d a ls o b e ex em ptfro m gi ft t ax , Sumne r se ek s t o p ortra y itas p artof th e o ve ral l re co nf

ig ur at io n o f st oc k o wne rs hi p b y whi chth e p art ie s b ro ug htEdward ’s li ti ga ti on to a cl os e. “ Bu t fo r th e li ti ga ti on with Edwardan d t he set tl em en t reac he d b y

th e p art ie s,” S um

ne r subm it s tha t h e wou ldno t h av e es tabl is he d t ru st s fo r hi s ch il dr eninJu ly 197 2. “ By crea ti ng tru st s h e o th erwi se wou ldno t h av e es tabl is he d a t the ti m e,” Su m ne r al le ge dl y

“ faci li ta te d t he set tl em en t o f hi s br ot he r’s li ti ga ti on ,” “ ap pe as edhi s fa th er,” an d “ po is edhi m se lf t o b eco m e NAI’s
m ajor it y sh areh ol de r.” He acc or di ng ly con te nd s tha t h is tra ns fer, l ik e Edwa rd ’s, was “ m ad e in th e o rd in ary co ur se of b us in es s” an d fo r “ anad equa te an d fu ll co ns id erat io n i n m on ey

or m on ey ’s worth.” Sec. 2 5.2 51 2- 8, Gi ft Tax Reg s.- 31 -

[* 31 ] W e d o n otfin d t hi s ar gu m en t p ers ua si ve . There is no ev id en ce tha t an y di spu te ex is te d i n 1 97 1- 19 72 co nc ern in g o wne rs hi p o f Su m ne r’s st oc k o r th atMi ck ey was de te rm in edto withh ol d a ny of Su m ne r’s sh ares fro m

hi m . To th e co nt rary: th e ev id en ce s ho wedth atMi ck ey an d S umne r were wo rk in g i n c on certto dri ve Edwardou t o f th e co m

pa ny andth atth e “ or al tru st ” th eo ry was aweap on th ey

de
pl oyed ag ai ns t Edwardinaneffo rt t o a ch ie ve th atgo al . Becau se no de m an d was ev er p la cedon Su m

ne r’s sh ares , no ne go ti at io ns ev er o ccu rredco nc ern in g h is own ers hi p o f th os e sh ares . Sumne r ne ve r fi le d alaws ui t, an d h e rec ei ve d n o rel eas e o f cl ai m s fr om

Mi ck ey (or an y on e el se ) up on trans ferr in g h is st oc k. W e li ke wis e d is cern no co nv in ci ng ev id en ce tha t Su m ne r’s tra ns fer “ faci li
ta te d the set tl em en t o f hi s b ro th er’s l it ig at io n.” The Se tt le m en t Ag reem en t h ad be enfin al ly execu te d t hr ee wee ks be fo re Su m ne r m ad e h is tra ns fer. Th e Set tl em en t Ag reem en t d oe s n otm en ti on an y pro sp ect iv e tr an sf

er o f st oc k b y

Su m ne r, an d t he re i s n o d oc um en ta ry ev id en ce tha t h is pro m is e to m ak e su cha tr an sf er was a co nd it io n p rece de ntto th e Set tl em en t Ag reem en t. By it s t erm s, the Set tl em en t Agr eem en t i m

po se d n o o bl ig at io ns on Sum ne r ex cep t tha t h e ex ecu te rel eas es in ex ch an ge forreci pr oc al rel eas es fro m each of t he ot he r pa rti es . 5 Inco nt en di ng th atEdward ’s li ti ga ti on “ was res ol ve d b y bo th Edwardan d 5 * * * [S umne r] agree in g t o t ran sf er 1 6 2 /3 sh ares of NAI s to ckto each of t he ir (co nt in ue d...)- 32 -

[* 32 ] Pet it io ne r’s tra ns fer o f st oc k t o h is ch il dr enwas u nd oubt ed ly pro m pt edby th e Set tl em en t Ag reem en t, b oth a s t o i ts ti m in g a ndit s t erm s, an d t hi s tran sf er su rel y pl eas edMi ck ey

by ens ur in g t he fin an ci al sec ur it y of h is fou r gr an dc hi ldren on equa l t erm s. Bu t thi s i s n oten ou ghto m ak e ita tr an sa ct io n “ in th e o rd in ary co ur se of b us in es s.” Pl eas in g p aren ts , li ke pl eas in g c hi ldren , is pre su m pt iv el y a fam il y m ot iv at io n, an d we d is cern no ev id en ce t en di ng to reb utth atpre su m pt io n he re. The re was no cla im ag ai ns t Su m

ne r; t he re were no arm ’s-le ng th ne go ti at io ns ; an d h e rec ei ve d n o c on si de rat io n fr om an y on e in ex ch an ge forhi s tran sf er. Intra ns ferr in g s to ckto th e Bre ntan d S ha ri Tru st s, Su m ne r was ess en ti al ly
m ot iv at edby the ki ns hi p t ha t h e h adwith h is fathe r an d h is ch il dr en . Sumne r was th e so le tru st ee o f bo th hi s ch il dr en ’s Trus ts ; the re i s n o e vi de nc e th athe was (...co nt inue d) 5 ch il dr en ,” pe ti ti on er re li es on a st at em en t i n a20 04 de po si ti on by Mr. DiGia co m o. Whe n a sk edto ex pl ai n h ow the 19 71 -1 97 2 d is pu te was re so lv ed , he s ta te d: “ It was res ol ve d b y

Edd ie be in g d eem edth e o wne r of two -th ird s o f th e sh ares . That is m y be streco ll ect io n. An d t he ot he r on e-thi rdwas t o b e d iv id edbe twee n Mi ch ael an d R

ut h An n. An d t he ir s ha res were h el d u nd er a tru st . Edd ie ’s sh ares were re de em edby the co rp or at io n, an d I b el ie ve th e sa m e ap pl ie d t o S umne r. In ot he r wor ds , Sumne r’s ch il dr enha d the same pro po rti on at e o wne rs hi p, an d t ha t’s ho w th e m at te r was res ol ve d.” Mr. DiGi aco m o n ot edinhi s 2 00 4 d ep os it io n t ha t he was p ro vi di ng a hi gh -le ve l s umm ary of di st an t ev en ts of wh ic h h e h adim pe rfectreco ll ect io n: “ [T]his m at te r go es ba ckawhi le , lo ok in g a t the fil e th is m orni ng , so m e o f itco m es ba ckto m e, bu t wi th ou t h av in g l oo ke d a t the fil e, itwou ldno t ha ve .” Neithe r Su m

ne r, Mr. Di Giac om o, n oran y ot he r witne ss inth e in st an t ca se te st ifi edth ata pr om is e b y Su m ne r to tra ns fer s to ckto th e Bre ntan d S ha ri Tru st s was a co nd it io n p rece de ntto ex ecu ti on of t he Set tl em en t Ag reem en t.- 33 -

[* 33 ] rel uc ta ntto effe ctth is tra ns fer o r th atitdi sa dv an ta ge d h im fro m a bu si ne ss pe rs pe ct iv e. The tran sf

er thu s b ears all th e in di ci a o f do na ti ve in te ntto wardth e 6
na tu ral ob jects of h is affe ct io n. Su m ne r’s te st im on y

inth e O’Con no r cas e fi rm ly sup po rts th es e co nc lu si on s. He te st ifi edrep eat ed ly, bo th inde po si ti on an d a t tria l, tha t h is 19 72 tra ns fer o f st oc k was co m

pl et el y vo lu nt ary. He st at edth athe “ vo lu nt ari ly w en t thr ou gh th e sa m e p ro cedur e” as hi s b ro th er an d “ ga ve * * * [h is ] own ch il dr en ” th e st oc k. He ex pl ai ne d: “ I wan te d t o d o the same thi ng th atm y bro th er d id , on ly he d iditas a res ul t o f li ti ga ti on . I di d i t v ol un ta ril y .” He tes ti fie d s im il arl y at t ria l: “ I ga ve m

y ki ds a th irdof t he st oc k v ol un ta ril y , no t as a res ul t o f a l aws ui t. In[s]o d oi ng , I di d wha t I wan te d a ndap pe as edm y fathe r to o.” He em

ph as iz edth athi s s ha res , un li ke Edwar d’s, were “un en cu m be red ” b y an y li ti ga ti on cla im s: “ Edd ie was s ue d. I was no t. * * * I jus t m ad e anou tri gh t g ift .” W e fi ndth atSu m

ne r’s 19 72 tra ns fer o f st oc k t o t he Bren t an d S ha ri Tru st s was “ actua te d b y

lo ve an d a ffec ti on .” Cf. Bev eri dg e, 10 T.C. at 9 18 ; Es ta te of By co nt ras t, Edwardwas c le arl y rel uc tantto tra ns fer s to ckto hi s o wn 6 ch il dr en ’s Trus ts ; fo r on e th in g, Su m ne r, rathe r th anhe , was the so le tru st ee o f th os e Tru st s. Bo th eco no m ic an d fa m il y reas on s m ot iv at edEdwardto in si ston se cu rin g o ut rig htown ers hi p o f (o r pa y m en t fo r) al l 1 00 sh ares th atwere o rig in al ly reg is te redinhi s n am e. See Es ta te of R ed st on e, 14 5 T.C. at__(sl ip op . at 2 5 & n.5 ).- 34 -

[* 34 ] Nol an d v . Comm is si on er, T.C. Mem o. 1 98 4- 20 9, 4 7 T.C.M . (CCH) 1 64 0, 16 44 -1 64 5. Hi s tran sf

er was an im at edby don at iv e in te ntan d was no t a t ran sa ct io n

“ m ad e in th e o rd in ary co ur se of b us in es s” withi n t he m ean in g o f se ct io n 2 5.2 51 2- 8, GiftTax R eg s. Itwas the refo re a t ax ab le gi ft f orFed eral gi ft t ax purp os es . 7 C. Valu at io n

“ If the gi ft i s m ad e in pro pe rty, the va lu e th ereo f atth e d at e o f th e g iftsh al l be co ns id eredth e am ou ntof the gi ft.” Sec. 2 51 2. Th e fai r m ark etva lu e o f pr op erty is th e p ric e atwhi chitwou ldch an ge ha nd s b etweena wil li ng bu y er an d a wil li ng sel le r, ne it he r be in g u nd er an y co m pu ls io n t o b uy or s el l an d b ot h h av in g reas on ab le kn owl ed ge of r el ev an t fa ct s. Sec . 25 .25 12 -1 , GiftTax R eg s.; see Rev . Ru l. 5 9- 60 , 19 59 -1 C.B. 2 37 . The v al ua ti on of p ro pe rty is aqu es ti on of f act . See Tall ic he t v . Commis si on er, T.C. Mem o. 1 97 4- 25 5. Inva lu in g s ha res of aclo se ly hel d c or po rat io n, “ actua l arm ’s-le ng th sal es of su chst oc k i n t he no rm al co ur se of b us in es s wi th in a reas on ab le ti m e b efo re o r aft er
Pet it io ne r co nt en ds th athi s tran sf er was m ad e in th e o rd in ary co ur se of 7 bu si ne ss be cau se he th ereb y “po is edhi m se lf t o b eco m e NAI’s m ajor it y sh areho ld er.” Bu t Su m

ne r ha d a lre ady

be co m e NAI’s m ajor it y

sh areh ol de r as a res ul t of th e Set tl em en t Ag reem en t; hi s d eci si onth ree wee ks lat er t o t ran sf er 3 3 1 /3 of hi s 1 00 sh ares to hi s ch il dr en ’s Trus ts di d n ot hi ng to en ha nc e h is m ajor it y po si
ti on . This tra ns fer c ou ldbe de em edcau sa ll y rel at edto hi s ac hi ev em en t o f m ajor ity status on ly if itwere a co nd it io n p rece de ntto ex ecu ti on of t he Set tl em en t Agr eem en t. As e xp la in edinth e te xt , we fin d n o c on vi nc in g e vi de nc e th atitwas.- 35 -

[* 35 ] th e v al ua ti on date are the be stcri te riaof m ark etva lu e.” Est at e o f And rews v. Co m m is si on er, 7 9 T.C. 9 38 , 94 0 (1 98 2) . Whe re ac tu al sal e p ric es are u na va il ab le , st oc k m ay

be va lu edby referen ce t o “ th e co m pa ny’ s n etwort h, p ro sp ect iv e earni ng po wer an d d iv id en d- pa y in g c ap aci ty, an d o th er re le va ntfact or s.” Se c. 25 .25 12
- 2( f), Gif t Tax Reg s. Th es e fac to rs can no t b e ap pl ie d wi th m athe m at ic al pre ci si on ; th e wei gh t g iv enva rio us fact or s d ep en ds on th e p art ic ul ar fa ct s o f eac h c as e. Est at e o f And rews , 79 T.C. at 9 40 -9 41 . Inde ci di ng va lu at io n i ss ue s we m ay co ns id er the op in io ns of e xp ertwit
ne ss es pro pe rly adm it te d i nt o e vi de nc e. Helv eri ng v. Nat ’l Groce ry Co ., 30 4 U.S. 28 2, 2 95 (19 38 ). If we fi ndon e ex pe rt’s o pi ni on pe rs ua si ve init s en ti rety , we m ay acce pthi s o pi ni oninpre fere nc e to th e o pp os in g e xp ert ’s. See Bu ffal o To ol & Die Mfg . Co. v . Comm is si on er, 7 4 T.C. 4 41 , 45 2 (1 98 0) . Alte rn at iv el y , we m ay reac h

“ anin te rm ed ia te co nc lu si on as t o v al ue ” b y dra win g s el ect iv el y

fro m th e te st im on y of va rio us ex pe rts . Park er v . Comm is si on er, 8 6 T.C. 5 47 , 56 2 (1 98 6) . 1. Pet it io ne r’s Exp ert Em pl oyin g t he so -cal le d e ng raft in g m etho d, M r. Klei n v al ue d t he sh ares pe ti ti on er tran sf

erre d i n J ul y

19 72 by referen ce t o t he pri ce NAI p ai d t o re de em th e Trus ts ’ sh ares inMarc h 1 98 4. Si nc e v al ue is de te rm in edas o f a s pe ci fic da te ,

“ [o ]nly facts reas on ab ly kno wn atth e v al ua ti on da te m ay serve as t he ba si s fo r- 36 -

[* 36 ] va lu at io n.” Est at e o f Newh ou se v. Co m m is si on er, 9 4 T.C. 1 93 , 21 8 (1 99 0) . Bu t l at er o ccurri ng ev en ts , in cl ud in g l at er o ccu rri ng sal es of s to ck , “ m ay be tak en in to acco un t as ev id en ce o f fai r m ark etva lu e as of t he va lu at io n d at e.” Est at e o f Ju ng v. Co m

m is si on er, 1 01 T.C. 41 2, 4 31 . As a ru le , st oc k t ran sa ct io ns po st -d at in g th e v al ua ti on da te are p ro ba ti ve on ly if th ey oc cur “ withi n areas on ab le ti m e * * * aft er the va lu at io n d at e.” Est at e o f And rews , 79 T.C. at 9 40 ; s ee Es ta te of S can la n v. Co m m is si on er, T.C. Mem o. 1 99 6- 33 1, 7 2 T.C.M . (CCH) 1 60 , 16 2 (c on si de rin g of fers to purch as e st oc k m ad e m or e th an18 m on th s af te r th e v al ua ti onda te ), aff’d witho utpubl is he d o pi ni on , 11 6 F .3d14 76 (5th C ir. 1 99 7) ; J ay so n v . Uni te d S ta te s, 29 4 F .2d80 8, 8 10 (5t h C ir. 1 96 1) (co ns id eri ng as n otto o re m ot e a tran sa ct io n oc cu rri ng 3 1 /2 y ears aft er the va lu at io n d at e). Pet it io ne r ha s ci te d n o c as e in whi cha co urt em

pl oyed, as it s p rin ci pa l v al ua ti on m etric , a st oc k s al e th atoc cu rred as m any as 1 2 years a fte r th e v al ua ti on da te . If we as su m e arg ue nd o t ha t the 19 84 red em pt io n p ric e co ul d b e u se d t o d ete rm in e th e v al ue of NAI s to ck inJu ly 197 2, v ari ou s ad

jus tm en ts wou ldha ve to be
m ad e to tak e acc ou ntof c hang es wrou gh t b y th e p as sa ge of t im e. Thes e wou ldin
cl ud e “ ch an ge s i n g en eral in fla ti on , peo pl e’s ex pe ct at io ns with re sp ectto th atin
du st ry , per fo rm an ces of t he va rio us co m po ne nt s o f th e b us in es s, t ech no lo gy, and th e p ro vi si on s o f ta x l aw th atm ig htaffec t fa ir m ark etva lu es .” Est at e o f Ju ng , 10 1- 37 -

[* 37 ] T.C. at 4 31 -4 32 ; Es ta te of S can la n, 7 2 T.C.M . (CCH) at16 3. Here , ad jus tm en ts be twee n 1 97 2 a nd19 84 m ig htbe requi redfordi ffer en ces inm acro eco no m ic fact or s (s uc h a s i nf la ti on , in te res t ra te s, an d s to ckm ark etva lu es ), in du st ry -s pe ci fic fact or s (s uc h a s ch an ge s i n t he m ov ie in du st ry ), an d c om pa nysp eci fic fact or s (s uc h a s ch an ge s i n t he m ix of NAI’s as se ts or l in es of b us in es s) . Whe n i m pl em en ti ng hi s v al ua ti on m etho do lo gy, Mr. Klei n m ad e n o a dju st m en t o f an y

ki ndto acco un t fo r di ffer en ces be twee n t he m acro -eco no m ic , in du st ry sp eci fic , andNAI-sp eci fic co nd it io ns pre va il in g i n 1 98 4 a ndth os e p rev ai li ng in 19 72 . Andhe pro vi de d n o ra ti on al e fo r fai li ng to m ak e th es e ad jus tm en ts , st at in g:

“ I co ns id eredth e n eedforno rm al iz at io n a dju stm en t b as edonth e av ai labl e d at a. Non e cam e to m in d.” His fai lu re t o m ak e (o r to sh ow the ab se nc e o f a n eedto m ak e) re le vantad

jus tm en ts ren de rs hi s re po rt a lt og ethe r un rel iabl e. W e th us ha ve no ne edto de ci de whethe r hi s “ en gr aft in g m etho d” is anacce pt ab le m etho d o f va lu in g c lo se ly-hel d c om pa ny sto ck ; whet he r th e 1 98 4 re de m pt io n was to o re m ot e 8 fro m th e Ju ly 197 2 v al ua ti on da te to co ns ti tu te pro ba ti ve ev id en ce; or wh ethe r th e

Res po nd en t’s ex pe rt, M r. Hast in gs , op in es th atth e “ en gr aft in g m etho d” is 8 no t a r eco gn iz edm etho d o f va lu in g c or po rat e st oc k. Mr . Klei n a rg ue s tha t h is m etho d, wh ic h e m

pl oys a rat io be twee n t he 19 84 red em pt io n p ric e an d NAI’s n et in co m e, res em

bl es th e “ di rectcap it al iz at io n” m etho d.- 38 -

[* 38 ] pri ce NAI p ai d t o re de em th e Tru st s’ st oc k i n 1 98 4, co nt rary to the co nt en ti on s o f th e O’Con no r pl ai nt iff s, was de te rm in edat f

ai r m ark etva lu e. 2. Res po nd en t’s Ex pe rt Res po nd en t’s ex pe rt, M r. Hast in gs , bas edhi s v al ua ti onof NAI s to ckas o f Ju ly 21, 1 97 2, p rimaril y

onth e p ric e th atNAI pai d t o re de em Edward ’s st oc k o n Ju ne 30 , 19 72 . Mr. Has ti ng s o pi ne d t ha t the $5 m il li on pri ce NAI ag reedto pa y Edwar d was ne go ti at edat a rm ’s len gt h, was ess en ti al ly con te m po ran eo us with Su m ne r’s tra ns fer, an d yiel de d ava lu e o f $7 5,0 00 pe r NAI co m m on sh are. W e ag ree wi th Mr. Has ti ng s. Th e tr an sa ct io n b y whi chNAI red eem edEdward ’s sh ares oc cu rred“ withi n areas on ab le ti m e b efo re * * * th e v al ua ti on da te .” Est at e o f And rews , 79 T.C. at 9 40 . It thu s re fle ct edm ark etco nd it io ns ap pr ox im ati ng th os e p rev al en t thr ee wee ks lat er wh enSu m ne r m ad e h is gi ft. In Est at e o f Red st on e, 14 5 T.C. at__(sl ip op . at 2 2- 23 ), we co nc lu de d t ha t the Settl em en t Agr eem en t p ur su an t t o wh ic h NAI re de em edEdward ’s st oc k was th e res ul t o f arm ’s-le ng th ba rg ai ni ng am on g M ic ke y , Sumne r, an d Edward . The p ric e atwhi ch Edwar d’s s to ck

wou ldbe red eem edwas acen tra l el em en t o f th is barg ai ni ng , and we co nc lu de th atit , inpa rti cu la r, was n eg ot ia te d a t arm ’s len gt h. Mi ck ey , Sum

ne r, an d Edwardwere NAI’s th ree p rin ci pa ls . They ha d worke d fo r NAI fo r de cad es an d wer e th or ou gh ly fam il ia r with i ts fin an ci al co n-- 39 -

[* 39 ] di ti on an d p ro sp ect s. Edwardha d a n e co no m ic in te res t i n g et ti ng pa idas m uc h a s p os si bl e fo r hi s s ha res , andSu m ne r an d M ic ke y

ha d a n e co no m ic in te res t in pa y in g h im

as l it tl e as po ss ib le . All t hr ee were rep res en te d b y co un se l, an d t he y ne go ti at edth is po in t fo r m or e th ana y ear. We fin d t ha t the ou tc om e o f th is ne go ti at io n- -a p er-s ha re p ric e o f $7 5,0 00 --re pr es en te d the fai r m ark etva lu e o f NAI co m m on st oc k a s o f th e v al ua ti on date . This y ie ld s a v al ue of $ 2.5 m il li on forth e 33 1/ 3 s hares th atSu m

ne r tr an sf erre d t o t he Bren t an d S ha ri Tru st s. 3. Pet it io ne r’s Argu m en ts Pet it io ne r adva nc es fou r arg um en ts insupp ort o f hi s s ub m is si on th atth e pr ic e NAI pa idEdwardis no t a r el iabl e in de x o f NAI’s st oc k v al ue . Firs t, h e co nt en ds th atth e Ju ne 30 , 19 72 , red em pt io n tran sa ct io n c an no t b e em pl oyed und er th e reg ul at io ns be cau se Edwardan d NAI wer e “un de r * * * [a ] co m pu ls io n t o b uy orsel l.” Se e se c. 25 .25 12 -1 , GiftTax R eg s. Acco rd in g t o p et it io ne r, Mi ck ey an d NAI were u nd er a co m

pu ls io n t o b uy Edward ’s sh ares “be cau se th ey want edto pr ev en t Edwardfro m

sel li ng hi s s to ck

to anou ts id er”; an d Edwardwas u nd er a co m pu ls io n t o s el l b ecau se he was s up po se dl y un de r fi na nc ia l s tra in . W e fi ndno ev id en ce tha t the tra ns act io n b y whi chNAI red eem edEdward ’s st oc k was inan y

sen se a “ fo rcedsal e.” Cf. Hei ne r v. C ro sb y , 24 F.2d19 1 (3 d C ir. 19 28 ) (n ot in g t ha t “ fo rcedsal es ” d o n otsi gn ify fair m ark etva lu e). The pa rti es di d- 40 -

[* 40 ] no t ac t i n h as te ; the y ne go ti at edforsi x m on th s b efo re Edwardfil edhi s la wsu it s an d fo r an ot he r si x m on th s the reaf te r. See Es tate of S ha rp v. Co m m is si on er, T.C. Mem o. 1 99 4- 63 6, 6 8 T.C.M . (CCH) 1 52 1, 1 52 5 (f in di ng th at th e ex is te nc e o f bu si ne ss di sp ut es be twee n t he sel li ng pa rti es di d n otm eanth ey

“ were u nd er an y

‘ co m pu ls io n’ to sel l” ). All pa rti es were ex pe rie nc edbu si ne ss m en , an d a ll ha d t he ass is ta nc e o f ab le co un se l. The lei su rel y pa ce o f th ei r ne go ti at io ns su gg es ts th atne ithe r si de fel t co m pe ll edto act . As of

te n i n l it ig at io n, ea chsi de he ldso m e le ve rag e o ve r th e o th er b ecau se of t he lat te r’s ci rcu m st an ces . Butth is do es no t m eanth ateit he r was co m pe ll edto act . Qui te th e co ntrary is tru e: th e po ss es si on of l ev erag e o ve r on e’s op po ne ntis oft enanin cen ti ve to ho ldou t ra th er th anto cap itul at e. Seco nd , pet it io ne r po in ts ou t tha t Edwarddi d n otrece iv e th e $ 5 m il li on rede m pt io n p ric e in cas h. Ra th er, h e rec ei ve d fr om NAI a $5 mil li on no te pay ab le in qu art erl y in st al lm en ts ov er 1 0 years. Pe ti ti on er co nt en ds th atEdwardactua ll yrecei ve d p ro ceed s wo rth les s tha n $ 5 m il li on be cau se NAI’ s n ot e b or e in te res t ata

“be lo w m ark et* * * ra te .” The re i s n o fa ctua l s up po rt f orth is arg um en t. Edward ’s no te bo re i nt eres t at th e “ flo at in g p rime rate” ch arg edby the Bo st on ba nkfro m whi chNAI hadob ta in ed
m os t o f it s fi na nc in g. NAI’s fi na nc ia l s tate m en ts sh ow tha t i ts th ird -p arty bo rro w-- 41 -

[* 41 ] in gs were g en eral ly effect edat t he pri m e rat e. Sin ce the pri m e rat e is th e rat e atwhi chNAI bo rro wedfro m it s i ns ti tu ti on al len de rs , itwas an a rm ’s-le ng th in te res t ra te th atful ly com pe ns at edEdwardforth e ti m e v al ue of m on ey an d t he ris k o f no np aym en t. Thi rd , pet it io ne r co nt en ds th atth e $ 5 m il li on red em pt io n p ric e co m

pe ns at ed Edwar d, n oton ly for s urren de rin g 6 6 2 /3 sh ares of NAI s to ck , bu t al so forex ecu tin g re le as es of t he cla im s h e h el d a ga in stNAI, Mic ke y , andSu m ne r. W e fi ndno m eri t i n t hi s ar gu m en t. The Set tl em en t Ag reem en t an d t he Red em pt io n Ag reem en t sp eci fic al ly pro vi de d t ha t NAI wo ul d p ur ch as e Edwa rd ’s 66 2/ 3 s hares for$5 m il
li on , i.e., th atth is co ns id erat io n was be in g p ai d e xc lu si ve ly for h is st oc k. Th e rele as es were p ro vi de d fo r se parat el y inth e Set tl em en t Ag reem en t. Un de r se ct io n 9 th ereo f, Mi ck ey , Sumne r, NAI, andEdwardeachrel eas edall cla im s i n c on si de rati onof t he othe r pa rti es ’ reci pr oc al rel eas e o f cl ai m s. Pet it io ne r ha s s up pl ie d n o re as on to be li ev e th atth e rel eas es th athe , Mic ke y , an d NAI p ro vi de d t o Edwardwere l es s v al uabl e th anth e rel eas es th atEdwardpro vi de d t o t he m . For e xam pl e, Mi ck ey

ori gi na ll y

cla im edth atth e “ or al tru st ” co veredha lf o f Edwar d’s 1 00 sh ares , wher eas Edwardcla im edou tri gh t o wne rs hi p o f al l 1 00 sh ares . Mic ke y

an d Edwardrel eas edth ei r res pe ct iv e cl ai m s p ur su an t t o a co m pr om is e b y

whi chEdwardwas d eem edth e o ut rig htown er o f 66 2/ 3 s ha res .- 42 -

[* 42 ] W it h re sp ectto th is an d o th er cl ai m s, i t i s i m po ss ib le to de te rm in e who se rel eas e was m or e v al uabl e b ecau se th e cas e was set tl edrathe r th antri ed . Ass um in g as we do th atth e p art ie s ra ti on al ly eval ua te d t he ir r es pe ct iv e h azar ds of l it ig at io n, we co nc lu de th atth e rel eas es each pa rty pro vi de d wer e equi va le ntinva lu e to th e rel eas es th ateachpa rty recei ve d. 9 Fi na ll y , pet it io ne r arg ue s tha t the pri ce NAI p ai d t o re de em Edward ’s sh ares was in fla te d b y

a co nt ro l p rem iu m

be cau se it“po si ti on edpe ti ti on er t o o bt ai n c on tro l o f NAI.” W e li ke wis e rejectth is arg um en t. NAI ex ecu te d t he Red em pt io n Agr eem en t wi th Edward ; l og ic al ly, itwou ldno t h av e p ai d a“ co nt ro l p rem iu m ” to acqui re i ts ownsh ares . Sumne r ha d fi du ci ary du ti es to NAI’ s o th er s ha reh ol de rs , in cl ud in g t he be ne fic ia rie s o f th e Gran dc hi ldren ’s Trus t, o f whi chhe was atru st ee. W e wil l n otass um e th atSu m ne r, inord er t o a dv an ce h is ownin te res t, b reac he d h is fiduc ia ry du ti es by caus in g NAI t o p ay Edwardm or e th anhi s s ha res were wo rth .

Pet it io ne r ur ge s tha t we as cri be va lu e to Edward ’s agr eem en t t o “ ha ve no 9 th in g fu rth er t o d o wi th th e b us in es s o r affa irs of” NAI. ButEdwardha d v ol un ta ril y lef t h is em pl oym en t atNAI nea rly a y ear b efo re the Set tl em en t Ag reem en t was ex ecu te d. He m ad e n o c la im s i n t he NAI Acti on forda m ag es ba se d o n t he m an ne r in whi chhi s emplo ym en t en de d. Inth e O’Conno r li ti ga ti on , pet it io ne r ag reedth atth e st oc k Edwardha d t ran sf erre d t o h is ch il dr en ’s Trus ts was p ro pe rly va lu edat $ 75 ,00 0 p er s ha re; he di d n otco nt en d t ha t the pro ceed s Edwardrece iv ed in cl ud edco m

pe ns at io n fo r rel eas e o f em pl oym en t o r ot he r cl ai m s.- 43 -

[* 43 ] In st ead , we acce ptMr. Has ti ng s’ con cl us io n t ha t NAI wo ul d h av e ag reedto pa y Edwardno m or e th anth e am ou nthe wou ldha ve rece iv edby sell in g h is sh ares to anun rel at edth ird -p arty bu y er. Far f

ro m in cl ud in g aco nt ro l p rem iu m , th is am ou ntwou ldin co rp or at e a d is co un t fo r a l ackof m ark et ab il it y , whi chpre su m ab ly is refl ect edinth e $ 5 m il li on red em pt io n p ric e th atth e p art ie s n eg ot ia te d a t arm ’s le ng th . There is no ev id en ce tha t Su m ne r cau se d NAI t o p ay

a pr em iu m

of a ny 1 0 ki ndto acqui re Edward ’s sh ares . Insu m , we fin d t ha t the red em pt io n p ric e NAI pa idEdwardon Ju ne 30 , 19 72 , is a rel iabl e in de x o f th e st oc k’s v al ue on Ju ly 21, 1 97 2, wh enSu m ne r m ad e hi s g ift s. Be cau se we fin d t hi s ac tu al arm ’s-le ng th tra ns act io n t o b e th e b es t i nd icat orof f ai r m ark etva lu e, se e Est at e o f And rews , 79 T.C. at 9 40 , we fin d i t u nne ces sa ry to ex am in e th e res ul ts th atco ul d b e g en erat edun de r th e “ di rectcap it al
iz at io n” an d “ gu id el in e p ub li c co m pany” m etho ds , whi chMr. Has ti ng s al te rn at iv ely em pl oyed. (Aft er ap pl y in g adi sc ou ntforlac k o f m ark et ab il it y , he d et erm in ed

Pet it io ne r ap pe ars to acce ptth is an al y si s wh enhe ag rees th ata 34 % lac k- 1 0 of -m ark et ab il it y

di sc ou ntsh ou ldbe ap pl ie d u nd er the di rectcap it al iz at io n m etho d an d t he gu id el in e p ub li c co m pa ny m etho d, b utno t und er the m erg ers an d a cqui
si ti on s m etho d (wh ic h i s ex act ly how M r. Hast in gs ap pl ie d t he di sc ou nt s) . A dis
co un t fo r la ckof m ark et ab il it y was n otrequi redun de r th e m erg ers an d a cqui si
ti on s m etho d i n t hi s ca se be cau se itwas a lre ady fact or edin to th e $ 5 m il li on red em pt io n p ric e.- 44 -

[* 44 ] un de r th es e ap pr oa ch es va lu es of $ 2,4 33 ,60 8 a nd$2 ,99 7,0 54 , res pe ct iv el y , fo r th e 3 3 1 /3 tra ns ferr edsh ares .) The pa rti es di sa gr ee ab ou t n um ero us inpu ts in to th es e o th er m etho do lo gi es , in cl ud in g NAI’s co stof e qu it y , th e ap pr op ria te “be ta ,” th e co m pa ny’ s ex pe ct ed gr owt h ra te , andth e uni ve rs e o f co m pa rab le co m

pa ni es . Thes e d is ag reem en ts are no t s ur pr is in g b ecau se th e v al ua ti on da te was 4 3 years a go , th e d at a av ai labl e fro m publ ic da taba se s an d NAI’s o wn re co rd s ar e in ad equa te , anditis di ffi cu ltto fin d co m pa ni es co m

pa rab le to NAI in19 72 , whi chwas the n (r athe r in co ng ru ou sl y ) an en te rta in m en t co m

pa ny with m

uc h o f it s v al ue ti edup inreal est at e. Su ffi ce i t t o sa y th atth e $ 2.5 m il li on va lu at io n we h av e d et erm in edon th e b as is of t he Ju ne 19 72 red em

pt io n p ric e fal ls co m fo rtabl y withi n t he ran ge of v al ue s tha t ca n b e ge ne rat edus in g v ari ou s p erm ut at io ns of t he se ot he r fo rm ul as . III. Add it io ns to Tax A. Add it io n t o Tax for Frau d Res po nd en t co nt en ds th atpe ti ti on er i s l iabl e und er s ect io n 6 65 3( b) for an ad di ti on to tax forfrau d. Re sp on de ntbe ars th e b ur de n o f pr ov in g fr au d b y cle ar an d c on vi nc in g e vi de nc e. See Go ldbe rg v. Co m m is si on er, 2 39 F.2d31 6, 3 20 (5t h Ci r. 19 56 ), rev ’g T.C. Mem o. 1 95 4- 24 2. Re sp on de ntco nt en ds th athi s “ as se rti on of th e fraudpe na lt y

is ba se d o n p et it io ne r’s co m pl et e fai lu re t o e xp la in why, gi ve n- 45 -

[* 45 ] th athe kn ew th atth ere was no pre ex is ti ng ora l tru st , * * * [h e] didno t re po rt th is gi ft andpa y

gi ft t ax .” Res po nd en t h as no t m ethi s b ur de n o f pr oo f. The o ral tru stm ay have be ena fic ti on , bu t i t was a fi ct io n wi th real -wo rldco ns eque nc es . Mic ke y pa ss io na te ly be li ev edinth e “ or al tru st ” th eo ry an d, athi s i ns is te nc e, itbe cam e a ce nt ral featur e of th e Set tl em en t Ag reem en t b y whi chEdward ’s li ti ga ti on was re so lv ed . To pl eas e hi s fa th er, Su m

ne r ad op te d t he same “ or al tru st ” te rm in ol og y when m ak in g asym m etric al tra ns fer t o h is ownch il dr en . There is no ev id en ce tha t Su m ne r em br aced th e “ or al tru st ” co nc ep t i n a n e ffo rt t o e va de hi s Fe de ral gi ft t ax li ab il it ie s. B. Oth er Ad di ti on s t o Tax Res po nd en t al te rn at iv el y co nt en ds th atpe ti ti on er i s l iabl e fo r ad di ti on s t o t ax un de r se ct io n 6 65 1( a)(1 ) fo r fai lu re t o fi le a gi ft t ax return a ndun de r se ct io n 66 53 (a) fo r ne gl ig en ce. In19 72 th e Co de im po se d a5% ad di ti on to tax on an y un de rp aym en t at tri bu tabl e to “ ne gl ig en ce o r in te nt io na l d is reg ardof rul es an d reg ul at io ns .” See s ec. 6 65 3( a). The qu es ti on of n eg li ge nc e is on e o f fac t upo n whi chth e ta xp ay er h as th e b ur de n o f pr oo f. Marc el lo v. Co m m is si on er, 4 3 T.C. 16 8, 1 82 (19 64 ), aff’d i n p art , rem an de d i n p art , 38 0 F .2d49 9 (5 th Cir . 19 67 ). A ta xp ay er m ay

sh ow tha t h is fai lure t o fi le a return was no t n eg li ge ntif h e rel ie d i n go odfai th on advi ce fr om a ta x p ro fes si on al th atno tax li ab il it y ex is te d o r th atno- 46 -

[* 46 ] return was requi red . See Co m m is si on er v . Am . Ass ’n of En g’rs Em p’t, In c., 20 4 F .2d19 (7th C ir. 1 95 3) (no ad di ti on to tax wher e ta xp ay er was advi se d b y a rep ut ab le tax att orne y

th athe di d n othave to fil e a return) ; HaywoodLum be r & Mi ni ng Co . v. Co m

m is si on er, 1 78 F.2d76 9, 7 71 (2dCir . 19 50 ). W e fi ndth atpe ti ti on er m ad e th e requi si te sh owi ng of areas on ab le cau se de fen se forbo th ad di ti on s t o t ax . Mr. Ro se n, M r. Is enbe rg , andth e ta x pr of es si on al s atJ.K. Las se r were c om pe te nttax advi se rs . Col le ct iv el y , th ey advi se d S umne r ab ou t h is gi ft t ax fil in g re qu ire m en ts on 34 oc cas io ns be gi nn in g i n 19 70 . Sumne r so ug htan d re cei ve d t he ir a dv ic e co nc ern in g the tax co ns eque nc es of tra ns ferr in g s to ckto th e Bre ntan d S ha ri Tru st s. Th e ev id en ce es tabl is he d t ha t Mr. Ro se n o bt ai ne d a dv ic e fro m J.K. Las se r’s na ti on al off ic e ab ou t thi s tra ns act io n; th atth is advi ce was m em or ia li zedina le tt er o r m em or an du m co nc lu di ng th atno gi ft t ax return was requi redto be fil ed ; tha t M es sr s. Ro se n a nd Is enbe rg co nc urredinth is co nc lu si on ; an d tha t Su m ne r rel ie d o n t hi s advi ce i n go odfai th . W e co nc lu de th atpe ti ti on er i s n otli ab le foranad di ti onto tax for ne gl ig en ce o r fo r fai lu re t o fi le a gi ft t ax return.- 47 -

[* 47 ] To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redfor res po nd en t as to th e d efi ci en cy an d fo r pe ti ti on er as to th e ad di ti on s t o t ax .