United States Tax Court

T.C. Memo. 2024-12

CYNTHIA L. HUFFMAN AND ESTATE OF CHET S. HUFFMAN, 

DECEASED, CYNTHIA L. HUFFMAN, EXECUTOR, ET AL.,1

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 3255-16, 3256-16, Filed January 31, 2024.

 3261-16, 3526-16.

—————

Jonathan N. Kalinski, Robert Samuel Horwitz, Edward M. Robbins, Jr., 

and Evan J. Davis, for petitioners.

Aely K. Ullrich, Alan H. Cooper, D. Anthony Abernathy, and Trent D. 

Usitalo, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

ASHFORD, Judge: The Internal Revenue Service (IRS or 

respondent) determined the following deficiency in federal gift tax and 

additions to tax for R. Lloyd (Lloyd) Huffman’s2 2007 taxable year:

1 Cases of the following petitioners are consolidated herewith: Infinity 

Aerospace Inc., Docket No. 3256-16; Estate of R. Lloyd Huffman, Deceased, Raymond 

Lance Huffman, Executor, Docket No. 3261-16; and Patricia Huffman, Docket No. 

3526-16.

2 After trial Lloyd died and was substituted for in this proceeding by his 

executor, Raymond Lance Huffman.

Served 01/31/24
2 

Year Deficiency

Additions to Tax

§ 6651(a)(1)3 § 6651(a)(2)

2007 $3,727,337 $838,651 $931,834

The IRS determined the following deficiencies in federal gift tax 

and additions to tax for Patricia (Patricia) Huffman’s 2007 taxable 

year:4

Year Deficiency

Additions to Tax

§ 6651(a)(1) § 6651(a)(2)

2007

$3,727,337 $838,651 $931,834

10,297,337 2,316,901 2,574,334

The IRS determined the following deficiencies in income tax, 

additions to tax, and penalties for Chet S. (Chet) and Cynthia L. (Cindy) 

Huffman’s5 2008 and 2009 taxable years:

Year Deficiency

Additions to Tax/Penalties

§ 6651(a)(1) § 6662(a)

2008 $284,489 – $56,898

2009 6,842,147 $1,591,748 1,368,429

3 Unless otherwise indicated, statutory references are to the Internal Revenue 

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are 

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, 

and Rule references are to the Tax Court Rules of Practice and Procedure. Some 

monetary amounts are rounded to the nearest dollar.

4 The IRS issued two deficiency notices to Patricia for her 2007 taxable year.

5 After trial Chet died and was substituted for in this proceeding by his 

executor, Cindy.

[*2]
3

[*3] The IRS determined the following deficiencies in income tax, 

additions to tax, and penalties for Infinity Aerospace, Inc.’s (Dukes’s)6

2008–10 taxable years:

Year Deficiency

Additions to Tax/Penalties

§ 6651(a)(1) § 6662(a)

2008 $1,411,852 $352,963 $282,370

2009 481,084 133,635 96,217

2010 13,031,561 5,693,794 2,606,312

After certain concessions by the parties in the Cindy and Estate 

of Chet S. Huffman case and in the Dukes case,7 the issues remaining 

for decision are whether (1) Patricia and the Estate of Lloyd Huffman

made a taxable gift to Chet in 2007; (2) Patricia made a taxable gift to 

Chet in 2007; (3) Patricia and the Estate of Lloyd Huffman are liable for 

6 Infinity Aerospace was formerly known as Dukes, Inc.; for convenience we 

will throughout this Opinion refer to this corporation as Dukes.

7 By way of a Stipulation of Settled Issues in the Cindy Huffman and Estate of 

Chet S. Huffman case, the parties agree that Chet (now deceased) and Cindy are

(1) entitled to deduct losses on Schedules E, Supplemental Income and Loss, of 

$580,310 and $379,481 for 2008 and 2009, respectively; (2) not entitled to a section 166

bad debt deduction of $571,000 nor a $571,000 capital loss deduction for 2008; (3) not 

entitled to a section 170 charitable contribution deduction of $120,000 for 2008; and 

(4) not subject to an increase in ordinary dividend income of $120,000 from Dukes for 

2008.

By way of a Stipulation of Settled Issues in the Dukes case, the parties agree 

that (1) as part of the computation of “Capital Gain Net Income – Schedule D,” the 

amount of “Cost or other basis of property sold” reflected on the Form 886–A, 

Explanation of Items, attached to the notice of deficiency is increased to $18,079,778 

for 2010; (2) Dukes is not entitled to deductions for legal and professional expenses of 

$306,430, $152,875, and $87,727 for 2008–10, respectively; (3) Dukes is not entitled to 

deductions for depreciation of $318,973, $644,250, and $104,148 for 2008–10, 

respectively; (4) Dukes is not entitled to costs of goods sold of $587,239, $319,244, and 

$63,544 for 2008–10, respectively; (5) Dukes is entitled to a net gain reduction of 

$2,037,398 for 2010; (6) Dukes is entitled to a net operating loss carryback of 

$2,578,291 from 2011 to either 2009 or 2010; and (7) Dukes is entitled to section 170 

charitable contribution deductions of $20,000 and $100,000 for 2008 and 2009, 

respectively. Additionally, on brief in the Dukes case, respondent concedes that the 

section 6651(a)(1) addition to tax for 2010 should be reduced to $2,842,544.
4

[*4] additions to tax pursuant to section 6651(a)(1) and (2) for 2007; 

(4) Cindy and the Estate of Chet Huffman had ordinary dividend income

relating to the sale of Dukes to TransDigm, Inc. (TransDigm), in 2009; 

(5) Cindy and the Estate of Chet Huffman are liable for accuracy-related 

penalties under section 6662 for 2008 and 2009; (6) Cindy and the Estate 

of Chet Huffman are liable for an addition to tax under section 

6651(a)(1) for 2009; (7) Dukes is liable for tax on an increase to capital 

gain net income for 2009; (8) Dukes is liable for additions to tax pursuant 

to section 6651(a)(1) for 2008–10; and (9) Dukes is liable for accuracyrelated penalties pursuant to section 6662 for 2008–10.

When the Petitions were timely filed in these cases, all petitioners 

resided in California including Dukes, which maintained its principal 

place of business in California. These cases were consolidated for 

purposes of trial, briefing, and opinion pursuant to Rule 141(a).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The 

Stipulation of Facts, the Supplemental Stipulation of Facts, and the 

attached Exhibits are incorporated herein by this reference.

I. Background of Dukes and the Huffman Family

Dukes was incorporated in 1958 and headquartered in 

Northridge, California. It manufactured and supplied various 

engineering components to the aerospace industry. Lloyd and Patricia 

both worked for Dukes; he initially as a design engineer and she as a 

bookkeeper.

In 1970 Lloyd was made president of Dukes and acquired 113,365 

shares in the company. During Lloyd’s time as president Dukes 

employed two of Lloyd and Patricia’s sons: Randy and Lance (Randy and 

Lance) Huffman.

In January 1979 Lloyd and Patricia formed the Huffman Family 

Trust (Trust). They appointed themselves trustees of the Trust. Lloyd 

had his 113,365 shares in Dukes reissued to the Trust. The Trust 

acquired an additional 5,000 shares in 1990.

Lloyd held the position of Dukes president until 1987. He stepped 

down from the role after suffering a near fatal car racing accident. 

Within days of the accident, Lloyd and Patricia’s other son, Chet, was 
5

[*5] made chief executive officer (CEO) and issued 5,000 shares of 

Dukes (representing 0.7% of the total outstanding shares).

In March 1990 Lloyd and majority shareholder Robert L.

Barneson8 entered into an agreement (Lloyd-Barneson agreement) 

whereby Lloyd was granted the right to purchase Mr. Barneson’s shares. 

At that time, Mr. Barneson owned 322,241 shares (representing 43% of 

the total outstanding shares). The Lloyd-Barneson agreement entitled 

Lloyd to purchase Mr. Barneson’s shares upon Mr. Barneson’s death or 

by a right of first refusal for a price not to exceed $2 per share. There 

was no specific termination or exercise date for purchasing the shares 

in the agreement.

In June 1993 Lloyd assigned his rights under the Lloyd-Barneson 

agreement to Chet (Assignment agreement). In August 1993 Chet

exercised his assignee rights under the Lloyd-Barneson agreement. By 

separate agreement (Chet-Barneson agreement), he agreed to pay Mr. 

Barneson $150,000 for his 322,241 shares with $50,000 being paid upon 

execution and the remaining $100,000 being paid in equal installments 

over the following five years. As a result of the purchase, Chet became 

the majority shareholder of Dukes with 43.7% of the total outstanding 

shares.

In November 1993 Chet entered into two additional right to 

purchase agreements (RTP agreements)—one with Dukes Research and 

Manufacturing, Inc. (DRM), and another with the Trust. DRM was an 

S corporation owned entirely by Patricia; it owned 304,124 Dukes shares 

(representing 40.5% of the total number outstanding). The Trust owned 

118,635 Dukes shares (representing 15.8% of the total number 

outstanding).

For a sum of $2 and “other good and valuable consideration,” the 

RTP agreements provided Chet with the right to purchase DRM’s and 

the Trust’s Dukes shares for a price not to exceed $3.6 million and $1.4 

million, respectively, upon the death of Lloyd and Patricia. Chet could 

also purchase the shares by virtue of a right of first refusal. The right 

of first refusal exempted offers from Randy and Lance, Chet’s brothers. 

The parties executed an addendum to the RTP agreements that 

provided Chet with the option to purchase the shares at any time, in 

addition to the stated events in the agreements themselves.

8 By January 1971 Mr. Barneson became the majority shareholder of Dukes.
6

[*6] Chet was not permitted to sell, assign, or otherwise transfer his 

rights under the RTP agreements without the consent of the owners. 

For the RTP agreement between Chet and DRM, Chet had to obtain 

DRM’s consent to override the alienability restrictions. For the RTP 

agreement between Chet and the Trust, Chet had to obtain Lloyd and 

Patricia’s consent to override the alienability restrictions.

The RTP agreements provided that they were “not compensatory 

in nature, rather the purpose [was] to retain the ownership of” Dukes 

within the family. A tax opinion letter Chet obtained from the law firm 

Proskauer Rose LLP (Proskauer) stated that the purpose behind the 

RTP agreements “was not compensatory. It was not in connection with 

the performance of services.”

II. Dukes Under Chet’s Leadership

Chet graduated from Pepperdine University in 1983 with a 

bachelor’s degree in business management. He worked abroad after 

college for approximately 14 months before returning stateside to work 

in the off-road racing industry. After his father’s accident, he assumed 

the role of Dukes’s CEO, at which time the company had annual revenue 

of approximately $5 million. From 1993 to 2006 Chet’s salary ranged 

from $65,000 to $85,000. In 2007 it increased to $147,000; at this time 

the salary of Dukes’s only other paid officer was $243,300.

Under Chet’s leadership Dukes expanded its product offerings 

and implemented a new strategy for acquiring and maintaining 

customers. When Chet started at Dukes, the company mainly produced 

in-line boost pumps for piston aircrafts. In the early 1990s it began to 

supply bleed air valves and landed a key contract with the U.S. Air 

Force. This new product line enabled Dukes to build relationships with 

manufacturers Hawker Beechcraft and Cessna. In the late 1990s Dukes 

expanded into cabin pressure control systems.

Chet also altered Dukes’s strategy for obtaining new business. In 

the aerospace parts manufacturing industry, there is a division of how 

parts are incorporated within an aircraft, both in its original design and 

in its maintenance and repairs. The original equipment manufacturer

(OEM) is the parts supplier to the aircraft manufacturer. To become an 

OEM, an aircraft parts supplier will solicit parts specification requests 

from aircraft manufacturers. These are parts that will be incorporated 

into the aircraft’s final design. The parts supplier will then design a 

part and bid it to the aircraft manufacturer. If the aircraft manufacturer 
7

[*7] accepts the bid, it will then subject the part to testing, and upon 

passing the tests, the part will be incorporated into the aircraft.

There is also an aftermarket process by which aircraft parts 

suppliers may generate business. It involves selling the products to the 

purchasers of the aircrafts. The Federal Aviation Administration (FAA) 

has a separate process for this known as Parts & Manufacturing 

Approval (PMA). In this alternative process the aircraft parts 

manufacturer would design a product, seek certification of the part by 

the FAA, and then sell it directly in the aftermarket. The benefit of 

selling via the PMA process was higher profit margins. The aircraft 

manufacturer typically purchases parts from the OEM at much lower 

prices than it will the spare or replacement parts. Chet used the PMA 

process to expand Dukes customer base as well as enhance its 

profitability.

In addition to expanding the company’s product line and altering 

its strategy for acquiring new business, Chet networked extensively and 

strived to acquire and maintain a strong workforce. By expanding into 

the bleed air valve industry, Chet was able to become personally 

acquainted with Hawker Beechcraft’s president. Through that 

relationship Chet became a member of the General Aviation 

Manufacturers Association (GAMA), a lobbying organization for private 

aircraft. Most other GAMA members were industry leaders: presidents 

and other corporate executives of major aerospace companies. This 

allowed Chet to meet and develop personal relationships with customers 

and competitors alike.

Chet expanded and maintained Dukes’s human capital as well. 

When he began with Dukes in the late 1980s, Dukes had approximately 

five engineering employees, one of whom was a part-time sales 

representative. By 2007 he had expanded the engineering team to 

include 18 full-time employees. Despite a competitive hiring 

environment, Dukes was able to keep its employee turnover low. It did 

so by instituting a four-day work week and offering deferred 

compensation plans for engineering employees, among other incentives. 

Under Chet’s leadership Dukes experienced significant growth, and by 

the end of fiscal year 2006 it had annual revenue of approximately 

$28.14 million.

Over the years, members of the Huffman family formed and 

acquired various business entities to support Dukes’s operations. On 

June 25, 2001, Chet and Cindy formed CCC&B, LLC (CCC&B), as equal 
8

[*8] 50% owners. They formed CCC&B as a holding company for 

various intellectual property assets, including several licensing 

agreements with Honeywell Intellectual Properties, Inc. (Honeywell). 

CCC&B entered into sublicensing agreements for the Honeywell 

licenses with Dukes and another affiliate, PMA Sales, Inc. (PMA Sales). 

PMA Sales—owned 60% by Chet Huffman and 40% by Robb Watts—

acted as a distributor for Dukes and specialized in aftermarket sales.

On January 1, 2005, CCC&B entered into an asset purchase and 

sale agreement with GST Industries, Inc., a California corporation that 

manufactured and assembled hydraulic and electro-mechanical 

components for the U.S. military. CCC&B then organized a new Arizona 

corporation, also named GST Industries, Inc. (GST), and transferred all 

of the acquired tangible operating assets to that entity.

Members of the Huffman family formed various business entities 

to lease employees and manufacturing equipment to Dukes. As of June 

30, 2008, there were three leasing companies: (1) Aviation 

Manufacturing & Design Corp. (AMDC); (2) DRM; and (3) TRD of 

California, Inc. (TRD). Dukes was the only customer of each of the three 

leasing companies. The ownership of the leasing companies is set forth 

below:

Entity Chet Lloyd Patricia Randy

AMDC 57% 43% – –

DRM – – 100% –

TRD 66% – – 34%

III. Hanwha’s Proposed Acquisition of Dukes

In the early 2000s Chet began receiving correspondence from 

parties interested in acquiring Dukes. He rejected the offers because 

the company was not for sale. This changed in 2007 when Deloitte 

Corporate Finance, LLC (Deloitte), contacted Chet regarding a potential 

acquisition by its client, Hanwha Corp. (Hanwha), a Korean company. 

In September 2007 Dukes and Hanwha entered into a nonbinding 

memorandum of understanding (MOU), which provided the terms of a 

tentative stock acquisition for a purchase price between $85 million and 
9

[*9] $105 million, depending on the due diligence findings. The MOU 

also contemplated a reorganization before any sale. The following 

Dukes-affiliated entities would transfer their assets to Dukes: 

(1) CCC&B; (2) DRM; (3) TRD; and (4) AMDC. Chet would then form 

the Dukes Group, LLC (Dukes Group), and transfer all of the Dukes 

shares to the new entity. Chet would also transfer all GST shares to 

Dukes Group. The result would be that Dukes Group would be the sole 

shareholder of Dukes and GST with Chet as the sole member of Dukes 

Group.

On October 15, 2007, Chet exercised his rights under the RTP 

agreements, purchasing all of the Trust’s and DRM’s Dukes shares for 

$1.4 million and $3.6 million, respectively. This equates to $11.83 per 

share. He paid for the shares with a promissory note secured by the 

shares. At this point he owned 100% of the outstanding stock of Dukes. 

On June 23, 2008, Chet formed Dukes Group under Nevada law, electing 

to treat it as a disregarded entity. He was the managing member and 

100% owner. On June 30, 2008, he transferred all of the stock of Dukes 

and GST to Dukes Group.

As part of the proposed consolidation, Chet caused AMDC, TRD, 

DRM, and CCC&B to each enter into asset purchase agreements with 

Dukes. These agreements were effective as of June 30, 2008.

The AMDC Agreement provided that Dukes would pay AMDC 

$39,929; the parties would void an employee leasing agreement; and 

AMDC would forgive a $148,508 debt owed by Dukes. The TRD 

agreement provided that Dukes would pay TRD $41,404; the parties 

would void an employee leasing agreement and an equipment leasing 

agreement; and TRD would forgive a $42,123 debt owed by Dukes. The 

DRM agreement provided that Dukes would pay DRM $85,155; the 

parties would void an employee leasing agreement; DRM would forgive 

a $465,000 debt owed by Dukes; and Dukes would assume three thirdparty contracts. The CCC&B agreement (CCC&B-Dukes agreement) 

provided that Dukes would forgive a $904,221 debt owed by CCC&B; the 

parties would void a licensing agreement between Dukes and CCC&B; 

and Dukes would assume three third-party contracts.

On February 23, 2009, Hanwha sent a letter to Chet stating that 

it no longer wished to acquire Dukes. The letter informed him that after 

considering economic conditions and reviewing Dukes’s 2007 and 2008 

financial statements, Hanwha had concluded that an acquisition would 

not be in Hanwha’s best interest.
10

[*10] After the failed acquisition, Chet caused CCC&B and Dukes to 

enter into a modification of the CCC&B-Dukes agreement (Additional 

License Modification or ALM). The ALM was effective as of June 30, 

2008. It provided that the original asset purchase agreement between 

Dukes and CCC&B would be extended to the date of any eventual sale 

to a third party. It also provided that the consideration for a future sale 

of Dukes would include any additional Honeywell licenses acquired by 

CCC&B and that they would be sold for their fair market value at the 

time of sale. The ALM also stated that CCC&B would be the direct 

payee for any portion of the purchase price attributable to the Honeywell 

licenses and any associated goodwill.

Chet caused CCC&B to enter a second modification (Correcting 

Amendment) of the CCC&B-Dukes agreement. The Correcting 

Amendment was dated March 1, 2011, with an effective date of June 30, 

2008. In addition to the consideration stated in the CCC&B-Dukes 

agreement, the Correcting Amendment provided that Dukes would pay 

CCC&B the fair market value of its assets as of the closing date.

IV. TransDigm’s Acquisition of Dukes

After Hanwha decided not to acquire Dukes and its affiliates, 

Chet continued to pursue a sale of Dukes. On March 25, 2009, he

entered into an agreement on behalf of Dukes with Deloitte to provide 

corporate finance advisory services. This agreement provided that 

Deloitte would assist Dukes in developing a brochure—the Confidential 

Information Memorandum (CIM)—to describe the company, as well as 

assist Dukes in marketing the business, selecting a buyer, and 

performing due diligence. Deloitte ultimately distributed the CIM to 

approximately 40 potential buyers. Dukes chose to pursue negotiation 

with TransDigm.

On September 2, 2009, TransDigm sent a letter of intent to 

Dukes, which was approved the same day by Chet as the sole director of 

Dukes. On December 1, 2009, Dukes and TransDigm entered into an 

asset purchase agreement (Dukes-TransDigm agreement). The 

agreement provided for a $95.75 million purchase price, all of which 

would be wired to the sellers at closing, save for $10.5 million which 

would be held in escrow for 24 months. In addition to the base purchase 

price, the agreement provided Dukes with an earn-out of up to $60 

million. The assets acquired by TransDigm were transferred to a newly 

formed subsidiary of TransDigm, Dukes Aerospace, Inc. (Dukes 

Aerospace).
11

[*11] The assets sold as part of the Dukes-TransDigm agreement 

included goodwill, which the agreement defined as “[a]ll goodwill 

associated with the Business, including any personal goodwill of Chet 

Huffman . . . as it relates to the Purchased Assets and the Business.” 

TransDigm was also required to engage the investment bank and 

advisory firm Stout Risius Ross, Inc. (SRR), to prepare a valuation of the 

purchased assets and allocate the purchase price among those assets.

Dukes was then required to engage an independent valuation 

expert, other than Deloitte, to perform an additional valuation to 

determine what portion of the purchase price allocated to goodwill (by 

SRR) should be considered Chet’s personal goodwill versus the 

company’s enterprise goodwill. The final allocation of the purchase price 

was to be binding on the parties.

In accordance with the Dukes-TransDigm agreement, TransDigm 

engaged SRR to perform the asset valuation and purchase price 

allocation. SRR allocated $50.042 million to goodwill. Dukes engaged 

the consulting firm Duff & Phelps, LLC (Duff & Phelps), to perform the 

additional valuation and the allocation of the purchase price among 

the goodwill subcategories. TransDigm approved Duff & Phelps as the 

designated appraiser. 

On June 10, 2010, Duff & Phelps rendered its valuation opinion, 

finding that Chet’s personal goodwill accounted for $21.8 million of the 

total $50.042 million (reached by SRR). Duff & Phelps determined that 

$17.4 million was attributable to Chet’s relationships with clients and 

$4.4 million was attributable to his relationships with Dukes’s key 

employees. Shortly before trial, Duff & Phelps revised its valuation of 

Chet’s personal goodwill to $19.2 million to account for an 18-month 

expected lag time in Chet’s ability to compete.

As part of the Dukes-TransDigm agreement, Chet entered into a 

noncompete agreement with Dukes Aerospace and TransDigm. The 

term of the agreement was four years. The Dukes-TransDigm 

agreement also required that PMA Sales execute an agreement 

relinquishing its rights to the Honeywell licenses that it entered into in 

2001 and 2003. Pursuant to this agreement, PMA Sales agreed not to 

seek parts manufacturer approval from the FAA for four years. Finally, 

the Dukes-TransDigm agreement provided that the transaction and the 

legal relations between the parties would be governed by the laws of the 

State of California.
12

[*12] In April 2010 Chet stopped working at the Dukes Aerospace 

facility.9 On August 23, 2011, Chet, Dukes, GST, and Dukes Group filed 

a complaint against TransDigm and Dukes Aerospace in the Los 

Angeles County Superior Court, asserting claims for contractual fraud 

relating to the Dukes-TransDigm agreement. The parties to that suit 

eventually settled the matter, agreeing to extend the term of Chet’s 

noncompetition agreement to nine years and requiring him to sell his 

interest in PMA Sales, among other terms.

V. Preparation of Tax Returns

Beginning in the early 1990s, Dukes and the Huffman family 

engaged A.R. Beckman and his son Ron Beckman (Mr. Beckman) to 

prepare the company’s and the family’s tax returns. After A.R. Beckman 

passed away, Mr. Beckman took over the practice, employing another 

certified public accountant (CPA), Tammy Ross-Stearn. Chet hired Mr. 

Beckman as chief financial officer of Dukes in 2004. Ms. Ross-Stearn 

took over Mr. Beckman’s accounting practice and the responsibility of 

filing returns on behalf of the Huffman family, Dukes, and all Dukes 

affiliates.

Ms. Ross-Stearn continued to provide accounting and tax 

advisory services to the family and Dukes until August 28, 2009, when 

she terminated the relationship by letter. The termination letter 

indicated that Dukes should immediately retain a new accounting firm 

since the 2007 and 2008 returns were coming due. At the same time the 

IRS was conducting an audit of Dukes’s 2006 Form 1120, U.S. 

Corporation Income Tax Return.

In November 2009 Mr. Beckman contacted a new CPA, Craig 

Whitfield, about being retained as accountant for the Huffman family 

and Dukes. Mr. Whitfield was formally engaged on January 4, 2010. 

His first task was obtaining his new clients’ books and records for the 

year under audit, the delinquent tax returns, and those coming due. He 

reached out to Ms. Ross-Stearn for this information; she indicated that 

all the records had been sent to Dukes’s Northridge, California, facility 

after TransDigm’s acquisition.

Mr. Whitfield thereafter directed his requests to TransDigm’s 

corporate controller, Sean Maroney. After speaking with Mr. Maroney 

9 At a February 3, 2012, meeting of the board of directors of Dukes Aerospace, 

Chet’s employment with Dukes Aerospace was terminated, effective immediately.
13

[*13] in January 2010, TransDigm compiled the documents and shipped 

some 40 boxes to Mr. Whitfield. The boxes began arriving at the end of 

March and early April 2010. The financial statements were 

unorganized and incomplete.

On May 14, 2010, Mr. Whitfield sent Ms. Ross-Stearn a formal 

Circular 230 demand letter, requesting access to Dukes’s client records 

for the fiscal year ending June 30, 2007 (the return for this year was 

then under audit). This led to a meeting with Ms. Ross-Stearn on June 

1, 2010, wherein she provided the trial balance and general ledger of 

Dukes for the year ending June 30, 2007. Ms. Ross-Stearn asserted that 

all other documents were in TransDigm’s possession.

After speaking with Ms. Ross-Stearn, Mr. Whitfield reached out 

to BDO Seidman, LLP, and obtained the financial statements it had

prepared on behalf of Dukes for fiscal years ending 2007–09. Mr. 

Whitfield shared these documents with the IRS revenue agent in charge 

of the audit investigation. He also used the documents to begin filing 

returns on behalf of Dukes, the Dukes affiliates, and the Huffman 

family. Mr. Whitfield engaged another CPA, Mark Hutchinson (a 

partner at the accounting firm Rothstein Kass), to assist in the filing of 

the returns. Mr. Hutchinson also tried to reach Ms. Ross-Stearn, but 

she did not return his calls.

Mr. Hutchinson filed Chet and Cindy’s 2008 and 2009 Forms 

1040, U.S. Individual Income Tax Return, on January 31 and March 8,

2011, respectively. He filed CCC&B’s 2009 Form 1065, U.S. Return of 

Partnership Income, in March 2011; on that return he reported 

approximately $12.692 million in gain from the sale of CCC&B’s 

intellectual property assets. As the members of CCC&B, Chet and 

Cindy reported the intellectual property sale proceeds as section 1231 

gain on their 2009 Form 1040.

Mr. Hutchinson filed Dukes’s 2008–10 Forms 1120 on June 22, 

September 7, and November 22, 2011, respectively. Mr. Hutchinson 

filed separately Patricia and Lloyd’s gift tax returns for 2007 on 

December 27, 2010.

On October 31, 2014, the IRS issued Letters 950-Z (30-day letter) 

to Chet and Cindy, as well as to Dukes. The letters stated that they had 

30 days to review the proposed adjustments and seek a review from the 
14

[*14] IRS Office of Appeals;10 otherwise a notice of deficiency would be 

forthcoming. IRS Team Manager Bryant Stanik signed each 30-day 

letter; he was the immediate supervisor of the individual who made the 

initial penalty determinations that were reflected in each letter. Chet 

and Cindy, as well as Dukes, did not reach a resolution of their cases at 

Appeals. On November 12, 2015, the IRS issued notices of deficiency.11

OPINION

There are two primary issues in these cases: (1) whether Patricia 

and the Estate of Lloyd Huffman made a taxable gift when Chet 

exercised his rights in the RTP Agreements in 2007, buying DRM’s and 

the Trust’s shares in Dukes for $5 million; and (2) whether Cindy and 

the Estate of Chet Huffman, as well as Dukes, properly reported the 

gain from the sale proceeds of the TransDigm acquisition in 2009 related 

to Chet’s personal goodwill and CCC&B’s intellectual property assets. 

The ancillary issue is whether petitioners are liable for certain accuracyrelated penalties and additions to tax.

I. Burden of Proof Generally

Generally, the Commissioner’s determinations set forth in a 

notice of deficiency are presumed correct, and taxpayers bear the burden 

of showing the determinations are erroneous. Rule 142(a); Welch 

v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a) provides an 

exception that shifts the burden of proof to the Commissioner as to any 

factual issue relevant to the taxpayer’s tax liability if the taxpayer 

introduces credible evidence with respect to the issue and meets certain 

other conditions. See § 7491(a)(2).

Petitioners argue that respondent bears the burden of proof on all 

issues because respondent asserted valuations at trial that differed from 

those in the notices of deficiency. In the notices of deficiency the IRS

valued DRM’s and the Trust’s shares in Dukes as of October 15, 2007, 

10 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent 

Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 

983 (2019). We will use the name in effect at the times relevant to these cases, i.e., the 

Office of Appeals or Appeals.

11 Patricia was issued two notices of deficiency. One indicated her joint 

liability—with Lloyd—for the gift tax and additions to tax associated with the Trust’s 

shares. Lloyd received an identical deficiency notice for the liability associated with 

the Trust’s shares. The second notice of deficiency that Patricia received indicated her 

sole liability for the gift tax and additions to tax associated with DRM’s shares.
15

[*15] at $23.9 million and $9.3 million, respectively. The IRS valued 

Chet’s personal goodwill at zero. At trial respondent’s expert testified 

that DRM’s and the Trust’s shares were worth $22.5 million and $8.8 

million, respectively. Respondent’s expert testified that Chet’s personal 

goodwill was worth $3.9 million.

Petitioners argue that Estate of Simplot v. Commissioner, 249 

F.3d 1191, 1193 (9th Cir. 2001), rev’g and remanding 112 T.C. 130

(1999), and Estate of Mitchell v. Commissioner, 250 F.3d 696, 702 (9th 

Cir. 2001), aff’g in part, vacating and remanding in part T.C. Memo. 

1997-461, prove their point. We agree in part.

In Estate of Simplot v. Commissioner, 249 F.3d at 1193, the 

Commissioner conceded that the assessed deficiency was erroneous,

thus forfeiting the presumption of correctness. In Estate of Mitchell v. 

Commissioner, 250 F.3d at 702, the Commissioner concluded in the 

notice of deficiency that the stock at issue was worth $105 million; at 

trial, the Commissioner’s expert valued the stock at $81 million. This 

represented a 19% deviation. The U.S. Court of Appeals for the Ninth 

Circuit determined that this change in value rendered the 

Commissioner’s initial assessment “arbitrary and excessive,” and 

therefore the Commissioner had the burden of proving whether a 

deficiency existed and if so the amount. Id.

Respondent has not conceded that the deficiency notice 

determinations were erroneous; therefore, Estate of Simplot is 

inapposite. Respondent did, however, alter his valuations. At trial 

respondent’s expert valued DRM’s and the Trust’s shares at amounts

that represent a 6% and a 5% change, respectively. We do not think this 

makes respondent’s initial valuation arbitrary and excessive. These 

figures are still entitled to a presumption of correctness.

The IRS determined in the notices of deficiency that no amount 

should have been attributed to Chet’s personal goodwill. In pretrial 

briefing, respondent offered the alternative position that Chet’s personal 

goodwill should be valued at $3.9 million.

On the basis of the Ninth Circuit’s analysis in Estate of Mitchell, 

we agree with petitioners that the IRS’s initial determination as to the 

personal goodwill was arbitrary. See id. at 703. Respondent bears the 

burden of proof on the issue of valuing Chet’s personal goodwill as it 

relates to the TransDigm acquisition of Dukes in 2009. All other 

determinations retain the presumption of correctness.
16

[*16] II. Gift Tax Issue

Respondent asserts that Patricia and the Estate of Lloyd 

Huffman are liable for gift tax arising from the sale of Dukes shares to 

Chet in 2007 when he exercised the options in the RTP agreements. To 

that point respondent argues that the RTP agreements are not 

controlling as to the fair market value of the shares, i.e., the shares were 

not in fact worth $5 million in 2007.

Respondent contends that the shares were worth approximately 

$31.3 million and so the differential value between the purchase price 

and the true fair market value should be deemed a gift. Petitioners 

maintain that the RTP Agreements were valid business arrangements 

and therefore should be conclusive as to the value of the Dukes shares. 

We agree with respondent that the RTP Agreements should be 

disregarded. We ascertain the proper value below.

A. Section 2703 

Section 2703(a)(1) provides that the value of any property must 

be determined without regard to “any option, agreement, or other right 

to acquire or use the property at a price less than the fair market value 

of the property (without regard to such option, agreement, or right).” 

Section 2703(b) provides an exception to section 2703(a) for any option, 

agreement, right, or restriction that meets all of the following 

requirements: (1) it is a bona fide business arrangement; (2) it is not a 

device to transfer such property to members of the decedent’s family for 

less than full and adequate consideration in money or money’s worth; 

and (3) its terms are comparable to similar arrangements entered into 

by persons in an arm’s-length transaction.

If section 2703(b) requirements are satisfied, then the agreement 

may be respected for valuation purposes. See Holman v. Commissioner, 

130 T.C. 170, 191 (2008), aff’d, 601 F.3d 763 (8th Cir. 2010). To meet 

the first requirement of section 2703(b), an “agreement must further 

some business purpose.” Estate of Amlie v. Commissioner, T.C. Memo. 

2006-76, slip op. at 33. Maintaining managerial control or family 

ownership satisfies section 2703(b)(1). See Holman, 130 T.C. at 194 

(“[B]uy-sell agreements serve a legitimate purpose in maintaining 

control of a closely held business.”).

For the second requirement of section 2703(b), we consider the 

totality of the facts and circumstances. Estate of Morrissette 

v. Commissioner, T.C. Memo. 2021-60, at *100. Whether an agreement 
17

[*17] “constitutes a testamentary device depends in part on the fairness 

of the consideration received by the transferor when it executed the 

transaction.” Id. (emphasis added) (citing Estate of True v. 

Commissioner, T.C. Memo. 2001-167, aff’d, 390 F.3d 1210 (10th Cir. 

2004)).

The regulations provide guidance on the final requirement of 

section 2703(b):

A right or restriction is treated as comparable to similar 

arrangements entered into by persons in an arm’s length 

transaction if the right or restriction is one that could have 

been obtained in a fair bargain among unrelated parties in 

the same business dealing with each other at arm’s length.

Treas. Reg. § 25.2703-1(b)(4)(i). “A right or restriction is considered a 

fair bargain among unrelated parties in the same business if it conforms 

with the general practice of unrelated parties under negotiated 

agreements in the same business.” Id. This determination will 

generally entail consideration of the following factors: (1) the expected 

term of the agreement; (2) the current fair market value of the property; 

(3) the anticipated changes in value during the term of the arrangement; 

and (4) the adequacy of any consideration given in exchange for the 

rights granted. Id.

This Court has described the final prong of the section 2703(b) 

exception as “more of a safe harbor than an absolute requirement that 

multiple comparables be shown.” Estate of Morrisette, T.C. Memo. 2021-

60, at *103 (quoting Estate of Amlie, T.C. Memo. 2006-76, slip op. at 41). 

It is therefore permissible to use an isolated comparable to establish 

that section 2703(b)(3) is satisfied. Estate of Amlie, T.C. Memo. 2006-

76, slip op. at 41.

B. Analysis of the RTP Agreements

On the basis of the interrelatedness of the parties to the RTP 

agreements, we review them with respect to section 2703 with a 

heightened level of scrutiny. See Estate of True, T.C. Memo. 2001-167, 

slip op. at 72 (“In evaluating whether buy-sell agreements were 

substitutes for testamentary dispositions, greater scrutiny was applied 

to intrafamily agreements restricting stock transfers in closely held 

businesses than to similar agreements between unrelated parties.”).
18

[*18] The parties agree that the first requirement of section 2703(b) is 

satisfied given that the stated purpose of the RTP agreements was to 

“retain ownership of the Dukes Shares within the Huffman Family.” See 

Holman, 130 T.C. at 194. The parties disagree as to the other 

requirements, which we discuss below.

1. Whether the RTP Agreements Were a Testamentary 

Device

Respondent asserts that Chet paid less than adequate 

consideration when he entered into the RTP agreements. According to 

respondent’s expert, Joseph Ruble of Caliber Advisers, Inc., the RTP 

agreements were together worth approximately $79,800 in 1993 when 

they were executed. Chet paid only the stated consideration of $2 for 

these rights.

Petitioners put forth two alternative arguments on the basis of 

their expert’s valuation of the agreements. They first argue that the 

RTP agreements were worth only $2 each, and so Chet did in fact pay 

the full consideration. Petitioners’ expert, Curtis Kimball of Willamette 

Management Associates, asserted in his report that $2 is the correct 

value “if Dukes simply continued to be operated by the Owners without 

any change in strategy or inputs from an incentivized Grantee.”

Petitioners alternatively assert that the rights under the RTP 

agreements were worth $77,850 “if Dukes was operated by the Owners 

with changes in strategy and inputs from an incentivized Grantee.” 

They argue that notwithstanding this higher valuation, Chet still paid 

full consideration, not in dollars up front but in reduced compensation 

from the time he became CEO until the time he sold the company. From 

1993 to 2006, Chet’s salary ranged from $65,000 to $85,000. In 2007 it 

increased to $147,000 but was far less than the only other paid officer’s

salary of $243,300. This, petitioners argue, led to Chet’s forgoing 

approximately $3.5 million in compensation over the years.

Petitioners contend that the RTP agreements contemplated 

reduced compensation as a form of payment because each stated that 

the agreements were entered into for “Two Dollars ($2.00) and for other 

good and valuable consideration.” They argue then that the “other good 

and valuable consideration” was the reduced compensation.

Respondent disagrees with petitioners that reduced 

compensation could have formed part of the consideration that Chet 

paid for the rights under the RTP agreements. Respondent points to the
19

[*19] text of the agreements, which each state that “this Agreement is 

not compensatory in nature, rather the purpose is to retain the 

ownership of” Dukes within the family. Respondent also notes that a 

tax opinion letter Chet obtained from Proskauer came to the same 

conclusion, noting that the purpose behind the RTP agreements “was 

not compensatory. It was not in connection with the performance of 

services.”

We agree with respondent that the rights associated with the RTP 

agreements were worth substantially more than $2. This finding is 

supported by both parties’ experts’ valuations of the agreements. Still, 

we do not think that the RTP agreements were a testamentary device 

by which Lloyd and Patricia attempted to pass assets on to their son 

Chet. We make this determination on the basis of all of the facts and 

circumstances involved. See Estate of Morrisette, T.C. Memo. 2021-60, 

at *100.

If we viewed the exchange of $2 for the rights under the RTP 

agreements without considering the circumstances, we would agree that 

this was an inequitable exchange. While we take note that the 

agreements themselves purported not to be compensatory, Chet did

accept a reduced salary during his years as Dukes’s CEO. Given his 

significant contributions to the company, we think that his reduced 

salary should be deemed consideration for the RTP agreements.

We note the significant amount of earnings growth that would 

have had to occur for the options to become “in the money.” According 

to respondent’s expert, the Dukes shares were worth approximately 

$0.51 per share in 1993; petitioners’ expert says they were worth 

approximately $0.47 per share. In 2007 Chet was able to purchase the 

shares for $11.83 per share. If we average the parties’ per-share 1993 

values ($0.49 per share), the Dukes shares that Chet purchased in 2007

had increased in value by 2,414%. 

We view this level of growth as unusual and unexpected. It is 

supported by the 1993 transaction by which Chet purchased 

Mr. Barneson’s shares for $150,000. Chet and Mr. Barneson—unrelated 

parties—reached this figure by estimating annual revenue growth for 

Dukes at 4% per year. Using a 4% growth rate, the shares that Chet 

was able to purchase via the RTP agreements would have taken between 

50 and 70 years to reach an “in the money” value.
20

[*20] We also note that the RTP agreements—though negotiated 

among family members—did have the characteristics of an arm’s-length 

transaction. Both parties were motivated to reach a fair price. Lloyd 

and Patricia were willing to part with their shares only for $5 million—

an amount which they considered sufficient for their retirement. Chet

on the other hand was incentivized to drive this number down so that 

he could reach the “in the money” value we mentioned above sooner. 

This incentivized Chet both to stay with the company and to increase its 

per-share value.

Taking these facts together, we do not think that the RTP 

agreements were a testamentary device by which Lloyd and Patricia 

transferred Dukes shares to Chet for less than full consideration. 

Section 2703(b)(2) is satisfied.

2. Comparability of the RTP Agreements to Similar 

Arrangements

Petitioners argue that the final section 2703(b) requirement is 

satisfied by the Lloyd-Barneson agreement, which they claim is 

comparable to the RTP agreements and was entered into in an arm’slength transaction. Petitioners note that the Lloyd-Barneson agreement 

contained the following provisions, which are also included in the RTP 

agreements: (1) a right to purchase on the death of the grantor and by a

right of first refusal; (2) a maximum purchase price; and (3) no specific 

termination or exercise date. Petitioners also point out that the LloydBarneson agreement was entered into by unrelated parties—Lloyd and 

Mr. Barneson—and executed at arm’s length.

Respondent counters that the Lloyd-Barneson agreement cannot 

serve as a good comparable because it was not submitted into evidence. 

Respondent notes that there are only two pieces of evidence which 

describe the Lloyd-Barneson agreement: a one-paragraph reference in 

the Assignment agreement and another in the Chet-Barneson 

agreement. Otherwise, the only information provided about the LloydBarneson agreement comes from witnesses’ testimony, which made 

vague references to the agreement.

Respondent contends that even if we are to find that the 

testimony regarding the Lloyd-Barneson agreement is credible, there 

are differences among it and the RTP agreements which render the 

Lloyd-Barneson agreement not a good comparable. The noted 

differences are that (1) Lloyd Huffman was allowed to freely transfer his 
21

[*21] rights whereas Chet had to obtain consent from the owners; (2) the 

right of first refusal in the RTP agreements exempted offers from Chet’s 

brothers; (3) the RTP agreements had an addendum that granted Chet

the right to purchase the shares at any time at his discretion; and (4) the 

stated purpose of the RTP agreements was to retain ownership of Dukes 

within the Huffman family.

We agree with respondent. As we noted in Estate of Amlie, T.C. 

Memo. 2006-76, slip op. at 41, reliance on an isolated comparable is 

adequate given that the regulations “delineate more of a safe harbor 

than an absolute requirement that multiple comparables be shown.” 

Use of the Lloyd-Barneson agreement then would be acceptable to show 

that the RTP agreements had terms similar to an agreement entered 

into at arm’s-length. But as respondent notes, we do not have the LloydBarneson agreement in evidence. We have only vague and incomplete 

references to it and testimony based on those references. We do not have 

an isolated comparable to undergo the section 2703(b)(3) analysis.

Even if we were to accept witnesses’ testimony as sufficient 

evidence, we do not think that the Lloyd-Barneson agreement is 

sufficiently similar. Even though the three agreements purport to 

create rights to purchase Dukes shares for a maximum price, the 

differences among them are significant. For example, Chet had the 

unfettered right to purchase the Dukes shares at any time and at his 

sole discretion; Lloyd did not have this same right. Further, Lloyd was 

permitted to assign or otherwise transfer his purchase rights whereas 

Chet had to obtain consent to do the same. Chet then had rights 

superior to Lloyd’s in purchasing the shares but inferior in transferring 

those rights. The terms of the agreements are therefore not comparable 

within the meaning of section 2703(b)(3).

On the basis of the foregoing, we do not think that petitioners 

have satisfied the final requirement of section 2703(b). See Estate of 

Blount v. Commissioner, T.C. Memo. 2004-116, slip op. at 48 (finding

that solely testimony without production of comparable agreements was 

insufficient to satisfy section 2703(b)(3)), aff’d in part, rev’d in part and 

remanded, 428 F.3d 1338 (11th Cir. 2005). Section 2703(b) is therefore 

not satisfied, and so the RTP agreements must be disregarded for 

purposes of valuing the Dukes shares that Chet purchased in 2007. See 

§ 2703(a).
22

C. Value of Dukes Shares in 2007

Lloyd and Patricia indirectly owned shares in Dukes by virtue of 

their interests in the Trust and DRM. While they had equal interests 

in the Trust’s shares, only Patricia had an interest in DRM’s shares. On 

October 15, 2007, Chet exercised his rights under the RTP agreements, 

purchasing the Trust’s and DRM’s shares for $1.4 million and $3.6 

million, respectively. Respondent argues that the shares were worth 

more than the amount Chet paid, and therefore Lloyd and Patricia made 

taxable gifts when they caused the Trust and DRM to transfer their

shares.

In the notice of deficiency issued to Lloyd (for his interest in the 

Trust), the IRS valued the Trust’s 118,635 shares at $10.7 million. Since 

Chet paid $1.4 million for the Trust’s shares, the IRS determined that 

Lloyd made a $9.3 million gift to Chet. 

In the first notice of deficiency issued to Patricia (for her interest 

in the Trust), the IRS similarly valued the Trust’s 118,635 shares at 

$10.7 million.12 Since Chet paid $1.4 million for the Trust’s shares, the 

IRS determined that Patricia made a $9.3 million gift to Chet. In the 

second notice of deficiency issued to Patricia (for her interest in DRM), 

the IRS valued DRM’s 304,124 shares at $27.5 million. Since Chet paid 

$3.6 million for the shares, the IRS determined that Patricia made a 

$23.9 million gift to Chet.

At trial respondent’s expert concluded that the aggregate fair 

market value of Dukes shares as of October 15, 2007, should be $31.3 

million: $22.5 million attributable to DRM’s shares and $8.8 million 

attributable to the Trust’s shares.13 Under this valuation, Patricia made 

a taxable gift of $18.9 million attributable to DRM’s shares and together 

12 Patricia and Lloyd received identical notices of deficiency for their role as 

donors of the Trust’s shares in Dukes.

13 When Chet exercised his rights under the RTP agreement with the Trust, he 

purchased its shares for $1.4 million. In the notices of deficiency issued to Patricia and 

Lloyd, the IRS determined that they were each liable for gift tax for that transaction 

because they had caused the Trust to transfer its shares to Chet for less than their fair 

market value.

When Chet exercised his rights under the RTP agreement with DRM, he 

purchased its shares for $3.6 million. In the notice of deficiency issued to Patricia, the 

IRS determined that Patricia was liable for gift tax for that transaction because she 

had caused DRM to transfer its shares to Chet for less than their fair market value.

[*22]
23

[*23] Patricia and Lloyd made a taxable gift of $7.4 million attributable 

to the Trust’s shares.

Petitioners argue that the shares were worth in total $5 million—

as provided in the RTP agreements—and therefore Patricia and Lloyd 

did not make a taxable gift on October 15, 2007. Alternatively, 

petitioners’ expert submitted that the fair market value of the Trust’s 

118,645 shares was approximately $4.5 million while that of DRM’s 

shares was approximately $11.6 million. Under that valuation, Patricia

made a taxable gift of approximately $8 million attributable to DRM’s 

shares and together Patricia and Lloyd made a taxable gift of 

approximately $3.1 million attributable to the Trust’s shares. We 

consider the parties’ expert reports and arguments below.

1. Parties’ Experts’ Reports

a. Respondent’s Valuation

Mr. Ruble testified on behalf of respondent as an expert for the 

purpose of valuing the Dukes shares. Mr. Ruble used three valuation 

approaches to ascertain the fair market value of Dukes Group on a 

marketable, controlling interest basis: (1) income approach using 

a discounted cashflow (DCF) analysis; (2) market approach using a 

guideline company analysis; and (3) market approach using a business 

transaction analysis. Mr. Ruble determined the value of Dukes Group 

under each method, then took the weighted average of the three values

to reach an enterprise value of $74.8 million.

To determine the fair market value of invested capital in Dukes 

Group, Mr. Ruble added to the enterprise value $5.3 million in noncore 

net assets and $1.8 million in net working capital. Taking these 

adjustments into account, Mr. Ruble reached a fair market value of 

invested capital for Dukes Group at $81.9 million as of the valuation 

date.

To determine the fair market value of the invested capital in 

Dukes, Mr. Ruble subtracted the fair market value of the Dukes-related 

affiliates’ (DRM, AMDC, TRD, and CCC&B) assets from the Dukes 

Group invested capital value. He determined that the fair market value 

of the Dukes-related affiliates’ assets (DRA) was $1.8 million. After 

subtracting the $1.8 million in DRA assets and $3 million in debt owed 

by Dukes, Mr. Ruble found that the fair market value of the invested 

capital in Dukes was $77 million as of the valuation date.
24

[*24] Lastly, Mr. Ruble took into account discounts for lack of control 

and lack of marketability. He determined that the appropriate minority 

interest discount was 10%. He determined that the appropriate 

marketability discount was 20%. After considering the discounts, Mr. 

Ruble determined that the fair market value of Dukes shares on a 

privately held, minority-interest basis was $55.3 million, or $74 per 

share. He found that the value of the Dukes stock transferred from 

Lloyd and Patricia to Chet in 2007 was $31.3 million: $22.5 million 

attributable to DRM’s shares and $8.8 million attributable to the Trust’s 

shares.

b. Petitioners’ Valuation

Petitioners’ expert, Duff & Phelps, used the same three valuation 

methods as Mr. Ruble. Duff & Phelps’s report similarly weighted each 

of the three valuation approaches equally to reach an enterprise value 

of $25.9 million. It then added various adjustments: (1) $2.6 million as 

the present value of the operating cashflows from CCC&B; (2) $4.4 

million and $160,100 as the loan receivable from Chet and the amount 

due from PMA Sales, respectively; and (3) $2.5 million as the excess of 

working capital. After these adjustments, Duff & Phelps determined 

that the enterprise value of Dukes was $35.6 million.

Duff & Phelps next determined a key person discount by valuing 

Chet’s personal relationships with key clients and key employees. It 

determined the value of Dukes attributable to Chet’s personal 

relationships with key clients to be $3 million. It determined the value 

of Dukes attributable to Chet’s relationships with key employees to be 

$2.6 million. Duff & Phelps then discounted the $2.6 million to $1.3 

million to account for a 50% probability that the key employees would 

leave if Chet left. Taking that together, Duff & Phelps reached a key 

person discount of $4.3 million or 16.7%.

After deducting the key person discount, Duff & Phelps reached 

a $31.3 million value for Dukes. It then deducted the interest-bearing 

debt obligations of Dukes to reach a total fair market value of all equity 

in Dukes at $28.7 million. It found this equated to $38.20 per share. 

Duff & Phelps then valued the shares held by DRM and the Trust as of 

2007 using this per-share value, reaching the final figure of $16.3 

million as the aggregate value.
25

2. Parties’ Arguments as to Value

a. Respondent’s Arguments

Respondent first notes that Duff & Phelps did not use any 

information from the Hanwha MOU or the Deloitte CIM in its analysis. 

Respondent asserts that these should have been considered in the 

valuation determination because they represented actual market 

transactions, albeit proposed ones. 

Respondent also notes that Duff & Phelps removed certain 

revenues from Dukes relating to the CCC&B licenses after three years. 

Duff & Phelps assumed that the sublicense agreement would not be 

renewed because the royalty paid was not market rate. Respondent 

contends that the royalty was within the market rate range in 2007 and 

therefore should not have been phased out in 2010. Mr. Ruble testified 

that there would have been an additional $10 million of value if Dukes 

had been able to continue using the licenses to sell Honeywell products.

Respondent asserts that Duff & Phelps calculated the key person 

discount improperly. Respondent contends that—instead of subtracting 

from the weighted average enterprise value—Duff & Phelps should have 

used only the income approach valuation figure as a starting point. 

Respondent further contends that Duff & Phelps should have compared 

the value of the business assuming that Chet left Dukes to the value of 

the business assuming that Chet stayed with Dukes pursuant to the 

income approach. According to respondent, Duff & Phelps attributes too 

high a value to other key employees. For these reasons, respondent 

argues that the total value of the key person discount should be reduced 

from $4.3 million to $1.75 million.

Additionally, respondent argues that Duff & Phelps used 

improper pricing multiples for the market approaches. Respondent 

asserts that Duff & Phelps selected companies that fell at or below the 

lowest quartile of industry performance. For the market transaction 

method, Duff & Phelps used multiples of 0.8×, 0.8×, 7.0×, and 7.0×, while 

the industry medians were 1.7×, 2.4×, 10.0×, and 8.2×, respectively. For 

the market comparable method, Duff & Phelps used multiples of 1.11×, 

1.19×, 6.5×, and 8×, while the industry medians were 1.27×, 1.26×, 

11.26×, and 9.87×. Myron Marcinkowski of Duff & Phelps testified that 

had he used pricing multiples closer to the median, the concluded value 

would have increased.

[*25]
26

[*26] Respondent lastly notes that Mr. Ruble’s valuation of Dukes ($81 

million) was comparable to the offer made in the Hanwha MOU 

(between $85 and $105 million) and the TransDigm purchase price ($95 

million). Since petitioners estimated the enterprise value of Dukes at 

$35.6 million, it is not close to the actual transactions that took place 

and therefore is unreliable.

b. Petitioners’ Arguments

Petitioners contend that the difference in enterprise values 

reached by the parties’ experts is largely attributable to their EBITDA 

figures.14 Petitioners assert that Mr. Ruble’s inflated EBITDA 

calculation resulted from his reduction of the cost of goods sold and 

operating expense figures for fiscal year 2007. Petitioners argue that 

Mr. Ruble’s adjustments were based on the CIM, which they believe is 

unreliable since Deloitte did not independently verify the accuracy of the 

information forming the adjustments.

Petitioners similarly criticize Mr. Ruble’s use of the Hanwha 

MOU, asserting that it was nonbinding and contingent and therefore 

cannot serve as the basis for a proper valuation. Petitioners also note 

that the MOU and Dukes-TransDigm agreement were completely 

different transactions. The former contemplated acquiring all Dukes 

and GST stock, CCC&B’s intellectual property, and the workforce and 

assets of the affiliate companies. In contrast, the Dukes-TransDigm 

agreement was structured as an asset purchase.

Petitioners assert that Mr. Ruble erroneously included the 

revenues of GST. They contend this inflated the Dukes valuation by at 

least $2 million despite GST’s having gross profit of less than $900,000 

in 2007.

Additionally, petitioners argue that CCC&B would not have 

renewed its license with Dukes after 2010. They note that despite there 

being market-level royalties for 2007, Chet had control over the licenses. 

And if he left Dukes, he would have caused CCC&B to enter into 

sublicensing agreements with GST and PMA Sales instead of Dukes. 

Petitioners further stress that CCC&B would not have renewed the 

licenses because the royalties were projected to be below market for 

2008, 2009, and 2010.

14 EBITDA is an abbreviation for earnings before interest, taxes, depreciation, 

and amortization.
27

[*27] Petitioners lastly voiced concerns about Mr. Ruble’s minority 

interest discount and marketability discount. They noted that once 

Dukes’s EBITDA is adjusted to account for advertising expenses and the 

affiliate companies’ shares of earnings, the discounts would bring Mr. 

Ruble’s enterprise value below petitioners’ value.

3. Conclusions as to Value of Dukes Shares in 2007

We find that petitioners failed to meet the burden of proof 

regarding why their expert’s valuation is correct. We agree with 

respondent that Duff & Phelps miscalculated the key person discount. 

In its report Duff & Phelps calculated the operating value attributable 

to Chet by first calculating the enterprise value without Chet using a 

DCF method. Duff & Phelps then subtracted that figure from the 

enterprise value calculated using the weighted average of the three 

methods. As respondent notes, this creates an apples-to-oranges 

comparison whereby the formula will always yield at least $2.5 million 

of value attributable to Chet regardless of whether he competes with 

Dukes. We think the better approach, as respondent notes, would have 

been to use the DCF enterprise value as the starting point.

We also agree with respondent that Duff & Phelps undervalued 

the Dukes shares when using the market approaches. In conducting 

this analysis, it selected 19 comparable companies for which to compare 

multiples. For both the market transaction and the market comparable 

methods, Duff & Phelps selected multiples that were at or below the 

lowest quartile of guideline companies. Mr. Ruble selected median 

quartile gross profit and EBITDA multiples.

Mr. Ruble’s valuation is proper except for one adjustment: We 

direct the parties to adjust the valuation by removing the revenues 

associated with the CCC&B licenses as done by Duff & Phelps.

We agree with petitioners that the licensing agreement between 

Dukes and CCC&B would not likely have been renewed after its 

expiration on July 30, 2010, because the licensing fees that Dukes paid 

to CCC&B were too low. Although they were consistent with the market 

rate in 2007, Duff & Phelps projected that they would be below market 

for 2008–10. We do not think that Chet would have allowed CCC&B to 

renew the licensing agreement if he could generate higher fees from a 

different licensee.

Even if the fees were projected to be at or above market rate 

beyond the expiration date, we do not think Chet would have allowed 
28

[*28] CCC&B to renew the licensing agreement because he would no 

longer have an interest in the licensee after leaving Dukes. Since he 

controlled CCC&B, it is far more likely that he would have caused it to 

enter into a new licensing agreement with GST, another manufacturing 

company capable of using the licenses, which he owned entirely. We 

conclude petitioners properly reduced Dukes’s revenue associated with 

the Honeywell licenses owned by CCC&B.

Where property is transferred for less than adequate and full 

consideration in money or money’s worth, the amount by which the 

value of the property exceeds the value of the consideration is deemed a 

gift. § 2512(b). We direct the parties to make the above change to Mr. 

Ruble’s valuation. Chet paid $5 million ($3.6 million for shares from 

DRM and $1.4 million for shares from the Trust); this amount should be 

deducted from the value and the remaining amount is subject to gift tax.

III. Income Tax Issues

The next issue concerns the treatment of sale proceeds from the 

Dukes-TransDigm agreement. First, we consider whether Chet and 

Cindy, as well as Dukes, properly reported the portion of the sale 

proceeds attributable to the CCC&B intellectual property assets. 

Second, we consider whether they properly valued and reported the sale 

proceeds associated with Chet’s personal goodwill. In each case Chet 

and Cindy reported the sale proceeds and income. Respondent contends 

that all of the income should have been reported by Dukes as capital 

gain net income and then by Chet and Cindy as ordinary dividend 

income.

A. Sale of CCC&B’s Intellectual Property Assets

1. Parties’ Arguments

Respondent argues that the gain from the sale of the CCC&B 

intellectual property assets (i.e., the Honeywell licenses) should have 

accrued to Dukes and thereafter as a constructive dividend to Chet and

Cindy. Respondent asserts that petitioners misreported the gains on 

CCC&B’s Form 1065 and on Chet and Cindy’s Form 1040 for 2009.

Respondent asserts that Dukes Group was the proper party to 

report the gain because CCC&B sold the assets before the DukesTransDigm agreement was executed. Respondent contends that the 

CCC&B-Dukes agreement controlled the methodology of the asset 

transfer and that by the terms of that agreement, the only consideration 
29

[*29] was Dukes’s forgiveness of a $904,221 debt in addition to other 

nonmonetary considerations. Therefore, respondent argues, no portion 

of the approximately $12 million in gain should have been reported by 

CCC&B.

Petitioners disagree. Although they recognize the CCC&B-Dukes 

agreement, they assert that it was never fulfilled because the Hanwha 

deal fell through. On that point petitioners assert that the loan was 

never forgiven and CCC&B continued to own the Honeywell licenses

until the TransDigm acquisition in December of 2009.

Petitioners argue that CCC&B properly reported the gain from 

the TransDigm acquisition because they modified the terms of the 

CCC&B-Dukes agreement. They allege that they did so twice. Chet 

testified that shortly after the Hanwha deal fell through, he executed 

the first amendment, the ALM. Petitioners argue that the ALM 

extended the effectiveness of the CCC&B-Dukes agreement to the date 

of an eventual sale to a third party (which turned out to be TransDigm) 

and increased the consideration to the fair market value of the 

Honeywell licenses then owned by CCC&B.

Petitioners additionally argue that the second amendment to the 

CCC&B-Dukes agreement, the Correcting Amendment, also increased 

the consideration to the fair market value of the licenses. Chet testified 

that he executed this second amendment having forgotten about 

executing the ALM.

Respondent argues that neither of the amendments should be 

treated as effective. As to the ALM, respondent notes that it is not dated 

and therefore cannot be relied upon as having been executed before the 

TransDigm acquisition. Since it was not executed before the TransDigm 

acquisition, respondent argues, the CCC&B-Dukes agreement 

controlled. This would mean that only debt forgiveness was the 

consideration for the Honeywell licenses and therefore nothing further 

should have been reported by CCC&B or Chet and Cindy.

As for the Correcting Amendment, respondent argues that—in 

contrast to the ALM—it did not (1) extend the effectiveness of the 

CCC&B-Dukes agreement, (2) include additional Honeywell licenses 

acquired in 2009, or (3) require that CCC&B be the direct payee of the 

sales portions attributable to the Honeywell licenses.
30

2. Discussion

The first principle of income taxation is that tax must be imposed 

on income to the party that earned it. Commissioner v. Culbertson, 337 

U.S. 733, 739–40 (1949). As we have further concluded, “[t]he choice of 

the proper taxpayer revolves around the question of which person or 

entity in fact controls the earning of the income rather than the question 

of who ultimately receives the income.” Vercio v. Commissioner, 73 T.C. 

1246, 1253 (1980) (first citing Am. Sav. Bank v. Commissioner, 56 T.C. 

828 (1971); and then citing Wesenberg v. Commissioner, 69 T.C. 1005 

(1978)).

We agree with respondent that CCC&B did not directly sell the 

intellectual property assets to TransDigm in the 2009 acquisition. 

CCC&B was not a named party to the Dukes-TransDigm agreement, nor 

was it to be specifically allocated any of the purchase price. We, 

however, conclude petitioners properly reported the gain.

The facts indicate that the parties did not follow through with the 

CCC&B-Dukes agreement in 2008 as contemplated. The Honeywell 

licenses were still listed on CCC&B’s 2008 Form 1065 at yearend and so 

too was the loan payable owing to Dukes. The terms of the CCC&BDukes agreement then were not carried out as anticipated, and CCC&B 

still owned the intellectual property assets going into 2009.

We believe that the ALM was duly executed in February or March 

of 2009 as Chet testified. Although the document is not dated, we 

acknowledge Chet’s strategy in keeping the CCC&B intellectual 

property held separately. Chet testified that he had modeled this 

strategy after Honeywell, which kept its intellectual property assets in 

an entity separate from the operating business entity. 

We agree that the timing of the ALM gives its alleged execution 

date credibility. Once the Hanwha deal fell through, Chet testified that 

he began more aggressively marketing Dukes for sale, hence the CIM 

sales brochure generated by Deloitte. This makes it more plausible that 

Chet would have sought to extend the effectiveness of the CCC&BDukes agreement until the date of an eventual sale.

Finally, we think that extending the effectiveness of the CCC&BDukes agreement—especially in early 2009—would have been 

advantageous to any eventual purchaser given that Hanwha had 

wanted to buy the Dukes organization (and its affiliates) as a whole. 

[*30]
31

[*31] Creating a mechanism then by which all assets would eventually 

come under the same corporate umbrella is plausible.

All of these facts lead us to the conclusion that petitioners have 

satisfied their burden of proof as to the CCC&B asset sale. We agree 

that the ALM amended the CCC&B-Dukes agreement, increasing the 

stated consideration to the fair market value of the then-owned 

Honeywell licenses and any other intellectual property held by CCC&B. 

On that basis, we agree with petitioners that CCC&B—and not Dukes—

was the proper party to report the gain from the sale. Cindy and the

Estate of Chet Huffman are not liable for dividend income related to the 

CCC&B intellectual property assets.

B. Sale of Chet’s Personal Goodwill

1. Parties’ Arguments

The next issue is the treatment of the TransDigm acquisition sale 

proceeds that petitioners allocated to Chet’s personal goodwill. On their 

2009 Form 6252, Installment Sale Income, Chet and Cindy reported 

approximately $21.8 million as the sale price attributable to Chet’s 

personal goodwill. Of that amount, they reported $19.4 million as

installment sale income.

Respondent argues that no amount of the sale proceeds can be 

attributed to Chet’s personal goodwill, so it was improper for Chet and 

Cindy to report the income. Respondent argues that Nevada law applies 

because Dukes Group was a Nevada limited liability company. 

Respondent notes that under Nevada law, any property owned by a 

limited liability company must be held and owned in the name of the 

company. See Nev. Rev. Stat. § 86.281 (2010).

Respondent asserts that Chet was not a party to the DukesTransDigm agreement. Since he was not listed in the agreement, 

respondent asserts that the personal goodwill either was not properly 

transferred to TransDigm via the Dukes-TransDigm agreement or was 

already owned by Dukes Group before the sale. In either case, 

respondent argues that the income should have been reported instead 

by Dukes.

Petitioners argue that they properly reported the income

according to the terms of the Dukes-TransDigm agreement. Section 2.01

of the agreement describes the purchased assets, which include 

goodwill. Goodwill is defined to include “[a]ll goodwill associated with 
32

[*32] the Business, including any personal goodwill of Chet, the sole 

member of Dukes Group, as it relates to the Purchased Assets and the 

Business.” Section 2.07 requires that the parties engage SRR to allocate 

the purchase price among the purchased assets.

Section 2.07 further provides that the sellers (i.e., Dukes) would 

hire an independent valuation expert, other than Deloitte, to prepare an 

allocation of the goodwill between enterprise goodwill and the personal 

goodwill of Chet. If TransDigm disagreed with the suballocation, then 

it could hire a different valuation firm to provide the analysis. 

Otherwise, the decision reached by the appraiser was to be binding on 

the parties. Section 2.07 finally provides that “[t]he Sellers will allocate 

the Adjusted Purchase Price between them and Chet Huffman with 

respect to the personal goodwill, if any, as they agree and in a manner 

consistent with this Section.”

Petitioners assert that the parties followed these provisions to the 

letter. SRR valued the purchased assets including the goodwill, to which 

it ascribed a value of approximately $50 million. Dukes then hired Duff 

& Phelps to perform the suballocation among the personal and 

enterprise goodwill components. At trial Chet testified that TransDigm 

agreed to the engagement of Duff & Phelps. Duff & Phelps valued Chet’s 

personal goodwill at $21.8 million. Petitioners argue that because the 

Dukes-TransDigm agreement specifically allocated this amount to Chet, 

it was his responsibility to report it.

Despite the valuation from Duff & Phelps, the IRS determined in 

the notice of deficiency that Chet’s personal goodwill had no value. 

Respondent contends that the expert report from Duff & Phelps cannot 

be relied upon because Mr. Marcinkowski made errors. First, 

respondent notes that Mr. Marcinkowski changed his personal goodwill 

valuation before trial. He lowered the personal goodwill amount from 

$21.8 million to $19.2 million after changing his assumption regarding 

when Chet would be effective in competing against Dukes. He decided 

that it would instead take Chet 18 months to become competitive. 

Respondent argues that this deviation weighs against Mr. 

Marcinkowski’s credibility as an expert.

Respondent also notes that Mr. Marcinkowski used a perpetuity 

model to determine the residual value of Chet’s personal goodwill. 

Respondent contends that this was improper because Chet was 48 years 

old at the time of the TransDigm acquisition in 2009. If Chet retired 

within the next 20 years, the value of his personal goodwill would be 
33

[*33] reduced to $15.5 million. Finally, respondent argues that there 

should have been no portion of Chet’s personal goodwill which was 

attributable to other employees at Dukes. Respondent contends that 

this is problematic because these employees, like Chet, did not have an 

employment agreement in place.

As an alternative argument, respondent’s expert, Mr. Ruble, 

asserted that Chet’s personal goodwill did have some value, 

approximately $3.9 million worth. Mr. Ruble confined his report to the 

areas in which he assumed that Chet offered the most value to Dukes: 

generating new business, either to existing customers or to new 

customers. Mr. Ruble asserted that the existing customers were mostly 

focused on pricing, quality, and the ability to deliver products timely. 

Respondent relies upon Chet’s testimony that the driving factors of 

growth for Dukes were a combination of acquisitions and winning new 

programs as well as choosing good products with high profit margins.

In his report, Mr. Ruble concluded that it was unlikely Dukes 

would have had fewer opportunities if Chet were no longer with the 

company. Mr. Ruble contended that Dukes would likely have hired a 

qualified replacement to mitigate the damages created by Chet’s lack of 

engagement with the company. Dukes could have hired a replacement 

from either an industry competitor, TransDigm, existing Dukes 

management, or one of Dukes’s customers.

2. Discussion

As discussed below, we find that Chet had personal goodwill and 

that he and Cindy properly reported the sale proceeds attributable to 

the goodwill to the extent of its fair market value.

Petitioners assert that Nevada law is irrelevant despite Dukes 

Group’s being formed there. We agree. The Dukes-TransDigm 

agreement specifically provides that the transaction and the legal 

relations between the parties will be governed by the laws of the State 

of California. We apply California law then in determining whether 

goodwill can be separated from a business and attributed to an 

individual.

Goodwill has been defined as the expectation of continued 

patronage. Newark Morning Ledger Co. v. United States, 507 U.S. 546, 

555 (1993). It has also been defined as “the sum total of those 

imponderable qualities which attract the custom of a business—what 

brings patronage to the business.” Philip Morris Inc. & Consol. Subs. 
34

[*34] v. Commissioner, 96 T.C. 606, 634 (1991) (quoting Boe v. 

Commissioner, 307 F.2d 339, 343 (9th Cir. 1962), aff’g 35 T.C. 720

(1961)), aff’d, 970 F.2d 897 (2d Cir. 1992). Goodwill can generally take 

two forms: (1) personal goodwill owned by key employees or 

shareholders and (2) corporate or enterprise goodwill developed and 

owned by the company or employer. Bross Trucking, Inc. v.

Commissioner, T.C. Memo. 2014-107, at *21. A business can only 

distribute corporate assets and cannot distribute assets personally 

owned by shareholders. See Martin Ice Cream Co. v. Commissioner, 

110 T.C. 189, 209 (1998). Key employees may transfer their personal 

goodwill via employment contracts or noncompete agreements. Bross 

Trucking, Inc., T.C. Memo. 2014-107, at *27 (citing Martin Ice Cream 

Co., 110 T.C. at 207).

We agree with petitioners that Chet created personal goodwill 

through his relationships with key employees and customers during his 

time as Dukes’s CEO. We also agree on the basis of the DukesTransDigm agreement that the parties to that transaction allocated a 

portion of the sale proceeds to Chet as his personal goodwill. Under 

California law, personal goodwill is an intangible asset capable of being 

owned by an individual. See, e.g., In re Marriage of Nichols, 33 Cal. 

Rptr. 2d 13, 20 n.4 (Ct. App. 1994).

While working for Dukes Chet did not have an employment 

contract, nor was he subject to a noncompete agreement. For that 

reason we disagree with respondent that he somehow transferred his 

goodwill to Dukes before the acquisition. See Bross Trucking, Inc., T.C. 

Memo. 2014-107, at *27. He continued to own his personal goodwill up 

until the TransDigm acquisition in December 2009; to that end, as part 

of the Dukes-TransDigm agreement, Chet entered into a noncompete

agreement. Thus, any gain on the sale of that personal goodwill would 

have had to be reported by its owner, Chet. See Commissioner v. 

Bollinger, 485 U.S. 340, 344 (“For federal income tax purposes, gain or 

loss from the sale or use of property is attributable to the owner of the 

property.”). On the basis of these findings, we conclude that respondent 

has failed to meet his burden of proof regarding Chet’s personal 

goodwill.

Mr. Marcinkowski derived the personal goodwill value by 

performing a scenario analysis using the DCF method. He performed 

this same analysis for each component of the personal goodwill value: 

that attributable to Chet’s personal relationships with key clients and 

that attributable to Chet’s personal relationships with key employees.
35

[*35] The first step he took for the key clients analysis was assessing 

the operating value of Dukes if TransDigm received full cooperation and 

assistance from Chet in perpetuity (Scenario 1). He discounted future 

cashflows from years 2010–14 to derive the Scenario 1 operating value 

of $87.084 million.

He then calculated the operating value of Dukes if TransDigm 

received no cooperation or assistance from Chet in perpetuity (Scenario 

2). He similarly discounted future cashflows from years 2010 to 2014 to 

derive a range of potential values for Scenario 2: between $63.859 

million and $75.471 million. The Scenario 2 range of values was 

calculated by estimating the percentage of revenue that would be lost if 

Chet did not cooperate with TransDigm after the acquisition.

His report indicated which clients would be vulnerable to Chet’s 

influence. Revenue from most clients was expected to remain the same. 

Only revenue related to specific aircraft from Bombardier, Cessna, 

Cirrus Design, Hawker Beechcraft, and Lockheed Martin was expected 

to decline as a result of Chet’s leaving. All other aircraft and clients 

were expected to generate the same level of revenue despite Chet’s 

absence. Mr. Marcinkowski determined the percentage of revenue lost 

as follows for these clients:
36

Percentage Revenue Retained After Chet’s Leaving

Client Aircraft Low-End High-End

Bombardier Challenger 

604/605

75% 50%

Bombardier Challenger 

850/850CD

50% 0%

Cessna Citation 

Sovereign

50% 0%

Cessna Citation X 50% 0%

Cirrus Design SR22-G3 50% 0%

Hawker Beechcraft 450 55% 10%

Hawker Beechcraft Premier II 70% 40% 

Lockheed Martin F-16 50% 0%

These percentages were then multiplied by the unadjusted, 

projected revenues for each client to reach the adjusted revenues. The 

adjusted revenues formed the basis for calculating the future cashflows 

that would be discounted back to the present to reach an operating 

value. Once Mr. Marcinkowski had derived low- and high-end operating 

values for Scenario 2, he averaged the two figures and subtracted the 

averages from the Scenario 1 values to reach the values attributable to 

Chet’s relationship with key clients. A similar analysis was done to 

reach the values attributable to Chet’s relationships with key 

employees. 

While we find Mr. Marcinkowski’s methodology sound, we think 

that his report overestimated the percentage of revenue that would be 

lost as a result of Chet’s failing to cooperate or assist TransDigm after 

the acquisition. We agree with Mr. Ruble that Chet would have had a 

much lesser impact on revenues from existing clients. His true value 

came from his ability to generate new business, be that from existing 

clients or new ones. Once the clients were obtained, keeping them was 

more a matter of continuing to provide quality products timely. This 

[*36]
37

[*37] was not an area that Chet himself had a direct influence on and 

should have been accounted for in Mr. Marcinkowski’s analysis.

On that basis we conclude that instead of averaging the low- and 

high-end Scenario 2 values, it would be more appropriate to use the lowend value. We direct the parties to use the low-end operating value of 

$75.471 million as the Scenario 2 figure (from Exhibit 197, Exhibit C, 

p. 1) to reach the value attributable to Chet’s relationship with key 

clients. The parties should additionally take into account the 18-month 

lag time that, Mr. Marcinkowski conceded at trial, Chet would need to 

become competitive with Dukes. We otherwise agree with Mr. 

Marcinkowski’s valuation.

Our adjustments will lower the value attributable to Chet’s 

personal goodwill. This means that the difference between the new 

value and that originally reported by Chet and Cindy should have been 

attributed to enterprise goodwill and reported by Dukes. Since this 

amount was distributed to Chet and Cindy, we agree with respondent 

that it must reclassified as a constructive dividend. See Truesdell v. 

Commissioner, 89 T.C. 1280, 1295 (1987) (“The crucial concept in a 

finding that there is a constructive dividend is that the corporation has 

conferred a benefit on the shareholder in order to distribute available 

earnings and profits without expectation of repayment.”).

Cindy and the Estate of Chet Huffman had ordinary dividend 

income pursuant to section 301, which provides that a dividend is taxed 

as ordinary income only to the extent of the distributing corporation’s 

earnings and profits. § 301(c); Benson v. Commissioner, T.C. Memo. 

2004-272, slip op. at 43–44, supplemented by T.C. Memo. 2006-55, aff’d,

560 F.3d 1133 (9th Cir. 2009). Any excess is a nontaxable return of 

capital to the extent of the taxpayer’s basis, and any remaining amount 

received is taxable as capital gain from the sale or exchange of a capital 

asset. Benson, T.C. Memo. 2004-272, slip op. at 44 (first citing § 301(c); 

then citing Truesdell, 89 T.C. at 1295–98; and then citing Barnard v. 

Commissioner, T.C. Memo. 2001-242).

Because a portion of the sale proceeds attributed to Chet’s 

personal goodwill was actually enterprise goodwill, Dukes understated 

capital gain net income on its 2009 Form 1120. The amount by which 

Chet and Cindy overvalued Chet’s personal goodwill should have been 

reported by Dukes with the rest of the sale proceeds on its 2009 Form 

6252. Dukes is therefore liable for tax on an increase to capital gain net 

income for 2009.
38

[*38] IV. Accuracy-Related Penalties and Additions to Tax

We now address the ancillary issue of petitioners’ liability for 

certain section 6662 accuracy-related penalties and section 6651

additions to tax. The IRS determined accuracy-related penalties against

Cindy and the Estate of Chet Huffman, as well as Dukes, and on the 

basis of our redeterminations in this Opinion with respect to those 

petitioners, together with the concessions previously noted, see supra

note 7, there are grounds for section 6662 penalties. For all petitioners, 

their failure to timely file certain returns and pay the amounts owing 

provides grounds for section 6651 additions to tax.

A. Burden of Proof

Under section 7491(c), the Commissioner bears the burden of 

production with respect to the liability of an individual for any penalty

or addition to tax. The Commissioner satisfies that burden by 

presenting sufficient evidence to show that it is appropriate to impose 

the penalty in the absence of available defenses. Graev v. Commissioner, 

149 T.C. 485, 493 (2017) (citing Higbee v. Commissioner, 116 T.C. 438, 

446 (2001)), supplementing and overruling in part 147 T.C. 460 (2016).

This burden includes satisfying section 6751(b)(1), which provides 

that “[n]o penalty under this title shall be assessed unless the initial 

determination of such assessment is personally approved (in writing) by 

the immediate supervisor of the individual making such determination 

or such higher-level official as the Secretary may designate.” Section 

6751(b) does not apply, however, to the addition to tax under section 

6651. See § 6751(b)(2)(A); ATL & Sons Holdings, Inc. v. Commissioner,

152 T.C. 138, 150 (2019).

In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 

F.4th 1066, 1071 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 

(2020), the Ninth Circuit considered the timeline for obtaining 

supervisory approval of “assessable penalties,” which are not subject to 

deficiency procedures. The Ninth Circuit held that, for an assessable 

penalty, supervisory approval is timely if secured before the penalty is 

assessed or “before the relevant supervisor loses discretion whether to 

approve the penalty assessment.” Id. at 1074. More recently, in Kraske 

v. Commissioner, No. 27574-15, 161 T.C. (Oct. 26, 2023), a case (like the 

cases here) appealable to the Ninth Circuit (absent stipulation to the 

contrary), see § 7482(b), we addressed whether the holding in Laidlaw’s 

Harley Davidson should be read so as to encompass penalties subject to 
39

[*39] deficiency procedures as well. We held that it should, and 

pursuant to Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 

F.2d 985 (10th Cir. 1971), applied the holding to the facts of the case. 

Kraske, 161 T.C., slip op. at 7–8. We will afford precedential weight to,

and follow, Kraske in the instant cases as it is squarely on point here.

For nonindividual taxpayers, the burden of production as to 

penalties remains with the taxpayer because section 7491(c) does not 

apply to corporations. See NT, Inc. v. Commissioner, 126 T.C. 191, 195 

(2006). We held previously that the Commissioner does not have the 

burden of production as to supervisory approval under section 6751(b) 

for a penalty determined against a corporation in a notice of deficiency. 

Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 231–32 

(2018). Accordingly, respondent does not bear the burden of production 

for the penalties determined against Dukes.

Petitioners argue that respondent has not satisfied the burden of 

proof because the supervisory approval did not take a specific form. 

They note that the IRS supervisor did not sign a Civil Penalty Approval 

Form as encouraged by the Internal Revenue Manual. The supervisor 

instead signed the 30-day letter, which generally indicates the IRS’s 

position on the disputed tax items and provides taxpayers a 30-day 

deadline to take their case to Appeals.

As we noted in Palmolive Building Investors, LLC v. 

Commissioner, 152 T.C. 75, 85–86 (2019), “[s]ection 6751(b) does not 

require written supervisory approval on any particular form.” 

“[P]enalty approval [can] be found in ‘a signed 30-day letter sent by the 

supervisor of the examining agent.’” Castro v. Commissioner, T.C. 

Memo. 2022-120, at *6 (quoting Tribune Media. Co. v. Commissioner, 

T.C. Memo. 2020-2, at *21). Since the IRS supervisor involved in these

cases signed the 30-day letter, approval was properly obtained for the 

penalties in question, and respondent has satisfied his initial burden of 

proof under section 6751(b) as to the individual petitioners.

B. Section 6662 Penalties

1. Liability

Section 6662(a) imposes a 20% accuracy-related penalty on any 

portion of an underpayment of tax required to be shown on a return if, 

as provided by section 6662(b)(1), the underpayment is attributable to 

“[n]egligence or disregard of rules or regulations.” The penalty may also 
40

[*40] be imposed for an underpayment attributable to any “substantial 

understatement of income tax.” § 6662(b)(2).

For section 6662(b)(1) purposes, “negligence” includes “any 

failure to make a reasonable attempt to comply” with the internal 

revenue laws, and “disregard” includes “any careless, reckless, or 

intentional disregard.” § 6662(c). Negligence also includes any failure 

by the taxpayer to keep adequate books and records or to substantiate 

items properly. Treas. Reg. § 1.6662-3(b)(1). 

An understatement is substantial within the meaning of section 

6662(b)(2) if it exceeds the greater of (1) 10% of the tax required to be 

shown on the return for the taxable year or (2) $5,000. § 6662(d)(1)(A). 

For corporations, there is a substantial understatement of income tax 

for any taxable year if the amount of the understatement exceeds the 

lesser of (1) 10% of the tax required to be shown on the return for the 

taxable year (or, if greater, $10,000) or (2) $10,000,000. § 6662(d)(1)(B). 

The accuracy-related penalty does not apply with respect to any portion 

of the underpayment for which the taxpayer shows that he or she had 

reasonable cause and acted in good faith. § 6664(c)(1); see Higbee, 116 

T.C. at 448–49.

Respondent asserts that Cindy and the Estate of Chet Huffman,

as well as Dukes, are liable for substantial understatement penalties

under section 6662(b)(2), or alternatively, for negligence penalties under 

section 6662(b)(1). Only one accuracy-related penalty may be applied 

with respect to any given portion of an underpayment, even if that 

portion is subject to the penalty on more than one ground. Treas. Reg. 

§ 1.6662-2(c). As a result of our holdings herein and the parties’ 

concessions in the cases involving Cindy and the Estate of Chet 

Huffman, as well as Dukes, the Rule 155 computations must confirm 

substantial understatements of income tax by those petitioners. Should 

the Rule 155 computations show substantial understatements of income 

tax (which we think they should), we conclude that respondent has met 

his burden of production for the accuracy-related penalties under section 

6662(b)(2).15

15 We note that respondent has in any event demonstrated that Chet and 

Cindy, as well as Dukes, acted negligently because the record before us shows that 

they failed to maintain books and records sufficient to accurately reflect their incomes. 

See Treas. Reg. § 1.6662-3(b)(1).
41

2. Reasonable Cause Defense

Cindy and the Estate of Chet Huffman, as well as Dukes, assert 

that they had reasonable cause that negates any section 6662(a) 

penalties because their accountant, Ms. Ross-Stearn, terminated the 

business relationship on August 28, 2009. They claim that her hasty 

departure impeded their ability to timely submit accurate tax returns. 

They further claim that the delay was exacerbated by Ms. Ross-Stearn’s

and TransDigm’s reluctance to provide financial statements that would 

form the basis of the tax returns for all of them. 

Cindy and the Estate of Chet Huffman, as well as Dukes, claim 

that after Ms. Ross-Stearn disengaged, they employed two accountants 

to help them submit all the individuals’ and Dukes-affiliated entities’ 

income tax returns. They first hired Mr. Whitfield and later Mr. 

Hutchinson to expedite the process and determine how Dukes’s sale 

proceeds should be reported.

They claim that they started first by considering the valuation 

provided by Duff & Phelps, which determined that $21.8 million of the 

sale proceeds were attributable to Chet’s personal goodwill. They assert 

that they relied on the Duff & Phelps valuation as well as the DukesTransDigm agreement to allocate the $21.8 million entirely to Chet.

As for the proceeds attributable to the CCC&B intellectual 

property assets, Cindy and the Estate of Chet Huffman, as well as 

Dukes, assert that Mr. Whitfield independently determined that the 

intellectual property was held by CCC&B—and not Dukes. 

Mr. Whitfield also reviewed the licensing agreements and CCC&B’s 

prior tax returns in reaching the conclusion that CCC&B was the proper 

entity to report the gain from the sale. Since Chet and Cindy were the 

sole owners of CCC&B, they contend that it was their responsibility to 

report the passthrough income from the sale.

Cindy and the Estate of Chet Huffman, as well as Dukes, claim 

that their reliance on the tax professionals excuses them from section 

6662(a) penalties. The Court’s caselaw sets forth the following three 

requirements for a taxpayer to use reliance on a tax professional to avoid 

liability for a section 6662(a) penalty: “(1) The adviser was a competent 

professional who had sufficient expertise to justify reliance, (2) the 

taxpayer provided necessary and accurate information to the adviser, 

and (3) the taxpayer actually relied in good faith on the adviser’s 

[*41]
42

[*42] judgment.” Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 

43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).

Chet and Cindy Huffman, as well as Dukes, relied on 

Mr. Whitfield and Mr. Hutchinson in determining how to report the sale 

proceeds from TransDigm’s asset purchase. Both Mr. Whitfield and Mr. 

Hutchinson were licensed CPAs with significant experience in public 

and private tax accounting. Therefore, Chet and Cindy Huffman, as well 

as Dukes, were justified in relying on their advice.

At trial Chet testified that he provided complete access to the 

books and records of Dukes, the affiliated entities, and the individual 

family members. Chet also testified that he and Mr. Whitfield took

great measures to obtain the tax documents of Dukes and the affiliated 

entities once Ms. Ross-Stearn disengaged. They successfully obtained 

approximately 40 boxes of financial data from Dukes and later were able 

to obtain the Dukes trial balance and general ledger from Ms. RossStearn. On the basis of this testimony, as well as Mr. Hutchinson’s 

testimony, we conclude that Chet and Cindy Huffman, as well as Dukes,

provided the tax professionals with as much accurate information as 

they could assemble.

Finally, we believe that Chet and Cindy Huffman, as well as

Dukes, relied in good faith on Mr. Whitfield’s and Mr. Hutchinson’s 

advice. Although Chet was a business school graduate and had 

successfully run Dukes for many years by the time of the TransDigm 

acquisition in 2009, he was not familiar with complex tax matters such 

as these. To ensure that he reported these items accurately, Chet hired 

two licensed accountants who rendered reasonable interpretations of the 

Code and the regulations. On that basis we find that Chet and Cindy 

Huffman, as well as Dukes, had reasonable cause with respect to the 

reporting of the Dukes-TransDigm sale proceeds, and thus they are not 

liable for the section 6662(a) penalties attributable to that

underpayment. However, because they seemingly do not argue, and the 

record does not support in any event, that the reasonable-cause 

exception negates their liability for the section 6662(a) penalties 

attributable to the conceded adjustments, they are liable for such 

penalties to that extent.
43

C. Section 6651 Additions to Tax

1. Liability

Section 6651 imposes additions to tax for failure to file timely 

returns or failure to pay timely the amount shown as tax on any return. 

For failure to file timely returns, there shall be added to the amount 

required to be shown as tax 5% of such tax if the failure is for not more 

than one month. § 6651(a)(1). The penalty increases by 5% for each 

additional month the failure continues. Id.

For a failure to pay timely, there shall be added to the amount 

shown as tax 0.5% if the failure is for not more than one month. 

§ 6651(a)(2). The penalty increases by 0.5% for each additional month 

the failure continues. Id. For failure either to file or pay timely, the 

addition to tax may not exceed 25% in the aggregate. § 6651(a)(1) and 

(2). There will be no additions to tax if the failure to file or pay was due 

to reasonable cause and not due to willful neglect. Id. The IRS

determined section 6651 additions to tax against all petitioners.

Lloyd and Patricia—who were issued separate notices of 

deficiency for their varying interests in the Trust and DRM—did not 

report any taxable gifts for 2007. The due date for the 2007 gift tax 

return was April 15, 2008. Under our valuation, they should have 

reported a taxable gift to Chet. Because Lloyd and Patricia did not 

timely file a gift tax return nor pay tax on the gift, respondent has met 

his burden of proof as to the additions to tax. Patricia and the Estate of 

Lloyd Huffman must demonstrate that the failure to file/pay was due to 

reasonable cause and not due to willful neglect to avoid the additions.

Chet and Cindy’s 2009 income tax return was due on October 15, 

2010. They did not file the return until March 8, 2011. Because they 

filed the return late, respondent has met his burden of proving that they 

are liable for the additions to tax. Cindy and the Estate of Chet Huffman 

must demonstrate that the failure was due to reasonable cause and not 

due to willful neglect to avoid the additions.

Dukes’s 2008 return was due September 15, 2008. Its 2009 return 

was due on September 15, 2009. Its 2010 return was due on September 

15, 2010. Dukes filed its 2008–10 income tax returns on June 22, 

September 7, and November 22, 2011, respectively. Because it filed the

returns late, it is liable for the additions to tax unless it can show that 

the failures were due to reasonable cause and not due to willful neglect.

[*43]
44

2. Reasonable Cause Defense

All of the aforementioned income tax returns for Chet and Cindy, 

as well as Dukes, were filed late. Regardless of whether Ms. RossStearn was employed during this time, they were responsible for timely 

submissions. United States v. Boyle, 469 U.S. 241, 252 (1985) (“The 

failure to make a timely filing of a tax return is not excused by the 

taxpayer’s reliance on an agent, and such reliance is not ‘reasonable 

cause’ for a late filing under § 6651(a)(1).”). Their argument that Ms. 

Ross-Stearn’s departure gives them reasonable cause for the untimely 

filings is therefore unavailing. The section 6651(a)(1) additions to tax 

will be sustained as to Cindy and the Estate of Chet Huffman, as well 

as to Dukes.

Patricia and the Estate of Lloyd Huffman assert a different 

argument against imposition of the additions to tax under section 

6651(a)(1) and (2). They claim that they were completely unaware of 

any gift tax liability. They believed that Chet paid the fair market value 

for the Dukes shares by exercising his rights under the RTP agreements 

in 2007. Their argument then is not that they failed to file so much as

that they did not think a filing was required.

They claim that Ms. Ross-Stearn did not advise them of any 

potential gift tax liability and so they did not file a return for that year. 

We think that is distinguishable from the other petitioners’ section 6651 

defenses. See Boyle, 469 U.S. at 251 (“When an accountant or attorney 

advises a taxpayer on a matter of tax law, such as whether a liability 

exists, it is reasonable for the taxpayer to rely on that advice.” (Second 

emphasis added.)). 

We agree with Patricia and the Estate of Lloyd Huffman that they 

had reasonable cause for their failure to report any gift tax liability. As 

they noted, the analysis in Cavallaro v. Commissioner, T.C. Memo. 

2014-189, at *66–71, aff’d in part, rev’d in part and remanded, 842 F.3d 

16 (1st Cir. 2016), is instructive. In that case we relied on the same 

three-part analysis described in Neonatology Associates, P.A. for 

determining whether the taxpayer’s reliance on a tax professional was 

sufficient to avoid liability for penalties and additions to tax. Cavallaro, 

T.C. Memo. 2014-189, at *71. We will do the same in these cases. 

Lloyd and Patricia relied on Ms. Ross-Stearn to advise on their 

tax liability. Ms. Ross-Stearn was a licensed accountant with many 

years of experience performing the accounting and payroll function of 

[*44]
45

[*45] Dukes, its affiliates, and the individual family members. She had 

enough experience to justify their reliance on her advice.

Chet testified that Ms. Ross-Stearn was “most certainly aware” of 

the RTP agreements and his decision to exercise his rights under the 

agreements in 2007. He also testified that Ms. Ross-Stearn would have 

had knowledge of the RTP agreements because she “effectively served 

as Dukes’[s] accounting department” and was integral to the proposed 

acquisition by Hanwha. On that basis, we find that Ms. Ross-Stearn 

was provided all the necessary information which would have alerted 

her to a potential gift tax liability owing from Lloyd and Patricia.

Finally, Patricia testified at trial that she “[t]otally relied” on Ms. 

Ross-Stearn to advise on tax matters. She further testified that she had 

no income or gift tax training whatsoever. She explained that had there 

been any indication that a gift tax return should be filed, she would have 

made the necessary efforts to do so. On the basis of that testimony, we 

agree that Lloyd and Patricia relied in good faith on Ms. Ross-Stearn. 

They therefore acted with reasonable cause in their failure to file a gift 

tax return and failure to pay the outstanding gift tax. Therefore, 

Patricia and the Estate of Lloyd Huffman are not liable for the additions 

to tax. Cindy and the Estate of Chet Huffman, as well as Dukes, are 

liable for the additions to tax as stated above.

We have considered all of the arguments made by the parties and, 

to the extent they are not addressed herein, we find them to be moot, 

irrelevant, or without merit.

To reflect the foregoing,

Decisions will be entered under Rule 155.