T.C. Mem o. 2 01 3- 26 3

UNITED STAT ES TAX COURT

ESTATE O F DIANE TANENBLATT, D ECEASED, ROY L. GREENBAUM,

PERSONAL REPRESENTATIVE, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 26 17 6- 10
. Fil edNov em be r 18 , 20 13
.
Thi s i s an est at e ta x v al ua ti oncas e in whi chR ha s i nc reas ed th e v al ue of a n i nt eres t i n an LLC i nc lu de d i n the va lu e o f th e g ro ss es ta te . The p art ie s h av e st ip ul at edco pi es of t he pl ead in gs . In the pe ti ti on , P av ers th athe ha s o bt ai ne d ane w app rai sa l, "aco py of whi ch " i s at ta ch edto th e p et it io n. R ad mit s o nl y th ata ne w app rai sa l is att ach edto th e p et it io n. P ar gu es th atth e ap pr ai sa l was admit te d i n ev id en ce b y

st ip ul at io n andm

us t b e co ns id eredby us as expe rt te st im on y no twi th st an di ng P's f

ai lu re t o qua li fy

th e au th orof t he ap pr ai sa l as anex pe rt p ur su an t t o F ed . R. Evi d. 7 02 or t o s at is fy Ru le 14 3( g) , Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e, ad dr es si ng ex pe rt witne ss rep orts , andth e p ro vi si on s o f ou r st an di ng pre tri al ord er ad dr es si ng ex pe rt t es ti m on y . Held : We exc lu de th e ap pr ai sa l fr om ev id en ce fo r fai lu re o f P to sat is fy th e p reco nd it io ns to ou r rec ei vi ng ex pe rt t es ti m on y .- 2 -

[* 2] Held , furth er, the va lu e o f th e in te res t i n the LLC is de te rm in ed
.
W il li am Jay Palm er an d P et er A. Lago no wicz , forpe ti ti on er. Bri anA. Pfeif

er an d Wil li am

Lee Bl ag g, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION HALPERN, Ju dg e: By

no ti ce o f de fic ie nc y

(no ti ce), re sp on de ntde te rm in ed a d efi ci en cy

of $ 30 9,5 47 inFed eral est at e ta x. Th e o nl y is su e fo r de ci si onis th e fai r m ark etva lu e o f a 1 6.6 67 % in te res t (s ub ject i nt eres t) i n aNew Yorkli mit ed li ab il ity co m pa ny, 37- 41 East18 th Str eetReal ty Co., LLC (LLC), in cl ud edinth e va lu e o f Diane Tane nb la tt 's (d eced en t's ) gr os s es ta te . Unl es s o th erwi se st at ed , sec ti on refer en ces are t o the Int ern al Rev enue Co de in effe ctforth e d at e o f de ced en t's de ath, an d a ll Ru le refe ren ces are t o the Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. Pet it io ne r be ars th e b ur de n o f pr oo f.- 3 -

[* 3] FINDINGS OF FACT Bac kg ro un d Deced en t d ie d t es ta te on Feb ru ary 23 , 20 07 (da te of d eath) . Whe n h e fi le d th e p et it io n, p et it io ne r res id edinPen ns y lv an ia
. Est at e Tax Return Pet it io ne r ti m el y

fil edFo rm

70 6, Un it edSta te s Es ta te (an d Gen erat io nSk ip pi ng Tran sf

er) Tax Return, el ect in g the reo n a lt ern at e v al ua ti on as p ro vi de d fo r in sec ti on20 32 . Sch edul e G, Tran sf ers Duri ng Deced en t's Life, at ta ch edto th e Fo rm 70 6, i nc lu de s the subjec t i nt eres t, re po rti ng th e in te res t t o b e worth $1 ,78 8,0 00 bo th on th e d at e o f de ced en t's de ath andon Aug us t 2 3, 2 00 7, the al te rn at e v al ua ti on da te (va lu at io n d at e). Pet it io ne r de sc rib edth e subjec t i nt eres t on Sch edul e G as a "1 6.6 7 P ER CENT MEMBERS HIP INTEREST IN [th e LLC] ". Pet it io ne r in cl ud edth e subjec t i nt eres t o n S ch edul e G be cau se de ced en t ha d b efo re h er d eath tran sf erre d the subjec t i nt eres t i n tru stto he rs el f, as tru st ee (trus t), re ta in in g the po wer t o re vo ke th attra ns fer, wh ic h p owe r sh e p os se ss edat he r de ath. Pet it io ne r de te rm in edth e $ 1,7 88 ,00 0 tha t h e rep orte d o n the Sch edul e G as th e v al ue of t he subjec t i nt eres t fr om anap pr ai sa l p rep aredforhi m by Man ag em en t Pl an ni ng , Inc . (MPI app rai sa l). Th e MPI ap pr ai sa l was ba se d i n p art- 4 -

[* 4] on anap pr ai sa l o f th e LLC's p rin ci pa l as se t, a co m m erci al bu il di ng at 3 7- 41 East18 th Str eet , New York , New York(bu il di ng ), pr ep aredby ind iv idua ls at Ja cque s O. Tuc hl er & As so ci at es (bu il di ng ap pr ai sa l). To de te rm in e th e v al ue of th e b ui ld in g, the bu il di ng ap pr ai sa l t oo k two ap pr oa ch es : a s al es co m paris on ap pr oa ch , whi chin di cat eda va lu e fo r th e b ui ld in g o f $2 2,8 00 ,00 0, an d an i nc om e cap it al iz at io n app ro ach , whi chin di cat eda va lu e fo r th e b ui ld in g o f $1 9,9 60 ,00 0. Ass ig ni ng no weig htto th e sa le s co m pa ris on ap pr oa ch , th e b ui ld in g app rai sa l
co nc lu de d o n the ba si s o f th e in co m e ap pr oa chth atth e v al ue of t he bu il di ng on th e d at e o f de ath was $1 9,9 60 ,00 0. Th e MPI ap pr ai sa l ad de d t o the va lu e co nc lu si on of t he bu il di ng ap pr ai sa l the am ountof t he LLC's ca sh an d o th er cu rren t as se ts ($8 51 ,33 7) , subt ract edth e LLC's l iabi li ti es ($1 83 ,11 6) , and
co nc lu de d tha t the va lu e (n etass etva lu e) o f th e LLC on th e d at e o f de ath was $2 0,6 28 ,22 1. Th e MPI ap pr ai sa l the n app li edto th atne t as se t v al ue , seque nt ia ll y , di sc ou nt s o f 20 % forlac k o f co nt ro l an d o f 35 % forlac k o f m ark et ab il ity , to reac h
a v al ue co nc lu si onof $ 1,7 88 ,00 0 fo r th e fai r m ark etva lu e o f th e subjec t i nt eres t. Exa min at io n Res po nd en t ex am in edth e Fo rm 70 6 a ndde te rm in edth atpe ti ti on er h ad
un de rrep orte d the fai r m ark etva lu e o f th e subjec t i nt eres t. Res po nd en t's
ex pl an at io n o f hi s ad

jus tm en t i nc reas in g the rep orte d fa ir m ark etva lu e o f th e- 5 -

[* 5] subjec t i nt eres t s ho ws tha t h e acc ep te d M PI's cal cu la ti on of the ne t as se t
va lu e o f th e LLC ($ 20 ,62 8,2 21 ) as a st art in g p oi ntforde te rm in in g the va lu e o f th e in te res t, b ut , rathe r th anall owi ng 20 % an d 3 5% d is co un ts forlac k o f co ntro l an d la ckof m ark et ab il ity , res pe ct iv el y , he a ll owe d d is co un ts of o nl y 10 % an d 2 0%. On the ba si s o f th os e 1 0% and20 % di sc ou nt s, h e d et erm in edth atth e fai r m ark et va lu e o f th e subjec t i nt eres t o n the va lu at io n d at e was $2 ,47 5,8 82 , rathe r th an $1 ,78 8,0 00 , as re po rte d b y pe ti ti on er, wh ic h i nc reas edth e ta xabl e es ta te by $6 87 ,88 2. Onth e b as is of t ha t i nc reas e, res po nd en t d et erm in edth e afo res ai d de fic ie nc y

inest at e ta x o f $3 09 ,54 7. Pet it io n Pet it io ne r ti m el y

pe ti ti on edforred et erm in at io n o f th e d efi ci en cy , ass ig ni ng erro r to th e n ot ic e, av erri ng on th e b as is of a n app rai sa l b y Dr. LauraJ. Tin da ll (Tin da ll ap pr ai sa l) t ha t the tru e v al ue of t he subjec t i nt eres t fo r es ta te tax pu rp os es was $1 ,03 7,7 96 , andpray in g tha t we re de te rm in e a d efi ci en cy of z ero an d a n ov erp aym en t o f es ta te tax en ti tl in g h im to a refu nd . Peti ti on er at ta ch eda co py of th e Tin da ll ap pr ai sa l t o the pe ti ti on . Pert in en t Fa ct s With Res pe ctto th e Bu il di ng an d the LLC The bu il di ng is a 10 -s to ry m ezza ni ne , cel lar an d s ub cel lar, co nc ret e/ st eel /
m as on ry , sem i-f

ire pr oo f cl as s C ele va to r lo ft b ui ld in g wi th off ic e sp ace a ndgra de- 6 -

[* 6] lev el ret ai l l oc at edinth e Mi dt own So ut h/ Lad ie s M il e se ct orof M an ha tt an . The bu il di ng ha s a g ro ss bu il di ng areaof app ro xi m at el y 67 ,05 0 s qu are f

eetab ov e gr ad e an d agro ss ren tabl e are a o f 77 ,72 5 s qu are f eet . The b ui ld in g was ful ly le as edon th e v al ua ti onda te . An o pe rat in g a gr eem en t (o pe rat in g a gr eem en t) g ov ern s o pe rat io n o f th e LLC. The t erm

"m em be r" i s d efi ne d i n the op erat in g a gr eem en t as on e who ha s si gn edth e o pe rat in g a gr eem en t o r who , th erea fte r, be co m es a party to t he ag reem en t. Me m

be rs parti ci pa te inm an ag em en t an d c on tro l o f th e LLC. The te rm "m em be rs hi p i nt eres t" is de fin edas t he m em be r's pe rcen ta ge in te res t i n the LLC's capi ta l. Me m

be rs hi p o f th e LLC is di vi de d a m on g thr ee famil y gro up s, an d tra ns fers of m em

be rs hi p i nt eres ts ou ts id e o f th os e g ro up s ar e res tri ct ed . A
no nf am il y m em be r tr an sf eree can no t b eco m e a m em be r of th e LLC witho utth e un an im ou s ap pr ov al of a ll of t he m em be rs . A no nf

am il y m em be r tr an sf eree who
rece iv es a m em

be rs hi p i nt eres t b utwho do es no t b eco m e a m em be r is en ti tl edto rece iv e th e d is tri bu ti on s an d a ll oc at io ns of p ro fit s an d l os se s ap pu rte nantto th at
m em be rs hi p i nt eres t b utha s n o ri gh t t o p art ic ip at e inm an ag em en t an d c on tro l o f th e LLC. The d eath o f a m em be r di ss ol ve s the LLC un le ss itis co nt in ue d b y m ajor ity vo te .- 7 -

[* 7] Pet it io ne r was a m em be r of on e o f th e fam il y

gro up s wh ensh e tr an sf

erre d th e subjec t i nt eres t t o the tru st . She was n ota m em be r of th e LLC on th e d at e o f de ath. Onth e d at e o f de ath, the tru stwas am em be r of th e LLC, an d i t o wne d the
subjec t i nt eres t. Fo ll owi ng de ced en t's de ath, the tru stco nt in ue d t o o wn the subjec t in te res t. Test im on y

W ith R es pe ctto Valu e At tria l, re sp on de ntoff

eredJo hn A. Thomson as a n e xp ertinbu si ne ss va lu at io n. Mr . Tho m so n i s v ic e p res id en t an d m an ag in g d ire ct orof t he Lon g Bea ch , Cal ifo rn ia , off

ic e o f Klaris , Tho m so n & Sch ro ed er, In c. He is als o a n accr ed it edsen io r ap pr ai se r of th e Am eri canSo ci ety

of Ap pr ai se rs , is a m em

be r of th e App rai sa l In st itut e, an d h as di rect edan d c on du ct ednu m ero us va lu at io n ap pr ai sa ls of v ari ou s b us in es s en te rp ris es . The Co urt ac cep te d M r. Tho m so n a s a bu si ne ss va lu at io n e xp ertan d re cei ve d h is writ te n re po rt i nt o e vi de nc e as hi s di recttes ti m on y

as t o the va lu e o f th e subjec t i nt eres t. Mr. Th om so n v al ue d the subjec t i nt eres t as of t he va lu at io n d at e. Becaus e he co ns id eredth e LLC to fun ct io n p rimaril y as areal est at e h ol di ng co m pa ny, he
ex cl ud edth e m ark etan d i nc om e ap pr oa ch es to va lu at io n, an d h e rel ie d e xc lu si ve ly
on a co stap pr oa ch ; i .e., whathe de sc rib edas " th e d is co un te d n etass etva lu e ap pr oa ch ." He d es cri be d tha t ap pr oa chas f ol lo ws:- 8 -

[* 8] As ap pl ie d t o the va lu at io n o f a n on m ark et ab le , m in or ity equi ty in te res t, the co stap pr oa chcal ls fora su m m at io n o f th e fai r m ark et va lu e o f th e en ti ty's as se ts an d areduc ti on of t ha t ag gr eg at e b y th e en ti ty's to ta l l iabi li ti es , with the res ul ti ng va lu e th enbe in g m ul ti pl ie d by the subjec t o wne rs hi p p erce nt ag e to arri ve at t he ne t as se t v al ue (NAV) of th e in te res t. To a rri ve at t he est im at edfai r m ark etva lu e o f th e in te res t[,] th e in di cat edne t as se t v al ue is reduc edby app ro pr ia te va lu at io n d is co un ts . Mr. Th om so n a ccep te d $ 20 ,62 8,2 21 as t he LLC's n etass etva lu e, on th e b as is of LLC's 2 00 6 p artne rs hi p t ax return a ndth e b ui ld in g app rai sa l. He d et erm in edth at di sc ou nt s o f 10 % an d 2 6% fo r la ckof c on tro l an d l ackof m ark et ab il ity , res pe ct iv el y , were ap pr op ria te . App lying th es e d is co un ts to th e subjec t i nt eres t, Mr. Th om so n c on cl ud edth atth e ro un de d fa ir m ark etva lu e was $2 ,30 3,0 00
. OPINION I. In tro du ct io n As s ta te d s up ra, the on ly iss ue we m us t d eci de is th e fai r m ark etva lu e o f th e subjec t i nt eres t o n the va lu at io n d at e. Res po nd en t i ni ti al ly det erm in edth atth e fai r m ark etva lu e o f th e subjec t i nt eres t o n the va lu at io n d at e was $2 ,47 5,8 82 , bu t, no w, onth e b as is of M r. Tho m so n's ex pe rt t es ti m on y , he c on ced es (an d we a ccep t) th atth e fai r m ark etva lu e o f th e subjec t i nt eres t o n the va lu at io n d at e was no gr eat er tha n $ 2,3 03 ,00 0. Pe ti ti on er ar gu es th atth e fai r m ark etva lu e o f th e subjec t in te res t o n the va lu at io n d at e was les s; in de ed , no t g reat er tha n the $1 ,03 7,7 96- 9 -

[* 9] de te rm in edinth e Tin da ll ap pr ai sa l. We con cl ud e th atonth e v al ua ti on da te , th e fai r m ark etva lu e o f th e subjec t i nt eres t was $2 ,30 3,0 00 , andwe red et erm in e th e d efi ci en cy

acco rd in gl y . II. Evi de nt iary

Iss ue s A. In tro du ct io n Befo re p ro ceed in g t o the m eri ts of t he cas e, we m us t d is po se of a n ev id en ti ary is su e rai se d b y pe ti ti on er, v iz , whet he r th e Tin da ll ap pr ai sa l i s i n ev id en ce. We con cl ud e th atitis no t. B. Bac kg ro un d Am on g p et it io ne r's av erm en ts inth e p et it io n, i n s up po rt o f hi s cl ai m th at , on th e Fo rm 70 6, h e o ve rv al ue d the subjec t i nt eres t (a ndis en ti tl edto a refu ndof t ax ), is th e fo ll owi ng (av erm en t):

The Pet it io ne r's in it ia l ap pr ai se r in th is cas e al so fai le d t o ut il iz e th e p ro pe r m etho d o f va lu at io n a ndfai le d t o p ro pe rly clas si fy th e In te res t. Co ns eque nt ly, Pet it io ne r ha s o bt ai ne d ane w app rai sa l (th e "Ap pr ai sa l" ), a co py of wh ic h i s at ta ch edhe ret o a s Ex hi bi t " B," whi chpro pe rly char act eri zes th e In te res t as anass ig ne e in te res t, g iv es th e p ro pe r wei gh t t o b ot h the in co m e ap pr oa chan d the ne t as se t v al ue ap pr oa ch , andap pl ie s the ap pr op ria te ap pl ic ab le di sc ou nt s. Res po nd en t an swe redth e av erm en t: "Adm it s tha t a n ew ap pr ai sa l i s at ta ch edto th e p et it io n a s Ex hi bi t B. Den ie s fo r la ckof s uf fic ie ntin fo rm at io n tha t Pe ti ti on er ob ta in edth e n ew ap pr ai sa l tha t i s at ta ch edto th e p et it io n. Den ie s the rem ai ni ng- 10 -

[* 10 ] all eg at io ns ." The ne w app rai sa l tha t the pa rti es are re ferr in g t o i s wh atwe ha ve sty le d (a ndsh al l co nt in ue to refe r to ) as th e Tin da ll ap pr ai sa l. Befo re tria l, p et it io ne r un ti m el y m ov edto co m

pe l re sp on de ntto st ip ul at e ei th er the Tin da ll ap pr ai sa l o r, al te rn at iv el y , th e en ti re p et it io n (i nc lu di ng th e at ta ch edTin da ll ap pr ai sa l). Pe ti ti on er al te rn at iv el y m ov edto san ct io n re sp on de nt fo r fai li ng to so st ip ul at e. W e d en ie d p et it io ne r's pre tri al m ot io ns an d p ro ceed ed to ho ldtri al . The p art ie s h av e st ip ul at edco pi es of t he pe ti ti on an d the an swe r, whi chare at ta ch m en ts to th e st ip ul at io n, an d h av e st ip ul at edsep arat el y th e te xtof th e av erm en t. The y

di d s o s ub

ject t o the cav eatth atth e st ip ul at io ns "s ho w th e pa rti es ' pl ead in gs inth is cas e an d a re n otadm it te d i n e vi de nc e." Pe ti ti on er as ks th atwe reco ns id er o urpri orrul in gs with re sp ectto th e Tin da ll ap pr ai sa l o r ot he rwis e al lo w itin to ev id en ce an d c on si de r itex pe rt t es ti m on y . Pet it io ne r's pa th foratt em pt in g t o i nt ro du ce the Tin da ll ap pr ai sa l i nt o ev id en ce as ex pe rt t es ti m on y is , to say the lea st , unus ua l. Gen eral ly, a p arty ob ta in s the tes ti m on y

of a n e xp ertwitne ss by call in g tha t wi tn es s t o t es ti fy . See Ru le 14 3( g) (1 ). Pur su an t t o tha t Ru le , th e ex pe rt wi tn es s m us t p rep are awritte n rep ort, wh ic h i s m ark edas a n e xh ib itan d, af te r ha vi ng be enid en ti fie d b y th e witne ss an d a do pt edby him , recei ve d i nt o e vi de nc e as hi s d ire cttes ti m on y un le ss th e Co urt d et erm in es th atth e wit ne ss is no t qua li fie d a s an ex pe rt. Th e Ru le- 11 -

[* 11 ] furth er p ro vi de s tha t, n otles s tha n 3 0 d ay s b efo re the cal l o f th e tr ia l cal en da r on whi cha cas e ap pe ars , a pa rty call in g a n e xp ertwitne ss sh al l s erv e o n each othe r pa rty andsubm itto th e Co urt a c op y of t he ex pe rt' s re po rt. Fi na ll y , th e Ru le als o p ro vi de s tha t, g en eral ly, we wil l ex cl ud e anex pe rt wi tn es s' t es ti m on y al to ge th er fo r fai lure t o c om pl y with the Ru le . Tho se requi rem en ts are ec ho edin
ou r st an di ng pre tri al ord er, wh ic h was serve d o n p et it io ne r. Pet it io ne r's ch os enm ean s fo r se ek in g t o i nt ro du ce the Tin da ll ap pr ai sa l i nt o ev id en ce i s p erh ap s ex pl ai ne d b y a co nv ers at io n we h adwith h is co un se l atth e he ari ng du rin g wh ic h we c on si de redpe ti ti on er's pre tri al m ot io ns alo ng with
res po nd en t's m ot io n i n l im in e to ex cl ud e th e Tin da ll ap pr ai sa l o n v ari ou s g ro un ds , in cl ud in g tha t p et it io ne r ha d n otsubm it te d a ndserve d aco py of th e rep ort as requi redby Rul e 1 43 (g )(1 ) an d o urst an di ng pre tri al ord er. Pet it io ne r ha d fi le d n o res po ns e to res po nd en t's m ot io n i n l im in e, an d, atth e h eari ng , inres po ns e to th e Co urt's qu es ti on as t o wh ethe r pe ti ti on er was jus t re lying on hi s o wn m ot io ns (with
res pe ctto st ip ul at in g the Tin da ll ap pr ai sa l i nt o e vi de nc e), p et it io ne r's co un se l
can di dl y res po nd ed : "P ro babl y . You r ho no r, be cau se rig htno w m y cli en t's ina fee d is pu te with the ap pr ai se r, so rig htno w I can no t g etth e ap pr ai se r to co m e in
an d t es ti fy ." App aren tl y , cou ns el 's t im e is les s d ear t ha n was Dr. Tin da ll 's.- 12 -

[* 12 ] C. Dis cu ss io n

1. Tax Co urt Ru le s The Tax C ou rt Rul es of P ract ic e an d P ro cedur e g ov ernall pro ceed in gs an d
cas es be fo re the Co urt. See Ru le 2(a ). Ple ad in gs are g ov ern edby Rul es 30 th ro ug h 4 1; st ip ul at io ns for tri al are g ov ern edby Rul e 9 1, an d e vi de nt iary m at te rs are a dd res se d b y

Ru le 14 3. Inge ne ral , th e Co urt co nduc ts tri al s i n a cco rd an ce with the rul es of e vi de nc e fo r tr ia ls witho uta jury in the U.S. Dist ric t Co urt fo r th e Dis tri ctof C ol um

bi a, an d, ac co rd in gl y , we fol lo w th e Fed eral Ru le s o f Evi de nc e. Sec. 7 45 3; Ru le 14 3( a); Clo ug h v . Comm is si on er, 1 19 T.C. 18 3, 1 88 (20 02 ). Inpe rti ne ntpa rt, R

ul e 1 43 (c) p ro vi de s: "Ex p art e aff id av it s o r de cl arat io ns , st at em en ts inbri efs , andun adm it te d a ll eg at io ns inpl ead in gs do no t co ns ti tu te ev id en ce." (Em

ph as is ad de d.) In an swe rin g the av erm en t, re sp on de ntadm it te d
on ly tha t a n ew ap pr ai sa l (the Tin da ll ap pr ai sa l) wa s at ta ch edto th e p et it io n. He de ni edth e cl ai m s tha t p et it io ne r's in it ia l ap pr ai se r erre d, tha t p et it io ne r ob ta in eda ne w app rai sa l, an d tha t the ne w app rai sa l p ro pe rly char act eri zedth e subjec t in te res t an d o th erwi se pro pe rly val ue d i t. Ru le 91 (a)( 1) pro vi de s: The pa rti es are re qu ire d t o s ti pu la te , to th e fu ll es t ex te ntto whi ch co m pl et e o r qu al ifi edag reem en t ca n o r fai rly sh ou ldbe reac he d, al l m at te rs no t p riv il eg edwhi chare re le va ntto th e p en di ng cas e,- 13 -

[* 13 ] reg ard le ss of wh ethe r su chm at te rs in vo lv e fac t o r op in io n o r th e ap pl ic at io n o f la w to fact . Inc lu de d i n m at te rs requi redto be st ip ul at edare al l fa ct s, al l d oc um en ts an d p ap ers or c on te nt s o r as pe ct s the reo f, an d a ll ev id en ce wh ic h fa irl y sh ou ldno t b e in di sp ut e. * * * Do cu m en ts or p ap ers or o th er ex hi bi ts anne xe d t o o r fil edwith the st ip ul at io n s ha ll be co ns id eredto be pa rt o f th e st ip ul at io n. Ru le 91 (c) g ov ern s the fil in g o f st ip ul at io ns , anditpro vi de s: "Exe cu te d st ip ul at io ns pre pa redpu rs ua ntto th is Ru le , andrel at edex hi bi ts , sh al l b e fi le d b y th e p art ie s ator b efo re co m m en cem en t o f th e tr ia l o f th e cas e, un le ss th e Co urt i n th e p art ic ul ar ca se sh al l o th erwi se sp eci fy . A sti pu la ti on when fil edne edno t b e of fere d fo rm al ly to b e co ns id eredinev id en ce." (Em ph as is ad de d.) 2. Pet it io ne r's Argu m en t As b es t we u nd ers tandpe ti ti on er's arg um en t fo r ou r rec ei vi ng th e Tin da ll ap pr ai sa l i nt o e vi de nc e as ex pe rt t es ti m on y , itis as f ol lo ws. Res po nd en t ca nn ot fai rly dis pu te th e au th en ti ci ty of th e p et it io n, i nc lu di ng th e at ta ch edTin da ll ap pr ai sa l. Res po nd en t m us t the refo re s ti pu la te th e au th en ti ci ty of th e co py of th e pe ti ti on pre se nt edby pet it io ne r. The au th en ti ci ty of th e p et it io n h av in g b een st ip ul at ed , it(in cl ud in g the Tin da ll ap pr ai sa l) i s i n e vi de nc e, subjec t t o a ny res erv at io n n ot edas t o m at eri al ity or r el ev an ce. Bec au se th e Tin da ll ap pr ai sa l i s in ev id en ce, the requi rem en ts go ve rn in g the adm is si on of e xp erttes ti m on y fou nd in Ru le 14 3( g) an d o urst an di ng pre tri al ord er ar e b es id e th e p oi nt .- 14 -

[* 14 ] The fol lo win g two s en te nc es fro m pe ti ti on er's an swe rin g b rie f cap tu re h is arg um en t (a ltho ug h the y

refe r to an ot he r ap pr ai sa l, the MPI app rai sa l, wh ic h i s at ta ch edto th e Fo rm

70 6) : Res po nd en t s ta te s tha t " th is Co urt wi ll no t ad mitanap pr ai sa l rep ort as ev id en ce o f fai r m ark etva lu e unl es s the au th orof t he ex pe rt [s ic ] te st ifi es at t ria l an d i s av ai labl e fo r cro ss ex am in at io n." (Res p. Br., p . 44 .) Thi s i s tru e, bu t the MPI Ap pr ai sa l was adm it te d i n ev id en ce b y

st ip ul at io n s o tha t i t was no t n eces sa ry to ha ve it adm it te d b y

th e Co urt thr ou gh Ru le 14 3, wh ic h a ls o s ho ul d o nl y ap pl y if Pe ti ti on er ca ll edth e ap pr ai se r to tes ti fy , whi chhe di d n ot . Cl earl y , pet it io ne r rel ie s o n the Tin da ll ap pr ai sa l fo r Dr. Tin da ll 's e xp ert op in io n. Onth e b as is of app rai sa l, h e p ro po se s tha t we fi ndth e fo ll owi ng fact : "Th e Tin da ll App rai sa l d et erm in edth atth e p ro pe r wei gh t i n v al ui ng th e LLC to be gi ve n t o the NAV andth e h is to ric al di st rib ut io ns of t he LLC is 20 % an d 8 0%,
res pe ct iv el y ." He arg ue s:

The Tin da ll App rai sa l ex pl ai ns why Pet it io ne r di sa vo ws tho se po rti on s o f th e 7 06 by exp la in in g wh y th e v al ue of t he Deced en t's in te res t s ho ul d b e $ 1,0 37 ,79 6.0 0 b ecau se th e d eced en t's in te res t t o b e va lu edis anass ig ne e in te res t i ns te adof m em be rs hi p i nt eres t, an d be cau se th e LLC is , at l eas t, i n p artanop erat in g c om pa ny ins te adof a ho ld in g c om

pa ny. The Tin da ll App rai sa l n oton ly exp la in s wh y Pet it io ne r di sa vo ws the se adm is si on s i n the 70 6 a ndth e MPI App rai sa l b utals o p la ces th e adm is si on s i n the 70 6 i n p ro pe r co nt ex t. The Tin da l Ap pr ai sa l al so ex pl ai ns ho w th e v al ue s o f th e LLC an d the Deced en t's in te res t ar e subs tant ia ll y un de rs ta te d [s ic ] in th e 7 06 . The ba si s fo r di sa vo win g the adm is si on s cann otbe ful ly andim parti al ly un de rs to odwitho utadmit ti ng th e Tin da ll App rai sa l i n e vi de nc e und er Fed eral Ru le of Ev id en ce 1 06
.- 15 -

[* 15 ] 3. Fed eral Ru le s o f Evi de nc e Ru le 70 1 o f th e Fed eral Ru le s o f Evi de nc e p ro vi de s tha t a l ay witne ss m ay no t o fferanop in io n b as edon sci en ti fic , tec hn ic al , or o th er s pe ci al iz edkn owl ed ge . Ru le 70 2 o f th e Fed eral Ru le s o f Evi de nc e p erm it s ex pe rt t es ti m on y : "A wi tn es s who is qu al ifi edas an e xp ertby kno wled ge , sk il l, ex pe rie nc e, tr ai ni ng , or educ at io n m ay

tes ti fy inth e fo rm

of a n o pi ni on or o th erwi se ". Whe th er a pa rti cu lar witne ss po ss es se s the ne ces sa ry qu al ifi cat io ns is a qu es ti onof f act , whi chis for

th e co urt t o d eci de , bef

or e th e wit ne ss ' tes ti m on y is rece iv ed . See Daube rt v . Merr el l Do w Pha rm ., Inc ., 50 9 U.S. 5 79 , 56 9 (1 99 3)
. The p ro cedur es 1 fo r pr es en ti ng expe rt t es ti m on y to th e Tax Co urt ar e, as de sc rib edsupr a, se t fo rth in Ru le 14 3( g) an d i n o urst an di ng pre tri al ord er. Pet it io ne r m is read s o urRu le s i f he th in ks th atRu le 91 , go ve rn in g s ti pu la ti on s fo r tr ia l, ca n b e u se d t o e nd -ru n o ur pr oc edur al rul es with re sp ectto ex pe rt t es ti m on y or t o p rev en t thi s C ou rt f ro m ex erci si ng it s g at ek eep er fu nc ti on with re sp ectto ex pe rt t es ti m on y .
InDaub ertv. Me rrel l Do w Pha rm ., Inc ., 50 9 U.S. 5 79 (19 93 ), th e Supr em e 1 Co urt ch arg edtri al jud ge s wi th th e res po ns ib il ity of a ct in g a s g at ek eep ers to ex cl ud e unr el iabl e expe rt t es ti m on y , andth e Co urt i n Kum ho Tire C o. v . Carm ic ha el , 52 6 U.S. 1 37 (19 99 ), cl ari fie d tha t tha t g at ek eep er fu nc ti on ap pl ie s t o al l ex pe rt t es ti m on y , no t ju sttes ti m on y ba se d i n s ci en ce. Fed . R. Evi d. 7 02 was am en de d i n 2 00 0 i n re sp on se to Daub ertan d the m any cas es ap pl y in g i t, i nc lu di ng Kumho . See Fed . R. Evi d. 7 02 advi so ry co m m it te e's no te (20 00 am en dm en t), 2 8 U.S.C. ap p. at89 3- 89 6 (2 00 0)
.- 16 -

[* 16 ] 4. St ip ul at io n P ro ces s The st ip ul at io n p ro ces s i s " th e b edro ckof Tax Co urt p ract ic e" a ndis de si gn ed"as anaidto th e m or e ex pe di ti ou s tria l o f cas es as we ll as f orset tl em en t pu rp os es ." Brane rto n C or p. v . Comm is si on er, 6 1 T.C. 6 91 , 69 2 (1 97 4) . The Fed eral Ru le s o f Ci vi l Pr oc edur e d o n otco nt ai n aco m pa rab le rul e. In it ia ll y , ou r Ru le s, i .e., th e Ru le s o f ou r pr ed eces so r, th e Uni te d S ta te s B oa rdof Tax App eal s, co nt em pl at edon ly sti pu lati on s o f fac ts . See Ru le 30 , 1 B.T.A. 12 91
. Now th e 2 st ip ul at io n p ro ces s h as bro adsco pe an d i s n otco nf in edto th e st ip ul at io n o f fac ts orev id en ce. See Ru le 91 (a) n ot e, 60 T.C. 11 18 ; Will am et te Indus ., Inc . v. Co m m is si on er, T.C. Mem o. 1 99 5- 15 0, af f'd , 14 9 F .3d10 57 (9t h C ir. 1 99 8)
. Ofte n, fo r in st an ce, the pa rti es ina cas e b efo re the Tax C ou rt wi ll st ip ul at e se tt le d is su es . See, e.g ., Koo ns v. Co m m is si on er, T.C. Mem o. 2 01 3- 94 , at * 2 (" Sev eral is su es were s et tl edby the pa rti es as r efl ect edina st ip ul at io n o f se tt le d i ss ue s fi le d
on Feb ru ary 9, 2 01 1." ). Fact s ar e st ip ul at edan d c om e in to ev id en ce wi th ou t the
ne ces si ty of fi nd in gs , see , e.g., Ru le 91 (c); Kens ic o C em et ery v. Co m m is si on er, 3 5 B.T.A. 49 8 (1 93 7) , aff'd , 96 F.2d59 4 (2 d C ir. 1 93 8) , alt ho ug h o fte n we wi ll
ex pl ic it ly findst ip ul at edfact s an d i nc or po rat e th em

by referen ce i nt o o ur

fin di ng s, Pro vi di ng inrel ev an t p art : "Th e ta xp ay er an d the Co m m is si on er o f In te rn al 2 Rev enue m ay , by st ip ul at io n i n wri ti ng fil edwith the Bo ard , or p res en te d a t the he ari ng , agr ee upo n a ny facts in vo lv edinth e cas e."- 17 -

[* 17 ] see , e.g., Ma rte ll v. Co m m is si on er, T.C. Mem o. 2 01 3- 11 5, at*2 ("So m e o f th e fac ts have be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io n o f fac ts is in co rp or at edhe rei n b y

th is refe ren ce." ). Cert ai nl y do cum en ts an d p ap ers are t o b e st ip ul at ed , anddo cu m en ts , pap ers or o th er ex hi bi ts an ne xe d t o o r fi le d wi th itare co ns id eredpa rt o f th e st ip ul at io n. Ru le 91 (a). A pa rag rap h i n ast ip ul at io n reci ti ng th atExh ib itX att ach edto th e st ip ul at io n i s an ap pr ai sa l o f Bl ack acre is
co nc lu si ve th atitis . Like wis e, a s ti pu la ti on th atatt ach edExh ib itY is a no np arty 's de po si ti on is co nc lu si ve th atitis . The au th en ti ci ty of th e d oc um en ts is
es tabl is he d, an d tha t fa ctne edno t b e fo un d. If f il ed , th e st ip ul at io n n eedno t b e of fere d i nt o e vi de nc e. Ru le 91 (c). If o ffer edby a part y for th e truth o f th e m at te rs as se rte d, h owe ve r, an d n otad op te d b y th e d ecl aran t t es ti fy in g a t the curren t tria l o r he ari ng , bo th do cu m en ts co ns ti tu te he ars ay , see Fed . R. Evi d. 8 01 , whi chm ay or m ay no t b e adm is si bl e, se e id . 80 2. Ru le 91 do es no t re qu ire th ata he ars ay ob jecti onbe res erv edina st ip ul at io n, s o wer e we to co nc lu de th ata de po si ti on or ap pr ai sa l i s i n e vi de nc e m erel y on acco un t o f it s b ei ng att ach edto a st ip ul at io n, th ena pa rty's s ub se qu en t h ears ay ob jecti on wou ldbe un av ai li ng . Lik ewis e, th e sp eci fic at io n i n R

ul e 1 43 (c) tha t " un adm it te d a ll eg at io ns inpl ead in gs do no t co ns ti tu te ev id en ce" wou ldha ve no for ce wi th res pe ctto un adm it te d a ve rm en ts in a p le ad in g i de nt ifi edin , andatt ach edto , a st ip ul at io n. Ce rta in ly, th atcan no t b e- 18 -

[* 18 ] so . In M in ni ckv. Co m m is si on er, T.C. Mem o. 2 01 2- 34 5, p rin ci pa ll y in vo lv in g the va lu e o f a co ns erv at io n e as em en t co nt rib ut edto ch ari ty, th e p art ie s ex ecu te d ast ip ul at io n o f fac ts st at in g tha t " al l ex hi bi ts att ach edto th e st ip ul at io n 'm ay be acce pt edas aut he nt ic ' an d 'a re i nc or po rat edinth is st ip ul at io n a ndm ad e a pa rt h ereo f '." Id . at * 18 . The t ax pa y ers ob jecte d t o fo ur

st ip ul at edex hi bi ts , ap pr ai sa ls of c ert ai n l an d, o n the gro un ds th atth e ex hi bi ts were i n s ub st an ce ex pe rt wi tn es s re po rts th atha d n otbe enex ch an ge d i n a cco rd an ce wi th Ru le 14 3
an d h adno t b eenex ch an ge d 1 4 d ay s b efo re tria l as requi redby our st an di ng pr etria l o rd er. W e th ou gh t tha t the tax pa y ers ' ob jecti on ha d m eri t, an d, al th ou gh we adm it te d the fou r ex hi bi ts in to ev id en ce fo r othe r pu rp os es , we dec li ne d t o re ly
on th em to th e ex te ntth ey

op in edon th e v al ue of t he co ns erv at io n e as em en t. Id . at *2 0. 3 Altho ug h we h av e o n o ccas io n s ai d tha t ex hi bi ts att ach edto a st ip ul at io n

3 fil edby the pa rti es are i n e vi de nc e o r are p artof t he ev id en ti ary reco rd , th e ci rcu m st an ces of tho se st at em en ts m us t b e ta ke n i nt o a cco un t. Fo r ex am pl e, in Si eg al v. Co m

m is si on er, T.C. Mem o. 1 99 2- 33 4, T.C.M. (R IA) p ara. 9 2,3 34 , at 9 2- 17 14 n.5 , we sai d tha t t ax returns att ach edto th e p art ie s' s ti pu la ti on of f act s "b eco m e p artof t he ev id en ti ary reco rdwhen th e st ip ul at io n i s fi le d wi thth e Co urt." The t ax pay ers ha d re se rv edrel ev an cy ob jecti on s t o the returns , whi ch were the ir o nl y

ob jecti on s an d wh ic h we h adov erru le d. Id ., T.C.M. (RIA) p ara. 92 ,33 4, at92 -1 71 2 n .2, 9 2- 17 14 n.5 . In Ham di v. Co m m is si on er, T.C. Mem o. 19 93 -3 8, 1 99 3 WL 20 16 9, at*8 n.8 , aff'dwitho utpubl is he d o pi ni on , 23 F.3d40 7 (6 th Cir . 19 94 ), qu ot in g R ul e 9 1( c), we s ai d: "Un de r th e Co urt's st ip ul at io n pr oc edur es th e p art ie s ex ecu te d s ti pu la ti on an d the ex hi bi ts att ach edth eret o, wh en (co nt in ue d...)- 19 -

[* 19 ] 5. The Tin da ll App rai sa l Pet it io ne r di d n otcal l Dr. Tin da ll as awitne ss bu t as ks us to rel y on he r rep ort (wh ic h, und er o urRu le s, wo ul d s erv e as he r di recttes ti m on y ) as he r ex pe rt op in io n. Pe ti ti on er h as ne ithe r qu al ifi edDr. Tin da ll as a n e xp erten ti tl edpu rs ua nt to rul e 7 02 of t he Fed eral Ru le s o f Evi de nc e to gi ve he r op in io n o n t ech ni cal
m at te rs no r ha s h e sa ti sf

ie d o urpro cedur al rul es forex pe rt t es ti m on y , fou ndin Ru le 14 3( g) an d i n o urst an di ng pre tri al ord er. Inothe r wor ds , pet it io ne r ha s fai le d t o s at is fy

th e p reco nd it io ns for

ou r rec ei vi ng Dr. Tin da ll 's o pi ni on in to

(...co nt inue d) 3 fil edwith the Co urt, 'n eedno t b e o ffer edform erl y to be co ns id eredinev id en ce.'" (Em ph as is ad de d.) Th e st ip ul at io n c on ta in edfew st at em en ts of f actbe y on d the pa rti es ' st ip ul at io n tha t the va rio us att ach eddo cu m en ts were s ub m itte d b y th e ta xp ay er t o the Int ern al Rev enue Serv ic e. Id ., 19 93 W L 20 16 9, at*1 n.1 . The Co m m is si on er d idno t co nc ed e th e p ro ba ti ve va lu e o f th e d oc um en ts bu t " ag reed to th is type o f st ip ul at io n i n a n e ffo rt t o p la ce s om ethi ng be fo re the Co urt." Id. Evi de nt ly con cl ud in g tha t the pa rti es ' in te ntinst ip ul at in g the do cu m en ts was t o pu t the do cu m en ts inev id en ce, we n ev erthe le ss cau ti on ed : "Ho wev er, the fact th atth es e d oc um en ts are co ns id ered'inev id en ce' d oe s n otth ereb y en do w th em with e vi de nt iary

weig htan d v al ue th ey

do no t o th erwi se po ss es s." Id. at*8 n.8
. InW arn er v . Comm is si on er, T.C. Mem o. 1 98 4- 58 2, T.C.M. (P -H) p ara. 8 4,5 82 , at 84 -2 35 0 n .2, we d is m is se d the tax pa y er's po st tri al co nt en ti on th atcert ai n jo in tl y st ip ul at eddo cu m en ts rel ie d o n b y th e Co m mis si on er were no t i n the reco rd . W e sa idth at , alt ho ug h i n the st ip ul at io n the tax pa y er h adex pr es sl y res erv edth e ri gh t to ob ject t o the adm is si bi li ty of th e d oc um en ts att ach edth eret o, h e h adfai le d t o rai se any ob jecti on at t ria l. We con cl ud ed : "Thus , th e rec or d i n thi s ca se in cl ud es al l o f th e ex hi bi ts att ach edto th e st ip ul at io n."- 20 -

[* 20 ] ev id en ce. Bec au se he r rep ort (i .e., th e Tin da ll ap pr ai sa l) i s n otinev id en ce, we m ay no t co ns id er h er o pi ni on . D. Co nc lu si on The Tin da ll ap pr ai sa l i s ex cl ud ed
. 4 III. Fai r Marke t Val ue of S ub ject I nt eres t A. In tro du ct io n Pet it io ne r cal le d n o wi tn es s t o t es ti fy to th e v al ue of t he subjec t i nt eres t o n th e v al ua ti on da te . Peti ti on er fi nd s faul t b oth wi th th e MPI ap pr ai sa l, o n wh ic h h e rel ie d i n re po rti ng th e v al ue of t he subjec t i nt eres t o n the Fo rm 70 6, an d o n M r. Tho m so n's op in io n a s t o the va lu e o f th atpro pe rty. H e co nt en ds th atth ere i s su ffi ci en t ev id en ce i n the reco rdfro m whi chth e Co urt co ul d d et erm in e th e fai r m ark etva lu e o f th e subjec t i nt eres t o n the va lu at io n d at e wit ho utrel y in g o n the
co nc lu si on s ei th er i n the MPI app rai sa l o r of Mr. Tho m so n. He co nt en ds th atth at va lu e is les s tha n the $1 ,78 8,0 00 he rep orte d o n the Fo rm 70 6. A di ffer en t ap pr ai sa l, the MPI app rai sa l, i s at ta ch edto th e Fo rm 70 6, wh ic h 4 (in cl ud in g the MPI app rai sa l) i s i de nt ifi edinth e st ip ul at io n a ndatt ach edas a n ex hi bi t. The MPI app rai sa l i s o ffer edby nei th er p arty so le ly as expe rt t es ti m on y , so th atwe do no t ex cl ud e it , as we d o the Tin da ll ap pr ai sa l, fo r fai li ng to sat is fy th e rel ev an t ru le s re la ti ng to ex pe rt t es ti m on y . W e d o n ot , ho wev er, rel y on itas ex pe rt t es ti m on y . See, e.g ., Min ni ckv. Co m m is si on er, T.C. Mem o. 2 01 2- 24 5, at *2 0 (a dm it ti ng in to ev id en ce b utno t re lying on ap pr ai sa ls no t co nf orm in g t o R

ul e 14 3 t o the ex te ntth ey

op in edon th e v al ue of t he co ns erv at io n e as em en ts in qu es ti on ).- 21 -

[* 21 ] To d et erm in e th e fai r m ark etva lu e o f th e subjec t i nt eres t, ea chof ( 1) th e MPI ap pr ai sa l, (2 ) res po nd en t i n e xp la in in g h is ad jus tm en t t o the va lu e o f th e subjec t i nt eres t i n the no ti ce, an d (3 ) Mr. Th om so n s tarte d wi th $2 0,6 28 ,22 1 a s the
ne t as se t v al ue of t he LLC. Each the n m ad e ad jus tm en ts forlac k o f co ntro l an d fo r la ck of m ark et ab il ity

(an d tho se ad

jus tm en ts are the on ly thi ng ab ou t wh ic h th ey di sa gr ee). Pe ti ti on er fi rs t fi nd s faul t wi th th e co m m onst art in g p oi nt , cl ai min g tha t the va lu e o f th e LLC sh ou ldno t h av e b eende fin edex cl us iv el y by refe ren ce t o i ts ne t as se t v al ue (th e ex ces s o f th e v al ue of i ts ass et s o ve r it s li ab il it ie s) : "[ T] he LLC is at l eas t i n p artanop erat in g c om pa ny tha t s ho ul d b e va lu edgi vi ng so m e wei gh t t o the LLC['s] earn in gs an d/ ordi st rib ut io ns ." Pet it io ne r ne xtfin ds fau ltwith re sp on de nt 's (a ndMr. Tho m so n's ) cl as si fic at io n o f th e subjec t i nt eres t as a m em be rs hi p i nt eres t i n the LLC: "Th e Not ic e o f Defi ci en cy

erro ne ou sl y

cla ss ifi edth e Dece de nt 's i nt eres t i n the LLC forva lu at io n pu rp os es as am em

be rs hi p In te res t. Su cherro ne ou s cl as si fic at io n re su lt edinth e fai lu re o f th e ex pe rts to refl ectap pr op ria te ly the * * * [l im it at io ns att en di ng a no nf am il y m em be r's in te res t] inde te rm in in g the am ountof t he di sc ou nt s fo r * * *
m in or ity in te res t [s ta tu s] andforlac k o f m ark et ab il ity ." Fi na ll y , pet it io ne r fi nd s fau ltge ne ral ly w ith the am ou nt s o f Mr. Th om so n's di sc ount s.- 22 -

[* 22 ] B. Dis cu ss io n

1. Mem

be r's Int eres t a. In tro du ct io n Addres si ng fir stth e se co ndfau ltpe ti ti on er as cri be s t o re sp on de ntan d M r. Tho m so n's po si ti on s, we u nd ers tandpe ti ti on er's arg um en t t o b e th atbo th
res po nd en t an d M r. Tho m so n e rredin(1) no t cl as si fy in g the subjec t i nt eres t as a no nf am il y m em be r's in te res t (a ss ig ne e's in te res t), and(2) fai li ng to va lu e th e subjec t i nt eres t as anass ig ne e's in te res t u nd er the wil li ng bu y er-wi ll in g s el le r st an da rdpre sc rib edinsec ti on 20 .20 31 -1 (b ), Est at e Tax Reg s. Sp eci fic al ly, pe ti ti on er co nt en ds th at , inap pl y in g the wil li ng bu y er-wi ll in g s el le r st an da rd , th e hypo th et ic al wil li ng bu y er m us t b e as su m edto be a no nf am il y m em be r, who
wou ld , ineffe ct , be p ur ch as in g a n a ss ig ne e's in te res t s in ce h e co ul d n otbe co m e a m em be r of th e LLC witho utun an im ou s ap pr ov al of a ll m em be rs hi p i nt eres ts . b. Und erl y in g P rin ci pl es of Law Sect io n 2 00 1( a) i m

po se s a t ax "o n the tra ns fer o f th e ta xabl e es ta te of e ve ry de ced en t wh o i s a c it iz enor r es id en t o f th e Uni te d S tate s." The v al ue of t he ta xabl e es ta te is de riv edfro m th e v al ue of the gro ss est at e. See s ec. 2 05 1. Se ct io n 20 33 bro ad ly pro vi de s tha t the "v al ue of t he gro ss est at e sh al l i nc lu de th e v al ue of al l p ro pe rty to t he ex te ntof t he in te res t the rei n o f th e d eced en t atth e ti m e o f hi s- 23 -

[* 23 ] de ath." Sect io ns 20 34 th ro ug h 2 04 5 the n e xp li ci tl y m an da te in cl us io n o f
se ve ral m or e n arro wly de fin edcla ss es of a ss et s. The va lu e o f th e subjec t i nt eres t was in cl ud edinth e v al ue of t he gro ss es ta te un de r se ct io n 2 03 8( a), wh ic h i nc lu de s i n the va lu e o f a d eced en t's gro ss es ta te th e v al ue of a ll in te res ts inpro pe rty tran sf erre d b efo re d eath wh ere, o n the da te of d eath, the trans fer was subjec t t o c ha ng e th ro ug h the de ced en t's ex erci se of a p owe r to "al te r, am en d, re vo ke , or t erm in at e th e tr an sf er." Gen eral ly, th e v al ue of a n i te m of p ro pe rty inc lu de d i n the de ced en t's gro ss es ta te is th e fai r m ark etva lu e o f th e it em at the ti m e o f th e d eced en t's de ath o r, if
anele ct io n i s m ad e, on th e al te rn at e v al ua ti on date . See s ec. 2 0.2 03 1- 1( b) , Est at e Tax Reg s. "Th e fai r m ark etva lu e is th e p ric e atwhi chth e p ro pe rty woul d c ha ng e ha nd s b etweena wil li ng bu y er an d awil li ng sel le r, ne ithe r be in g und er an y co m pu ls io n t o b uy or to sel l an d b ot h h av in g re as on ab le kn owl ed ge of r el ev an t fact s." Id.
c. Dis cu ss io n W e m us t d et erm in e whe th er re sp on de ntan d M r. Tho m so n e rredin cl as si fy in g the subjec t i nt eres t as a m em be r's in te res t ra th er tha n c la ss ifyin g i t as
anass ig ne e's in te res t. A m em be r's in te res t i s m or e v al uabl e th ananequi va le nt pe rcen ta ge in te res t o f anass ig ne e b ecau se th e m em be r's in te res t ca n p art ic ip at e in- 24 -

[* 24 ] m an ag em en t an d c on tro l o f th e LLC. W e th in k re sp on de ntan d M r. Tho m so n d idno t err. Deced en t was a m em be r of th e LLC whe n s he tra ns ferr ed th e subjec t i nt eres t t o the tru st . W e as su m e, th eref or e, th at , un ti l s he m ad e th e tra ns fer, s he en

joy edall of t he be ne fit s an d was sad dl edwith a ll of the burd en s at te nd an t upo n b ei ng a "m em be r" o f th e LLC. The t erm "m em be r's in te res t" (or th e te rm "m em be rs hi p i nt eres t" , whi chth e p art ie s u se , bu t wh ic h we d o n ot , be cau se itis a te rm

de fin edinth e o pe rat in g a gr eem en t t o m eana m em be r's pr op orti on al in te res t i n c ap it al ) is bo th a co nv en ie ntan d a n a ccurat e cl as si fic at io n fo r in di cat in g tha t d eced en t's in te res t i n the LLC was o f th e fu ll es t k in d; i.e., s he sh aredinm an ag em en t an d c on tro l an d d idno t m erel y sh are i n p ro fit s an d l os se s. Fo r th e sa m e rea so ns , th e te rm is a co nv en ie ntan d a ccu rat e cl as si fic at io n fo r th e subjec t i nt eres t i n the ha nd s o f th e trus t, wh ic h a ls o was a m em be r of th e LLC. Mo reo ve r, th ere i s n o e vi de nc e th at , onor b efo re the va lu at io n d at e, th e trus t di st rib ut ed , so ld , exc ha ng ed , or o th erwi se di sp os edof the subjec t i nt eres t, s o tha t, po ss ib ly, on th atda te , itco ul d m or e acc ur at el y be de sc rib edas a n a ss ig ne e's in te res t. The refo re, b ecau se th e te rm "m em be r's in te res t" co nv en ie nt ly and
accu rat el y

de sc rib es th e ri gh ts in he ren t t o asubjec t i nt eres t o n the da te de ced en t tra ns ferr edit , onth e d at e sh e d ie d, an d o n the va lu at io n d at e, ne ithe r res po nd en t- 25 -

[* 25 ] no r Mr. Th om so n e rredincla ss ifyin g i t as su ch(or , inth ei r te rm s, cl as si fy in g i t as a "m em

be rs hi p i nt eres t" ). The fai r m ark etva lu e o f th e subjec t i nt eres t o n the va lu at io n d at e is de te rm in edun de r th e o bjec ti ve wil li ng bu y er-wi ll in g s el le r st an da rddi sc us se d
supr a. The wi ll in g b uyer an d wi ll in g s el le r are pu rel y hypo th et ic al pe rs on s, an d th ei r ch arac te ris ti cs are n otne ces sa ril y th e sa m e as th e p ers on al ch arac te ris ti cs of th e actua l s el le r ora parti cu lar bu y er. E.g., Ch ap m anGlen Ltd . v. Co m m is si on er, 14 0 T.C. _

_ (M ay 28 , 20 13 ). Cert ai nl y , inap pl y in g the wil li ng bu y er-wi ll in g se ll er s tand ardto de te rm in e th e v al ue of t he subjec t i nt eres t, i t wo ul d b e ap pr op ria te to tak e in to co ns id erat io n l im it at io ns inth e o pe rat in g a gr eem en t o n the rig ht s o f a n on fam il y

m em be r tr an sf eree to pa rti ci pa te inco nt ro l an d m an ag em en t of th e LLC an d l im it at io ns on th e tr an sf eree 's ri gh ts othe rwis e to be tre at edas a m em be r. Pet it io ne r, ho wev er, s eek s t o c ol laps e th e two st ep s o f th e v al ua ti on pr oc es s- -i.e ., (1) i de nt ify the pro pe rty to b e v al ue d a ndit s n atur e an d c ha ract er, an d (2 ) ob

jecti ve ly det erm in e it s v al ue --i nt o asi ng le st ep . Peti ti on er wo ul d
ex pa ndsec ti on 20 .20 31 -1 (b ), Est at e Tax Reg s., b ey on d i ts in te nd edsco pe by
us in g the pro vi si on to red efi ne th e ch arac te r of th e subjec t i nt eres t as anass ig ne e's in te res t. See Kerr v . Comm is si on er, 1 13 T.C. 44 9, 4 69 (19 99 ), aff'd , 29 2 F .3d(5t h Ci r. 20 02 ). As d is cu ss edinth e imm ed ia te ly prece di ng parag rap h o f th is rep ort, o n- 26 -

[* 26 ] th e v al ua ti on date th e subjec t i nt eres t was a m em be r's in te res t. The ho ld er of th atin te res t, atth atti m e, en joy edful ly the be ne fit s an d b ur de ns of b ei ng a m em be r of th e LLC, in cl ud in g h is or h er i nabi li ty to tran sf er al l o f th os e b en efi ts
an d b ur de ns to a no nf

am il y m em be r tr an sf eree . The h y

po th et ic al wil li ng bu y er an d h y po th et ic al wil li ng sel le r--" bo th ha vi ng reas on ab le kn owl ed ge of r el ev an t fact s" , sec . 20 .20 31 -1 (b ), Est at e Tax Reg s.-- wou ldun de rs tanda m em be r's in te res t to be so res tri ct ed , andwou ldtak e th atres tri ct io n i nt o a cco un t i n the ir
ne go ti at io ns of wh ata m em be r's in te res t was worth. Mr . Tho m so n c on si de red
res tri ct io ns im

po se d o n tran sf

erab il ity of a n i nt eres t i n the LLC as a f act orinhi s m ark et ab il ity

di sc ou ntan al y si s. d. Co nc lu si on Neit he r res po nd en t n orMr. Tho m so n e rredincla ss ifyin g the subjec t i nt eres t as a m em be r's in te res t. 2. App rai sa l Pr oc edur es a. In tro du ct io n As fo un d s up ra, Mr . Tho m so n c on si de redth e LLC to fun ct io n p rimaril y as a real est at e h ol di ng co m

pa ny and , forth atreas on , rel ie d e xc lu si ve ly on the di sc ou nt edne t as se t v al ue ap pr oa chinva lu in g the subjec t i nt eres t. Pet it io ne r- 27 -

[* 27 ] fin ds fau ltwith M r. Tho m so n's ex cl us iv e rel ianc e o n tha t ap pr oa ch
. Pet it io ne r ex pl ai ns : The Deced en t's in te res t i n the LLC to be va lu edis anass ig ne e in te res t, * * * an d the hypo th et ic al pu rch as er wo ul d n otha ve an y say in th e LLC's d eci si on s t o m ak e d is tri bu ti on s, t o s el l the Bu il di ng , or to li qu id at e, so th e h y

po th et ic al pu rch as er's pri m ary co nc ernwou ldbe hi st or ic al earn in gs an d d is tri bu ti on s. * * * Acco rd in gl y , th is LLC m us t b e v al ue d g iv in g p rimary weig htinth e v al ua ti on of t he LLC to th e cap it al iz at io n o f th e h is to ric al di st rib ut io ns to it s m em be rs . b. Dis cu ss io n It i s p erh ap s a s uf

fic ie ntan swe r to pe ti ti on er's arg um en t tha t we d o n ot ag ree t ha t the subjec t i nt eres t was anass ig ne e's in te res t. Mo reo ve r, any co nc ern th atpe ti ti on er m ig htha ve ab ou t a m em be r's (or , in de ed , an a ss ig ne e's ) la ck of in flu en ce o n d eci si onm ak in g i s p ro pe rly addres se d i n the co nt ex t o f th e la ck -o fco nt ro l d is co un t ap pl ie d b y Mr. Tho m so n i n d et erm in in g the fai r m ark etva lu e o f th e subjec t i nt eres t. Mr . Tho m so n e xp la in edth atdi sc ou nt(de sc rib in g i t, al te rn at iv el y , as a"m in or ity in te res t d is co un t" ) as fol lo ws: "The hypo th et ic al
m in or ity in te res t i nv es to r can no t co nt ro l, o r ha s l it tl e in flu en ce o n, the di sp os it io n of ass et s, the pa y

m en t o f di st rib ut io ns , th e ap po in tm en t o f m an ag em en t, o r ot he r pr ero ga ti ve s o f co nt ro l. The refo re, a l ackof c on tro l d is co un t i s ap pl ie d t o a cco un t fo r th e ab se nc e o f th es e co nt ro l fe atur es ."- 28 -

[* 28 ] It i s tru e th atMr. Tho m so n c on si de redth e LLC to fun ct io n p rimaril y as a real est at e h ol di ng co m

pa ny, and , forth atreas on , he e xc lu de d the m ark etan d in co m e ap pr oa ch es to va lu at io n, re lying ex cl us iv el y on a di sc ou nt edne t as se t va lu e ap pr oa ch . The LLC's pri nc ip al ass et , ho wev er, was th e b ui ld in g, the va lu e of whi ch($1 9,9 60 ,00 0) Mr. Tho m so n a ccep te d fr om th e LLC's p artne rs hi p re tu rn an d the bu il di ng ap pr ai sa l. The $1 9,9 60 ,00 0 v al ue fro m th e b ui ld in g app rai sa l
was ba se d e xc lu si ve ly on an i nc om e ap pr oa chth atus eda di sc ou nt edcas hf lo w an al y si s. Th e au th or s o f th e b ui ld in g app rai sa l p ro jecte d b ui ld in g i nc om e fo r si x y ears , cap it al iz edth e si xt h year's in co m e to de te rm in e a t erm in al va lu e, an d di sc ou nt edth e res ul ti ng in co m e st ream to pre se ntva lu e ($ 19 ,96 0,0 00 ). Thu s, whi le Mr. Tho m so n's va lu at io n o f th e LLC was b as edon th e n etass etva lu e o f th e LLC's as se ts , th e v al ue he acce pt edforth e LLC's p rin ci pa l as se t, the bu il di ng , was ba se d o n a n i nc om e ap pr oa ch
. W e h av e sa id : "I t i s wel l es tabl is he d tha t, i n g en eral , an a ss et -b as edm etho d of va lu at io n app li es inth e cas e o f co rp or at io ns th atare es se nt ia ll y ho ld in g co rp or at io ns , whi le anearn in gs -b as edm etho d app li es forco rp or at io ns th atare go in g c on cern s." Est at e o f Sm ith v . Comm is si on er, T.C. Mem o. 1 99 9- 36 8, 1 99 9 W L 10 01 18 4, at*5 . Thatrul e o f th um b i s n o d oubtba se d i n p arton th e n ot io n th ata ho ld in g o r in ve st m en t co m pa ny m ay be m an ag edno t fo r cu rren t i nc om e b ut ,- 29 -

[* 29 ] rathe r, fo r ap pr eci at io n i n the va lu e o f it s h ol di ng s. If o wne rs hi p i nt eres ts in a h ol di ng or i nv es tm en t co m pa ny are no t trad edinanest ab li sh edm ark et , th enne t as se t v al ue m ay

be th e b es t i nd ic at orof t he firm 's v al ue . See, e.g ., Hess v. Co m m is si on er, T.C. Mem o. 2 00 3- 25 1, 2 00 3 WL 21 99 16 27 , at * 9; Est at e o f Fo rd v. Co m m is si on er, T.C. Mem o. 1 99 3- 58 0, 1 99 3 WL 50 19 17 , at * 13 , aff'd , 53 F.3d 92 4 (8 thCir . 19 95 ). The p oi ntis well st at edinRev . Rul . 59 -6 0, s ec. 5 (a), 1 95 9- 1 C.B. 2 37 , 24 2: "Inge ne ral , th e ap pr ai se r wil l ac co rdpri m ary co ns id erat io n t o earn in gs when va lu in g s to ck s o f co m pa ni es whi chsel l p ro du ct s o r se rv ic es to th e publ ic ; co nv ers el y , inth e in ve st m en t o r ho ld in g ty pe of c om

pa ny, the ap pr ai se r m ay acco rdth e g reat es t wei gh t t o the ass et s u nd erl y in g the sec ur ity to be va lu ed ." The LLC un do ub te dl y

pro vi de d s erv ic es to th e p ub li c, vi z, a fu ll y lea se d gr os s re nt ab le areaof 7 7,7 25 squa re fe et . Andaltho ug h the m em be rs of t he LLC
m ay ha ve ha d i n m in d the futur e ap pr eci at io n o f th e b ui ld in g, we ca nn otbu t co nc lu de th atth e LLC m an ag eda go in g c on cern . W e h av e o n o ccas io n b een pr es en te d wi th , andsan ct io ne d, the va lu at io n o f a cl os el y he ldreal est at e fi rm us in g aweig ht edap pr oa ch , i.e., u si ng bo th a ne t v al ue ap pr oa chan d a n i nc om e cap it al iz at io n app ro ach , att ach in g wei gh t t o e ach . E.g., Esta te of An dr ews v. Co m m is si on er, 7 9 T.C. 9 38 , 95 6- 95 7 (1 98 2) ; Es ta te of Weinbe rg v. Co m m is si on er, T.C. Mem o. 2 00 0- 51 . W e h av e h ere n o e vi de nc e th atanex pl ic it ly- 30 -

[* 30 ] in co m e-b as edap pr oa chto va lu in g the subjec t i nt eres t wo ul d n eces sa ril y ha ve reac he d adi ffer en t v al ua ti on co nc lu si on , or wh atth atva lu at io n c on cl us io n wou ldbe
. Fi na ll y , th e n etass etva lu e th atMr. Tho m so n was in st ru ct edto (an d d id ) us e was th e sa m e n etass etva lu e u se d i n the MPI app rai sa l, wh ic h p et it io ne r rel ie d o n in rep orti ng th e v al ue of t he subjec t i nt eres t o n the Sch edul e G. "[V]alu es or di sc ou nt s re po rte d o r cl ai m edon anest at e ta x re tu rnm ay be co ns id ered adm is si on s an d, t o s om e ex te ntbi nd in g o r pr ob at iv e, res tri ct in g an e st at e fro m subs ti tu ti ng a lo wer v al ue witho utco ge ntpro of th atth os e adm is si on s ar e wro ng ." Est at e o f Dep ut y

v. Co m m is si on er, T.C. Mem o. 2 00 3- 17 6, 2 00 3 WL 21 39 67 89 , at *5 n.6 ; ac co rdEst at e o f Hal l v . Comm is si on er, 9 2 T.C. 3 12 , 33 7- 33 8 (1 98 9) . W e ha ve no co ge ntpro of

th atth e v al ue th atpe ti ti on er re li edon inrep orti ng th e v al ue of th e subjec t i nt eres t o n the Sch edul e G is wron g.

c. Co nc lu si on The ev id en ti ary reco rdsh ows th atth e v al ue of the LLC bef or e de te rm in at io n o f de ced en t's pro po rti on at e in te res t the rei n andap pl ic at io n o f di sc ou nt s fo r la ckof c on tro l an d l ackof m ark et ab il ity was n o l es s tha n $2 0,6 28 ,22 1, the am ou ntrel ie d o n b y Mr. Tho m so n.- 31 -

[* 31 ] 3. Dis co un ts The pa rti es do no t d is pu te th at , inva lu in g the subjec t i nt eres t, i t i s ap pr op ria te to tak e acc ou ntof d is co un ts forbo th lac k o f co nt ro l an d l ackof
m ark et ab il ity . Ind eed , we hav e acc ep te d b ot h d is co un ts whenva lu in g s to ckof cl os el y he ldco rp or at io ns . See, e.g ., Esta te of Ne who us e v . Comm is si on er, 9 4 T.C. 19 3, 2 49 (19 90 ). Pet it io ne r di sa gr ees , ho wev er, wit h M r. Tho m so n's di sc ou nt s o f 10 % an d 2 6% fo r la ckof c on tro l an d l ackof m ark et ab il ity , res pe ct iv el y . Andwhi le pe ti ti on er cr it ic iz es Mr. Tho m so n's m etho do lo gi es for de te rm in in g b ot h d is co un ts , he h as pro vi de d n o e xp erttes ti m on y fro m whi chwe m ig htdra w di ffer en t, g reat er v al ue s i n tho se tec hn ic al area s o f an al y si s. IV. Co nc lu si on The va lu e o f th e subjec t i nt eres t o n the va lu at io n d at e was $2 ,30 3,0 00 , th e va lu e co nc ed edby resp on de nt . W e red et erm in e a d efi ci en cy inFed eral est at e ta x acco rd in gl y . To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redun de r Ru le 15 5.