112 T.C. No. 13

UNITED STATES TAX COURT

ESTATE OF RICHARD R. SIMPLOT, DECEASED, JOHN EDWARD SIMPLOT,

PERSONAL REPRESENTATIVE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23122-97. Filed March 22, 1999.

I.

Decedent owned 18 of the outstanding 76.445 shares

of the voting stock and 3,942.048 of the outstanding

141,288.584 shares of the nonvoting stock of J.R. Simplot

Co. (the Company), a private, family-owned corporation.

The remaining shares of outstanding voting stock were

owned by decedent's three siblings. The voting stock is

subject to a 360-day restriction on transferability or

hypothecation. Both classes of stock are entitled to the

same dividends (without preference) on a per-share basis,

if and when dividends are declared. Holders of the

nonvoting stock are entitled to a liquidating preference.

On the estate tax return, the fair market value for

both classes of stock was reported as $2,650 per share.

Petitioner agrees that because of an error by its

appraiser in the calculation of the aggregate number of

outstanding shares, the fair market value for both

classes of stock should have been $3,025 per share. In

the notice of deficiency, respondent determined the fair

market value of the voting stock to be $801,994.83 per

share and the fair market value of the nonvoting stock to
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be $3,585.50 per share. The disparate valuations are

primarily attributable to the valuation methodologies

employed by the parties. 

Held: On the basis of the facts and circumstances

presented, a premium for voting privileges is appropriate

and is determined in relation to the equity value of the

Company (enterprise value plus cash minus liabilities).

After application of a 35-percent marketability discount,

the fair market value of the voting stock is $215,539.01

per share and after application of a 40-percent

marketability discount, the fair market value of the

nonvoting stock is $3,417.05 per share.

II.

In the notice of deficiency, respondent reduced the

amount reported for the marital deduction from

$15,127,237 to $1,723,437. The amount of this reduction

($13,403,800) is due to: (1) Respondent's redetermination

of the fair market value of the voting stock, all of

which was bequeathed to the trustees of a credit shelter

trust for the benefit of decedent's children, and (2) the

charging of the Federal estate tax to that portion of the

estate (the residue) passing to decedent's wife. In

calculating the amount of the marital deduction,

respondent did not consider the amount of State transfer

and inheritance taxes which are payable with respect to

the value of the voting stock bequeathed to the trustees

of the credit shelter trust and which pursuant to

decedent's will are chargeable against that bequest.

Held: Because no State transfer or inheritance

taxes have yet been paid, and because the amount of the

marital deduction must be recalculated on the basis of

our determination of the value of the voting stock

passing to the trustees of the credit shelter trust, the

parties must consider (and not reduce the marital

deduction by) the amount of State transfer and

inheritance taxes actually and timely paid by reason of

the bequest of the voting stock to the trustees of the

credit shelter trust. 

III.

In the notice of deficiency, respondent determined

that petitioner is liable for penalties pursuant to sec.

6662(a), (g), (h)(1), and (2)(C), I.R.C. The penalties do

not apply to any portion of the underpayment for which

the taxpayer: (1) Had reasonable cause, and (2) acted in

good faith with respect thereto.
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Held: Petitioner is not liable for the penalties at

issue because petitioner acted reasonably and in good

faith by relying on the advice of tax professionals and

appraisers.

David John Thornton, Gregory Allen Byron, and Sheldon I.

Fink, for petitioner.

David J. Mungo and Robert A. Varra, for respondent.

JACOBS, Judge: Respondent determined a $17,643,886 deficiency

in petitioner's Federal estate tax and $7,057,554 in penalties

pursuant to section 6662(a), (g), (h)(1), and (2)(C). 

Following a concession by respondent, the issues for decision

are: (1) The fair market value of 18 shares of class A voting

common stock of J.R. Simplot Co. owned by Richard R. Simplot

(decedent) on June 24, 1993 (the valuation date); (2) the fair

market value of 3,942.048 shares of class B nonvoting common stock

of J.R. Simplot Co. owned by decedent on the valuation date; (3)

the amount of the section 2056 marital deduction to be allowed the

estate of decedent (petitioner); and (4) whether petitioner is

liable for the section 6662 penalties as determined by respondent.

Subsumed in the resolution of the stock valuation issues is the

question of whether a premium should be accorded the voting

privileges of the class A stock; and, if so, the amount of that

premium.
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All section references are to the Internal Revenue Code in

effect as of the date of decedent's death, and all Rule references

are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulations

of facts are incorporated in our findings by this reference.

A. Background

Decedent, a resident of Boise, Idaho, died testate on June 24,

1993. He was 59 years old. At the time the petition was filed

herein, John Edward Simplot, decedent's son and personal

representative, resided in Boise, Idaho. 

Decedent and his siblings are the children of Jack R. Simplot

(J.R. Simplot), who was living on the trial date of this case. At

the time of his death, decedent owned 18 shares of class A voting

common stock (class A voting stock) and 3,942.048 shares of class

B nonvoting common stock (class B nonvoting stock) of J.R. Simplot

Co., constituting 23.55 percent of the outstanding shares of class

A voting stock and 2.79 percent of the outstanding shares of class

B nonvoting stock. The remaining shares of class A voting stock

were owned by decedent's siblings: Gay C. Simplot Otter (Gay), Don

J. Simplot (Don), and Scott R. Simplot (Scott). As of the date of

decedent's death, virtually all of the shares of class B nonvoting

stock were owned, directly or indirectly, by the descendants of

J.R. Simplot and an Employee Stock Ownership Plan (ESOP)

established in 1978. 
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B. The History and Business of J.R. Simplot Co.

J.R. Simplot Co. (through a predecessor entity) was founded in

the 1930's by J.R. Simplot. It was incorporated in Nevada in 1955.

None of its stock is publicly traded. J.R. Simplot originally

owned all of the Company's stock; he transferred the stock to his

children in the 1960's. 

J.R. Simplot's philosophy was to reinvest the Company's cashflows into long-term assets (such as real estate mineral reserves,

water rights, and natural-resource-based operations), operate the

Company privately, and pass ownership of the Company on to his

descendants. From J.R. Simplot Co.'s inception through the

valuation date, J.R. Simplot was the Company's chairman of the

board and played a dominant role in the Company's operations. 

J.R. Simplot Co. is a major frozen food processing and

agribusiness chemical company. Its predecessor developed the

technique for producing frozen French fried potatoes in the 1950's.

It is headquartered in Boise, Idaho, and operates in the western

part of the United States and in Mexico, Turkey, and Canada. J.R.

Simplot Co.'s taxable year ends August 31. On the valuation date,

J.R. Simplot Co. employed between 9,000 and 10,000 individuals. 

For the 9 months ended May 31, 1993, J.R. Simplot Co. had net

sales of $1,282,526,000 and net income of $25,506,000. For its

fiscal year ended August 31, 1993, the Company had net sales of

$1,778,768,000 and net income of $37,825,000. On May 31, 1993,

J.R. Simplot Co. had assets with a book value of $1,340,803,000 and

shareholders' equity of $481,001,000. On August 31, 1993, J.R.
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1 J.R. Simplot Co. controlled a number of operations

(e.g., a potato storage facility operated through Aberdeen

Storage Limited Partnership and an office building operated

through Lake Forest Limited Partnership) using "off-balance sheet

financing". 

In addition, entities were established in the names of

Simplot family members to acquire land, enabling J.R. Simplot Co.

to obtain greater water and grazing rights. 

Simplot Co. had assets with a book value of $1,222,610,000 and

shareholders' equity of $490,905,000.1

As of the valuation date, J.R. Simplot Co. was operationally

divided into five groups: (1) The food products group (FPG), which

comprises J.R. Simplot Co.'s potato, fruit, and vegetable

processing operations; (2) the agriculture group (AG), which owns

approximately 70,000 head of cattle and is one of the largest

suppliers of cattle in the United States; (3) the diversified

product group (DPG), which essentially manages two businesses--WSI,

a producer and marketer of assorted agribusiness products including

livestock feeds and livestock handling equipment, and Simplot

Transportation, the transportation management division of the

Company; (4) the minerals and chemical group (MCG), which

manufactures and markets fertilizers and chemicals, mainly in the

Western United States and in Canada; and (5) the development and

corporate group (DCG). 

1. The Food Products Group

FPG is composed of three businesses: Potato processing, fruit

and vegetable processing, and other operations. As of the

valuation date, it represented approximately 55 percent or $718.3
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2 The Food Products Groups' 10 largest customers (in

alphabetical order) are:

Food Service of America

Friendly Restaurants Corp.

Marriott Distribution Services

McDonald's Corp.

Nichirei Corp. of America

PYA/Monarch Food Service

Reddy Raw, Inc.

Sugar Foods Corp.

(continued...)

million of J.R. Simplot Co.'s consolidated revenue for the 9-month

period ended May 31, 1993. 

Through its processing plants, J.R. Simplot Co. produces

hundreds of millions of pounds of frozen French fries each year.

It is one of the two largest potato processors in the world.

Potato processing involves the following: Purchasing new-crop

potatoes, sorting and grading the potatoes, storing potatoes for

use in year-round production, transporting potatoes from storage

facilities to the plant, washing and peeling the potatoes, cutting

or forming potatoes into the desired product, precooking the

potatoes, freezing the potatoes, packaging the potatoes according

to customer requirements, and preparing the potato products for

shipment to the end user. 

FPG's five potato production facilities produce a mix of

frozen French fries and formed products. The largest potato

processing facilities are located in Caldwell, Idaho; Hermiston,

Oregon; and Heyburn, Idaho. 

FPG's potato operations serve three market segments:

McDonald's, Food Service, and Consumer.2 McDonald's is FPG's and
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2(...continued)

The Kroger Company

Victory Spud Service

 

J.R. Simplot Co.'s largest customer, consuming approximately 42

percent of the total pounds of raw potatoes FPG processes, and

contributes approximately $200 million in revenues. J.R. Simplot

Co. supplies McDonald's with the following amounts of potato

products: 60 percent of McDonald's domestic potato products; more

than 95 percent of McDonald's potato products sold in Japan; 100

percent of McDonald's potato sales in Singapore, Hong Kong,

Thailand, Indonesia, and Mexico; and 80 percent of McDonald's sales

in the Caribbean. 

J.R. Simplot Co.'s food service segment is the fastest growing

segment of potato consumption. Approximately 56 percent of the

potatoes J.R. Simplot Co. processed are consumed by this segment,

and revenues have increased an average of 10 percent a year since

1965. FPG provides this market with several potato products

(including a variety of French fry products, hash browns, and cubed

potatoes). 

J.R. Simplot Co. serves the consumer market through brand

names such as MicroMagic, J.R. Simplot's Retail, and Okray's Hash

Browns. This segment accounts for approximately 2 percent of the

potatoes J.R. Simplot Co. processes. 

J.R. Simplot Co.'s competitors within the frozen potato

industry include Lamb-Weston, a division of ConAgra, Inc.; Ore-Ida,
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a division of H.J. Heinz Co.; McCain Foods; Universal Foods; and

Carnation Foods, a division of Nestle, S.A. 

FPG's vegetable operation, drawing on the distribution network

of J.R. Simplot Co.'s frozen potato operations, distribute more

than 33 varieties of fruits and vegetables to J.R. Simplot Co.'s

Food Service customers either under the Classic label or as private

label products. 

2. The Agriculture Group

AG is one of the largest suppliers of prime beef in the United

States, and the largest supplier to the Pacific Northwest. For the

9 months ended May 31, 1993, AG contributed $79.2 million or

approximately 6 percent of J.R. Simplot Co.'s gross revenues. 

 J.R. Simplot Co. raises and feeds approximately 260,000 head

of cattle per year on 1.4 million acres of leased or owned land.

The cattle operations complement the potato business through the

use of potato waste as cattle feed. 

At the time of trial, J.R. Simplot Co. sold approximately 85

percent of its cattle to IBP, Inc. In 1991, J.R. Simplot Co.

entered into a contract with Nicherei Corp., a Japanese food

company, whereby Nicherei Corp. buys the beef packed by J.R.

Simplot Co.'s Nampa, Idaho, processing facility. 

3. Diversified Products Group

DPG was established during the Company's 1989 fiscal year to

account for opportunities in the following diverse businesses:

Corporate trucking and maintenance services, refrigerated rail

cars, livestock feed, animal health, farm supply services, a
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commodities trading group, and two bonded grain elevators. For the

9 months ended May 31, 1993, DPG contributed $145 million or

approximately 11 percent of J.R. Simplot Co.'s gross revenues. 

DPG is divided into two types of operations through WSI and

Simplot Transportation. WSI produces and markets a variety of

agribusiness products (including livestock feeds, nutritional

supplements, livestock health products, and livestock handling

equipment). Simplot Transportation provides companywide

transportation management (including the operation of approximately

100 to 150 bulk trailers, more than 135 owned over-the-road trucks,

and 750 owned or leased rail cars). A small amount of revenue is

generated from transportation for third parties. 

During the 9-month period ended May 31, 1993, DPG had a loss

of $0.9 million on revenue of $145 million. 

4. Minerals and Chemical Group

MCG is a major manufacturer and distributor of phosphate

fertilizers and agricultural chemicals in the Western United States

and in Canada. It was formed in 1944 after a manufacturing plant

west of Pocatello, Idaho, was constructed to supply J.R. Simplot

Co. with the fertilizers it needed to nourish thousands of acres of

potatoes. MCG sells the fertilizers primarily to farmers west of

the Mississippi. 

MCG has consistently been J.R. Simplot Co.'s most profitable

segment (accounting for 31 percent of revenue for the period ended

May 31, 1993). At the time of decedent's death, it had

approximately 40 to 50 percent of the market. Despite the fact
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that prices fell to a 20-year low, MCG reported strong results for

the first 9 months of fiscal year 1993. For its fiscal year ended

August 31, 1993, MCG contributed $418.5 million or approximately 32

percent of J.R. Simplot Co.'s consolidated revenues. 

 Mining and Processing, MCG's principal segment, operates five

business units: Agricultural Fertilizer, Professional Products,

Feed Phosphates, Industrial Chemical, and Consumer Products.

Products mined and processed by these units are marketed throughout

the Western United States and in Canadian prairie provinces by

independent companies and other MCG operations, including 75 retail

outlets carrying J.R. Simplot Co.'s "Soilbuilder" name. MCG

employs 2,467 individuals. 

The Agricultural Fertilizer business unit (36 percent of MCG's

1992 revenues) markets nitrogen and phosphate fertilizers in the

Western North American agricultural market, sold through

agricultural fertilizer dealers who resell to growers. The

principal products manufactured and distributed are phosphoric

acid, ammonium nitrogen products, urea ammonium nitrate solutions,

and homogeneous N-P-K fertilizers. J.R. Simplot Co. has attained

a major share of the agricultural fertilizer market in the Western

United States and in Canada. 

The Professional Products business unit (3.5 percent of MCG's

1992 revenues) develops and markets fertilizers and chemicals for

use in the maintenance of turf grasses and ornamentals. The Feed

Phosphates business unit (1.7 percent of MCG's 1992 revenues)

markets feed-grade phosphates that serve the needs of the poultry
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and livestock industries of Western North America. The Industrial

Chemical business unit (2.2 percent of MCG's 1992 revenues) markets

ammonia and phosphates used in different nonagricultural

applications. The Consumer Products business unit (1 percent of

MCG's 1992 revenues) produces and markets fertilizers for home and

garden use, mainly in the Western United States and Hawaii. 

MCG operates four fertilizer manufacturing plants in Idaho,

California, and Manitoba, Canada. The largest facilities are the

Smoky Canyon Mine (near the Idaho-Wyoming border) and the Don

Manufacturing complex (west of Pocatello, Idaho). 

In the beginning of fiscal year 1992, J.R. Simplot Co.

purchased Chevron's fertilizer manufacturing operations. 

MCG also operates a silica sand operation in Overton, Nevada,

and an agricultural chemical formulating plant in Mountain Home,

Idaho. 

J.R. Simplot Co. has been isolated from the pressures of other

U.S. fertilizer producers, mainly located in the Southeast. MCG

sells most of its fertilizer in inland markets, where access to

other producers by land or water via the west coast is expensive.

MCG sells more than 20 percent of its output in Idaho and 85

percent of its sales in protected markets west of the Rockies. 

5. Development and Corporate (Administrative) Group

J.R. Simplot Co., through DCG, owns other agribusiness

ventures, including three cheese plants (e.g., Arpin Dairy, Inc.,

in Arpin, Wisconsin; Swiss Village Cheese Co., in Nampa, Idaho; and

Washington Farms Distribution, Inc., in Mount Vernon, Washington).
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DCG controls the operation of a hydroelectric plant, land

development, Simplot International (primarily in Hungary, Poland,

and Argentina), and former aquaculture operations that now grow

produce, such as tomatoes. For the 9 months ended May 31, 1993,

DCG had combined gross revenues of approximately $2.5 million. 

C. Equity Investment

In addition to its operating assets, as of the valuation date

J.R. Simplot Co. held 5,259,800 shares of Micron Technology, Inc.

(Micron Technology), common stock. This interest represented 13.36

percent of the shares of Micron Technology common stock

outstanding. 

Micron Technology manufactures and markets semiconductor

memory components and personal computers. It has operations that

directly or indirectly serve the computer, telecommunications, and

office automation industries. It competes in the manufacturing and

marketing of semiconductor memory components, the production of

memory-intensive modules and board-level products, the assembly and

selling of IBM-compatible personal computers, and the design and

development of new technologies relating to fueled emission flat

panel displays. 

The shares of Micron Technology stock are traded on the New

York Stock Exchange. On decedent's date of death, shares of Micron

Technology stock were trading at $34.63 (the mean between the high

and low selling price per share of Micron Technology on the New

York Stock Exchange); the closing price was $34.875 per share. 
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D. Capital Structure

As of June 24, 1993, J.R. Simplot Co. had two classes of

authorized stock: Class A common voting and class B common

nonvoting stock. 

As of June 24, 1993, J.R. Simplot Co. had 141,365.029 shares

of outstanding stock: 76.445 shares of class A voting stock and

141,288.584 shares of class B nonvoting stock. The stock of J.R.

Simplot Co. was owned as follows:

CLASS A VOTING STOCK

Stockholder Number of Shares Percent of Total

 Decedent 18.000 23.55%

 Don 18.000 23.55

 Gay 18.000 23.55

 Scott 22.445 29.35

 Total 76.445 100.00

CLASS B NONVOTING STOCK

Stockholder Number of Shares Percent of Total

 Decedent 3,942.048 2.79%

 Don 4,292.454 3.04

 Gay 4,406.403 3.12

 Scott 7,978.446 5.65

 Trust--decedent's 

 family 28,909.342 20.46

 Trust--Don's 

 family 24,997.252 17.69

 Trust--decedent's 

 and Don's

 family 34,826.391 24.65

 Other Simplot 

 family and 

 affiliates 27,042.707 19.14

 ESOP 4,893.541 3.46 

 Total 141,288.584 100.00

Each share of class A voting stock is entitled to one vote. 
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Both class A voting and class B nonvoting shareholders are

entitled to the same dividends (without preference) on a per-share

basis, if and when declared by the board of directors of J.R.

Simplot Co. As of the date of decedent's death, J.R. Simplot Co.

had never declared a dividend. 

Pursuant to J.R. Simplot Co.'s articles of incorporation, upon

liquidation of J.R. Simplot Co., the Company's assets are to be

used in the following order of priority: (1) Payment of all

outstanding indebtedness; (2) payment to the class B nonvoting

shareholders in an amount equal to the par value of their shares

($10 per share) plus a dividend equal to 40 cents per share for

each year that the stock is outstanding after July 1, 1955, up to

the last day of the February preceding the liquidation date; (3)

payment to the class A voting shareholders in an amount equal to

the par value of their shares ($10 per share); and (4) payment of

the balance to all class A voting and class B nonvoting

shareholders pro rata on a per-share basis. 

The articles of incorporation and the bylaws of J.R. Simplot

Co. place a 360-day restriction on the transferability or

hypothecation of the class A voting stock. Pursuant to this

restriction, if a class A voting shareholder desires to sell,

transfer, or hypothecate his/her class A voting stock, the stock

must be first offered to the Company under the same terms and

conditions as otherwise could be obtained by the selling

shareholder from another purchaser or lender for a period of 180

days. If the Company declines to exercise its right during this
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180-day period, then the other class A voting shareholders (as a

group) have an additional 180 days within which to purchase the

stock. 

Before June 23, 1993, class B nonvoting shareholders were

afforded a nominal level of liquidity for their shares through

sales to J.R. Simplot Co.'s ESOP as well as occasional ad hoc

redemptions of the shares by the Company. In substantially all

instances, the price paid for these repurchases occurred at the

most recent ESOP valuations prepared by Morgan Stanley & Co., Inc.

(Morgan Stanley). 

As a practical matter, before June 23, 1993, J.R. Simplot set

the amounts of compensation paid by the Company to his children.

The amounts paid from 1991 to 1993 were as follows: 

Officers/Directors 1991 1992 1993

 Don $246,385.76 $314,628.71 $235,972.26

 Scott 122,301.44 17,140.00 ---

 Decedent 222,730.14 200,801.14 79,785.42

 Gay --- --- ---

Before divorce, Gay's spouse received compensation in his

management capacity from J.R. Simplot Co. 

J.R. Simplot Co. owned resort properties in Ketchum and

McCall, Idaho; it also owned a corporate aircraft. Simplot family

members were permitted to use these facilities for nonbusiness

purposes, on a space-available basis (and did so). Simplot family

members were permitted to use the corporate aircraft for personal

purposes at rates below those available on commercial flights.
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Additionally, J.R. Simplot Co. paid club membership fees of various

Simplot family members.

Several partnerships, joint ventures, and companies owned by

J.R. Simplot Co.'s class A voting shareholders were created in

conjunction with J.R. Simplot Co.'s businesses. These entities did

all or substantially all of their business with J.R. Simplot Co.

As of the valuation date, these entities owned, among other things,

food storage facilities, office buildings, livestock, agricultural

and development real estate, and grazing rights (see supra note 1).

E. Management

As of the valuation date, J.R. Simplot Co.'s management

structure was as follows: 

Name Position

J.R. Simplot Chairman

Gordon C. Smith President and chief executive officer

Lawrence E. Costello Vice president of finance and chief

 financial officer

James D. Crawford Corporate treasurer

Stephen A. Beebe President of the Food Products Group

Donald D. Pottinger President of the Minerals and Chemical

 Group

Tom Basabe President of the Agricultural Group

Ray G. Kaufman President of the Diversified Products

 Group

Ronald N. Graves General counsel and corporate secretary

Nonfamily members have served on the board of directors for

several decades. 

In 1993, there was a change in both the chairmanship and

presidency of J.R. Simplot Co. J.R. Simplot retired as chairman of

the Company, and thereafter an office of the chairman, composed of

Don, Gay, Scott, and decedent's son, was established. 
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While J.R. Simplot was on the board of directors, the other

board members usually adhered to his business and policy decisions.

Although J.R. Simplot's four children had independent views

regarding how the family business should be run, there was

unanimity in their philosophy to maintain J.R. Simplot Co. as a

private, family-owned company. 

F. Contingent Environmental Liabilities

As of the valuation date, J.R. Simplot Co. had potential

environmental liabilities estimated to be at a maximum of $95

million. 

G. Financial History

The consolidated balance sheets for J.R. Simplot Co. and

subsidiaries for their fiscal years ended August 31, 1991, 1992,

and 1993, reveal:

J.R. SIMPLOT COMPANY & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AUG. 31, 1993, 1992 and 1991

(in thousands)

ASSETS 1993 1992 1991

CURRENT ASSETS

 Cash and equivalents $20,920 $22,366 $15,457

 Notes & accounts receivable,

 less allowances 206,398 187,935 164,285

 Inventories 197,022 170,449 233,164

 Manufacturing supplies 23,244 22,591 23,268

 Prepaid expenses & other assets 15,739 15,487 16,086

 Total current assets 463,323 418,828 452,260

INVESTMENTS & OTHER ASSETS

 Amounts due from affiliates 32,810 36,488 10,000

 Investments 128,543 110,718 102,941

 Other assets 38,624 27,554 31,712

PROPERTY & EQUIPMENT, net 559,310 523,908 493,988

 1,222,610 1,117,496 1,090,901
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LIABILITIES & SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

 Accounts payable & accrued 

 expenses $223,024 $193,987 $174,058

 Income taxes payable 1,592 775 917

 Long-term debt, current portion 3,440 4,126 2,571

 Total current liabilities 228,056 198,888 177,546

LONG-TERM DEBT, less current portion 433,924 380,921 382,554

OTHER LIABILITIES & DEFERRED CREDITS 15,375 14,495 21,283

DEFERRED INCOME TAXES 54,350 61,694 62,734

 731,705 655,998 644,117

SHAREHOLDERS' EQUITY

 Class A capital stock, voting,

 $10 par value, authorized 100

 shares, issued 76.445 shares 1 1 1

 Class B capital stock, nonvoting,

 $10 par value, authorized 249,900

 shares, issued 161,310.269 shares 1,313 1,324 1,336

 Additional paid-in capital 6,931 6,931 6,931

 Retained Earnings 482,660 453,242 438,516

 

 490,905 461,498 446,784

 1,222,610 1,117,496 1,090,901

The consolidated statements of cash-flow for J.R. Simplot Co.

and subsidiaries for their fiscal years ended August 31, 1991,

1992, and 1993, reveal:

J.R. SIMPLOT COMPANY & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED AUG. 31, 1993, 1992 and 1991

(in thousands)

 1993 1992 1991

CASH FLOWS FROM OPERATING ACTIVITIES 

 Net Income $37,825 $20,545 $5,281

 Adjustments to reconcile net income

 to net cash provided by operating

 activities:

 Depreciation 52,600 62,129 58,319

 Deferred income taxes (6,089) 580 (2,671)

 Equity investment earnings (16,378) (119) (3,112)

 Other items, net 6,842 14 4,190

 Changes in assets & liabilities:

 Notes & accounts receivable, 

 net (22,771) (23,940) (2,784)

 Inventories (27,335) 63,437 13,180
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 Accounts payable & accrued

 expenses $26,173 $12,252 $7,228

 Other liabilities & deferred

 credits (877) (2,404) (2,166)

 Other assets & liabilities, net (313) 1,849 (10)

NET CASH PROVIDED BY OPERATING 

ACTIVITIES 49,677 134,343 77,455

CASH-FLOWS FROM INVESTING ACTIVITIES

 Capital expenditures (101,328) (87,359) (74,580)

 Proceeds from sale of property &

 equipment 2,042 7,260 6,766

 Investments (111) (11,185) (2,319)

 Change in amounts due to/from

 affiliates 1,279 (27,728) (2,571)

NET CASH USED FOR INVESTING ACTIVITIES (98,118) (119,012) (72,704)

CASH-FLOWS FROM FINANCING ACTIVITIES

 Long-term debt proceeds 100,000 112,989 40,511

 Long-term debt repayments (52,121) (120,140) (41,888)

 Purchase of Treasury stock (884) (1,271) (1,638)

NET CASH PROVIDED BY (USED FOR)

FINANCING ACTIVITIES 46,995 (8,422) (3,015)

NET CHANGE IN CASH & EQUIVALENTS (1,446) 6,909 1,736

CASH & EQUIVALENTS, beginning of year 22,366 15,457 13,721

CASH & EQUIVALENTS, end of year 20,920 22,366 15,457

SUPPLEMENTAL DISCLOSURE OF CASH-FLOW

INFORMATION

 Income taxes paid 11,023 8,273 1,414

 Interest paid, net of amount

 capitalized 32,083 27,134 37,171

SUPPLEMENTAL DISCLOSURE OF NONCASH

INVESTING & FINANCING ACTIVITIES

 Asset acquisitions through 

 assumption of liabilities 13,292 19,719 10,087

 Asset acquisitions for noncash

 consideration 4,406 --- ---

 Exchange of receivables for stock 895 1,250 650

 Exchange of inventory for noncash

 consideration --- 4,400 4,435

H. Industry Conditions and J.R. Simplot Co.'s Prospects

 Between 1983 and 1993, J.R. Simplot Co. began facing a number

of stronger competitors, such as Lamb-Weston, Ore-Ida, and

Universal Foods. (The trend involved large companies such as OreIda Foods purchasing a small potato plant; subsequently, Ore-Ida
- 21 -

Foods sold out to H.J. Heinz.) Moreover, the opening up of the

Canadian market through the North American Free Trade Act brought

Canadian companies into competition with J.R. Simplot Co. Through

acquisitions, mergers, and growth, J.R. Simplot Co.'s competitors

were becoming larger and better financed. 

As of June 1993, the processed and frozen vegetable industries

appeared to be rebounding from a 3-year recession. Record crops

and the resulting high inventory levels were showing signs of

abatement, and frozen vegetables were expected to recover some of

the sales lost to fresh vegetables because of the decrease in fresh

vegetable prices. 

Total U.S. nutrient consumption in 1993 was projected at 20

million short tons, down 4 percent from 1992. Nitrogen was

projected at approximately 11 million tons, down more than 4

percent from 1992; phosphates at 4 million tons, down more than 2

percent; and potash 5 million tons, down 4 percent. 

In June 1993, the chemicals and fertilizer industry was

operating at full capacity. It was expected that the industry

would continue to operate at full capacity with slow to moderate

growth over the next several years. 

As of June 1993, J.R. Simplot's near-term prospects were good.

The Company's operating and capital budget for fiscal year 1994

projected that the anticipated shareholders' equity of the Company

would increase by 7.22 percent between August 31, 1993 and 1994.

In 1993, the Company projected 1994 fiscal year net revenues to be

$1,965,022,000 and net income to be $36,104,000. J.R. Simplot
- 22 -

Co.'s 5-year strategic business plan also projected a favorable

outlook for the Company. 

Both before and after the valuation date, several of J.R.

Simplot Co.'s competitors had inquired into whether the Company or

parts of the Company might be available for acquisition. 

I. Decedent's Last Will and Testament

Pursuant to the terms of his will, executed on July 13, 1988,

decedent bequeathed to the trustees of a testamentary trust for the

benefit of his children (the credit shelter trust) all of his J.R.

Simplot Co. class A voting stock plus that amount of class B

nonvoting stock which, when added to the voting stock (as valued

for Federal estate tax purposes), equaled the Federal estate tax

return filing requirement amount in effect at the time of his death

(i.e., $600,000), reduced by the aggregate amount of any adjusted

taxable gifts (as defined in section 2001(b)) made by him after

December 31, 1976. The balance of decedent's estate, including the

remaining class B nonvoting shares owned by decedent, passed to

decedent's surviving spouse, Adelia Ann Simplot. 

Federal estate tax due from decedent's estate is to be paid

out of that portion of the estate which is to otherwise pass to

decedent's surviving spouse. All State transfer and inheritance

taxes due with respect to a bequest are treated as a charge against

the distributive share of the person receiving the bequest. 

J. U.S. Estate Tax Return

In September 1994, petitioner filed a Form 706, United States

Estate (and Generation-Skipping Transfer) Tax Return, that listed
- 23 -

among other assets, 18 shares of class A voting stock and 3,942.048

shares of class B nonvoting stock of J.R. Simplot Co. The fair

market value for both the class A voting shares and class B

nonvoting shares owned by decedent on the date of his death was

reported at $2,650 per share. (Accordingly, the aggregate fair

market value of the 18 class A voting shares was reported at

$47,700, and the aggregate fair market value of the 3,942.048 class

B nonvoting shares at $10,446,427.) This valuation was based upon

an appraisal by Morgan Stanley, dated December 9, 1993.

The total number of outstanding shares of J.R. Simplot Co.

used by Morgan Stanley in its appraisal erroneously included

treasury shares held by J.R. Simplot Co. Using the correct number

of shares outstanding, and the same methodology Morgan Stanley

employed, the fair market value of decedent's class A voting and

class B nonvoting shares of J.R. Simplot Co. would have been

approximately $3,025 per share (in lieu of $2,650 per share as

reported). 

K. Notice of Deficiency

Respondent issued a notice of deficiency to petitioner, dated

September 9, 1997, determining an estate tax deficiency of

$17,643,886 and penalties of $7,057,554, pursuant to section

6662(a), (g), (h)(1), and (2)(C). The deficiency and penalties are

primarily based upon respondent's redetermination of the value of

the 18 shares of class A voting and 3,942.048 shares of class B

nonvoting stock of J.R. Simplot Co. owned by decedent on the date

of his death. Respondent increased the value for the 18 shares of
- 24 -

class A voting stock from the reported $47,700 (or $2,650 per

share) to $14,435,907 (or $801,994.83 per share) and increased the

value for the 3,942.048 class B nonvoting stock from the reported

$10,446,427 (or $2,650 per share) to $14,134,213 (or $3,585.50 per

share). These values resulted in the following determined

increases to decedent's gross estate:

 Amount Amount Increases

 reported by determined by to gross

 the estate respondent estate

18 shares of

class A voting

shares $47,700 $14,435,907 $14,388,207

3,942.048 shares

of class B 

nonvoting shares 10,446,427 14,134,213 3,687,786

 Total disputed increases 18,075,993

On brief, respondent concedes that the values of decedent's

class A and class B shares do not exceed $11,090,094 and

$13,887,007, respectively. 

In addition, respondent decreased the amount of the marital

deduction from the reported $15,127,237 to $1,723,437, because of

(1) respondent's redetermination of the fair market value of the

class A voting stock and (2) the resulting estate tax consequences

which are to be borne by that portion of the estate (the residue)

passing to decedent's surviving spouse. And finally, respondent

determined that petitioner is liable for $7,057,554 in penalties

pursuant to section 6662(a), (g), (h)(1) and (2)(C). 
- 25 -

3 In arriving at the valuations in Ultimate Findings of

Fact Nos. 1 and 2, we did not consider certain exhibits (Exs. 22-

J, 30-R, 41-J, 42-J, 43-J, 44-J, 45-J, 46-J, 121-P, 124-P, 125-P,

126-P, 127-P, and 128-P) that the parties objected to in the

stipulations of facts. These documents are not probative and

accordingly have been accorded no weight.

ULTIMATE FINDINGS OF FACT

1. The class A voting stock is to be accorded a premium for

its voting privileges. After giving consideration to the premium

for the voting privileges, and after applying a 35-percent

marketability (lack of liquidity) discount, the fair market value

of decedent's class A voting stock was $215,539.01 per share or a

total of $3,879,702.19, on the valuation date.

2. After applying a 40-percent marketability (lack of

liquidity) discount, the fair market value of decedent's class B

nonvoting stock was $3,417.05 per share or a total of

$13,470,190.88, on the valuation date.3

3. Because there has been no payment of State transfer or

inheritance taxes, respondent correctly did not include in the

computation of the amount of the marital deduction (and in the

computation of the asserted estate tax deficiency) an allowance for

State transfer or inheritance taxes paid.

4. Petitioner acted reasonably and in good faith in relying

on the advice of tax professionals and appraisers in valuing

decedent's class A voting stock and class B nonvoting stock for

Federal estate tax purposes. 
- 26 -

OPINION

Issues 1 and 2. Valuation of J.R. Simplot Co. Stock

Our fundamental task is to determine the fair market value of

18 shares of class A voting stock and 3,942.048 shares of class B

nonvoting stock in J.R. Simplot Co. owned by decedent at the time

of his death. In performing this task, we must decide whether

under the facts and circumstances presented, a premium should be

accorded to the voting privileges of the class A voting stock and,

if so, the amount of that premium. Petitioner took the position

that no premium should be given to the voting privileges of the

class A stock and thus in the estate tax return valued both the

class A voting stock and class B nonvoting stock at $2,650 per

share, or an aggregate fair market value of $47,700 for the class

A voting stock and $10,446,427 for the class B nonvoting stock. On

the other hand, respondent asserts that the class A voting stock is

entitled to a premium for voting privileges and in the statutory

notice of deficiency determined an $801,994.83 per-share value for

the class A voting stock, for a total value held by decedent in

that class of $14,435,907, and a $3,585.50 per-share value for the

class B nonvoting stock, for a total value held by decedent in that

class of $14,134,213. On brief, respondent concedes that the

values of decedent's class A and class B shares do not exceed

$11,090,094 and $13,887,007, respectively.

It is well settled that a presumption of correctness attaches

to respondent's notice of deficiency. See Helvering v. Taylor, 293

U.S. 507, 515 (1935); Cohen v. Commissioner, 266 F.2d 5, 11-12 (9th
- 27 -

4 The U.S. Court of Appeals for the Ninth Circuit stated: 

"When the Commissioner's determination has been shown to be

invalid, the Tax Court must redetermine the deficiency. The

presumption as to the correctness of the Commissioner's

determination is then out of the case." Cohen v. Commissioner,

266 F.2d 5, 11 (9th Cir. 1959), remanding T.C. Memo. 1957-172

(fn. ref. omitted).

Cir. 1959). Petitioner has the burden of showing that respondent's

valuation determinations as set forth in the notice of deficiency

are incorrect. See, e.g., Leonard Pipeline Contractors, Ltd. v.

Commissioner, 142 F.3d 1133, 1136 (9th Cir. 1998). "This burden is

a burden of persuasion; it requires * * * [petitioner] to show the

merits of [its] claim by at least a preponderance of the evidence."

Rockwell v. Commissioner, 512 F.2d 882, 885 (9th Cir. 1975), affg.

T.C. Memo. 1972-133; Estate of Gilford v. Commissioner, 88 T.C. 38,

51 (1987). In addition to initially overcoming the "procedural

burden of producing evidence to rebut the presumption in favor of

the Commissioner, the taxpayer must still carry his ultimate burden

of proof or persuasion." Rockwell v. Commissioner, supra at 885.

Here, we find, and thus hold, that petitioner has produced

sufficient evidence to overcome the presumption of correctness

attached to respondent's notice of deficiency valuation

determinations.4 However, this does not mean that we subscribe to

petitioner's reported valuations, for as will be further explained,

we do not.

Petitioner frames the ultimate valuation issue to be resolved

as "What was the fair market value of the Decedent's 2.8% minority

equity interest in Simplot as of June 24, 1993, represented by the
- 28 -

Decedent's 18 minority Class A voting shares and 3,942.048 minority

Class B nonvoting shares?". We disagree with this framing of the

ultimate valuation issue before us. The valuation of a single

class of stock in J.R. Simplot Co. is not before us. Rather, we

must determine the value of decedent's interest in two distinct

classes of stock: Class A voting stock and class B nonvoting stock

of J.R. Simplot Co. The class A voting stock represents a

significant percentage (23.55 percent) of the total outstanding

voting stock of the Company. Although decedent's class A voting

stock represents a minority interest, it is sizable nonetheless,

and except for Scott's 29.35-percent interest in the voting stock

of J.R. Simplot Co., there is no other block of voting stock larger

than that of decedent. The class A voting stock should not, in our

opinion, be combined and valued with the class B nonvoting stock.

 Petitioner further asserts that the fair market values of the

J.R. Simplot Co. class A voting and class B nonvoting stock are

identical--$2,964.10 per share. According to petitioner, because

decedent's class A voting shares do not represent voting control,

they are effectively equivalent to class B nonvoting shares and are

entitled to no or only a negligible premium for voting. In

petitioner's view, noncontrol voting and nonvoting shares are

"functionally equivalent" because no economic benefits were

available to class A vis-a-vis class B shareholders, and there was

no reasonable expectation that disproportionate economic benefits

would be available to the class A shareholders in the foreseeable

future. Indeed, petitioner's experts opined that the 360-day
- 29 -

5 As used by the experts, the term "equity value" means

J.R. Simplot Co's. enterprise value plus cash minus debt. In

determining J.R. Simplot Co.'s enterprise value, the experts

first valued the Company, exclusive of its Micron Technology

investment, using both an income and a market approach. The

value of the Company's Micron Technology investment was then

determined and added to the average of the values determined for

the Company under the income and market approaches.

We are mindful that this meaning of the term "equity value"

differs from that as used by accountants (namely, assets minus

liabilities of the Company). Herein, we use the experts'

meaning, rather than the accountant's meaning, of the term

"equity value".

restriction placed on the transferability of the class A voting

shares, as contrasted to the nonrestricted transferability of the

class B nonvoting stock, plus the liquidation preferences provided

to the class B nonvoting stock, made the class B nonvoting stock as

valuable as or more valuable than the class A voting stock. 

On the other hand, respondent contends that a voting privilege

premium should be given to the class A stock and that because of

the disparate ratio (or skewed distribution) between the number of

shares of voting stock outstanding and the number of shares of

nonvoting stock outstanding (1 to 1,848), the premium should be

expressed as a percentage of (or in relation to) the equity value

of J.R. Simplot Co.5 For the reasons that follow, we agree with

respondent.

The applicable statutory law, section 2031(a), requires the

"gross estate" of decedent to be determined for Federal estate tax

purposes "by including * * * the value at the time of his death of

all property, real or personal, tangible or intangible, wherever

situated." The standard for valuation is fair market value, which
- 30 -

is defined as "the price at which the property would change hands

between a willing buyer and a willing seller, neither being under

any compulsion to buy or to sell and both having reasonable

knowledge of relevant facts." United States v. Cartwright, 411

U.S. 546, 550 (1973); Collins v. Commissioner, 3 F.3d 625, 633 (2d

Cir. 1993), affg. T.C. Memo. 1992-478; sec. 20.2031-1(b), Estate

Tax Regs. The standard is objective, using a purely hypothetical

willing buyer and willing seller, each of whom would seek to

maximize his or her profit from any transaction involving the

property. See Estate of Watts v. Commissioner, 823 F.2d 483, 486

(11th Cir. 1987), affg. T.C. Memo. 1985-595; Propstra v. United

States, 680 F.2d 1248, 1251-1252 (9th Cir. 1982); Estate of Bright

v. United States, 658 F.2d 999, 1005-1006 (5th Cir. 1981). The

hypothetical persons are not specific individuals or entities, and

their characteristics are not necessarily the same as the personal

characteristics of the actual seller or a particular buyer. See

Propstra v. United States, supra; Estate of Newhouse v.

Commissioner, 94 T.C. 193, 218 (1990); Kolom v. Commissioner, 71

T.C. 235, 244 (1978), affd. 644 F.2d 1282 (9th Cir. 1981).

However, the hypothetical sale should not be constructed in a

vacuum isolated from the actual facts that affect value. See

Estate of Andrews v. Commissioner, 79 T.C. 938, 956 (1982).

Valuation of property for tax purposes is a question of fact;

all facts and circumstances are to be examined on the date of

valuation without regard to hindsight. See, e.g., Hamm v.

Commissioner, 325 F.2d 934, 938 (8th Cir. 1963), affg. T.C. Memo.
- 31 -

1961-347; Estate of Jung v. Commissioner, 101 T.C. 412, 423-424

(1993); Estate of Newhouse v. Commissioner, supra at 217; sec.

20.2031-1(b), Estate Tax Regs. However, future events that were

reasonably foreseeable at the valuation date may be considered in

determining fair market value. See Estate of Newhouse v.

Commissioner, supra at 218; Estate of Gilford v. Commissioner,

supra at 52; Gray v. Commissioner, 2 B.T.A. 672, 682 (1925); Estate

of Livermore v. Commissioner, T.C. Memo. 1988-503. The Court has

broad discretion to determine which facts are most important in

reaching a determination because "finding market value is, after

all, something for judgment, experience, and reason on the part of

the trier, and does not lend itself to dissection and separate

evaluation." Colonial Fabrics, Inc. v. Commissioner, 202 F.2d 105,

107 (2d Cir. 1953), affg. a Memorandum Opinion of this Court.

Determining fair market value of unlisted stock (such as J.R.

Simplot Co. stock) is, to say the least, difficult. Citing Alvary

v. United States, 302 F.2d 790, 795 (2d Cir. 1962), petitioner

admitted on brief that there is some "inherent inexactness of the

concept of fair market value". Here, our task is exacerbated as a

consequence of the skewed ratio of outstanding voting shares

(76.445) to nonvoting shares (141,288.584) in J.R. Simplot Co.'s

capital structure. 

An actual arm's-length sale of unlisted stock in the normal

course of business within a reasonable time before or after the

valuation date is the best evidence of fair market value. See

Estate of Andrews v. Commissioner, supra at 940; Estate of Campbell
- 32 -

v. Commissioner, T.C. Memo. 1991-615; sec. 20.2031-2(b), Estate Tax

Regs. In the absence of such an arm's-length sale, in valuing

unlisted stock we often look to the value of publicly traded stock

of corporations engaged in similar lines of business. See sec.

2031(b); Estate of Hall v. Commissioner, 92 T.C. 312, 336 (1989).

Factors relevant in valuing stock in closely held corporations

include:

(a) The nature of the business and the history of the

enterprise from its inception.

(b) The economic outlook in general and the condition

and outlook of the specific industry in particular.

(c) The book value of the stock and the financial

condition of the business.

(d) The earning capacity of the company.

(e) The dividend-paying capacity [of the company].

(f) Whether or not the enterprise has goodwill or other

intangible value.

(g) * * * the size of the block of stock to be valued.

[and]

(h) The market price of stocks of corporations engaged

in the same or similar line of business having their

stocks actively traded in a free and open market, either

on an exchange or over-the-counter.

Rev. Rul. 59-60, 1959-1 C.B. 237, 238-239; see also sec. 20.2031-

2(f)(2), Estate Tax Regs.

This revenue ruling "has been widely accepted as setting forth

the appropriate criteria to consider in determining fair market

value". Estate of Newhouse v. Commissioner, supra at 217.

Nevertheless, these factors cannot be applied with mathematical

precision. See Rev. Rul. 59-60, supra, 1959-1 C.B. at 238. As the
- 33 -

trier of fact, we have broad discretion in assigning the weight to

accord to the various factors and in selecting the method of

valuation. Estate of O'Connell v. Commissioner, 640 F.2d 249, 251-

252 (9th Cir. 1981), affg. on this issue and revg. in part T.C.

Memo. 1978-191. In reaching our ultimate valuation conclusions, we

have considered and given the weight we deem appropriate to these

factors.

In valuing stock in closely held corporations, discounts are

usually warranted. A discount for lack of marketability may apply

to minority interests in closely held corporations because a ready

market for shares in the corporations does not exist. See, e.g.,

Estate of Jung v. Commissioner, supra; Estate of Jameson v.

Commissioner, T.C. Memo. 1999-43; Estate of Furman v. Commissioner,

T.C. Memo. 1998-157; Mandelbaum v. Commissioner, T.C. Memo. 1995-

255, affd. without published opinion 91 F.3d 124 (3d Cir. 1996);

Estate of Lauder v. Commissioner, T.C. Memo. 1992-736; Estate of

Andrews v. Commissioner, supra at 953.

In several instances, courts have held that hypothetical

buyers will pay a premium for shares with voting privileges or

conversely apply a discount for nonvoting stock. See Barnes v.

Commissioner, T.C. Memo. 1998-413 (a 3.66-percent discount was

applied for nonvoting stock); Kosman v. Commissioner, T.C. Memo.

1996-112 (a 4-percent discount was applied for nonvoting stock);

Estate of Winkler v. Commissioner, T.C. Memo. 1989-231 (voting

shares accorded a 10-percent premium); Wallace v. United States,

566 F. Supp. 904, 917 (D. Mass. 1981) (voting shares accorded a 5-
- 34 -

percent premium). In Wallace, a premium for voting shares was

calculated as a percentage of total equity value, rather than as a

percentage of nonvoting shares. Further, courts have found wide

disparities in value between voting and nonvoting shares, even

where the economic rights to dividends and liquidation proceeds do

not favor the voting shareholders. See Estate of Newhouse v.

Commissioner, 94 T.C. at 248-249 (each voting share worth

approximately $350,000 more per share than a nonvoting share even

though voting shareholders had no economic advantage in dividends

or liquidation).

Both parties relied upon experts' valuations in order to

demonstrate the correct value of the stock at issue. The

difference in amounts arrived at by the experts is extreme.

At times expert testimony aids the Court in determining

valuation; in other instances, it does not. See Laureys v.

Commissioner, 92 T.C. 101, 129 (1989). We weigh the testimony in

light of the expert's qualifications as well as other credible

evidence. See Estate of Christ v. Commissioner, 480 F.2d 171, 174

(9th Cir. 1973), affg. 54 T.C. 493 (1970). We have broad

discretion to evaluate "'the overall cogency of each expert's

analysis'". Sammons v. Commissioner, 838 F.2d 330, 333 (9th Cir.

1988) (quoting Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir.

1986), affg. in part and revg. in part on another issue T.C. Memo.

1983-200), affg. in part and revg. in part T.C. Memo. 1986-318. We

are not bound by the formulas and opinions offered by an expert,

especially when they are contrary to our judgment. See Estate of
- 35 -

Newhouse v. Commissioner, supra at 217; Chiu v. Commissioner, 84

T.C. 722, 734 (1985). Instead, we may reach a decision as to the

value of the property based on our own analysis of all the evidence

in the record, see Silverman v. Commissioner, 538 F.2d 927, 933 (2d

Cir. 1976), affg. T.C. Memo. 1974-285; Hamm v. Commissioner, 325

F.2d at 941, using all of one party's expert opinion, see Buffalo

Tool & Die Manufacturing Co. v. Commissioner, 74 T.C. 441, 452

(1980), or selectively using any portion of such an opinion, see

Parker v. Commissioner, 86 T.C. 547, 562 (1986). We have broad

discretion in selecting valuation methods, see Estate of O'Connell

v. Commissioner, supra at 251, and in ascertaining the weight to be

given the facts in reaching our conclusion because "finding market

value is, after all, something for judgment, experience, and

reason", Colonial Fabrics, Inc. v. Commissioner, 202 F.2d at 107.

Finally, because valuation necessarily results in an approximation,

the figure at which we arrive need not be one as to which there is

specific testimony if it is within the range of values that may

properly be arrived at from consideration of all the evidence. See

Silverman v. Commissioner, supra at 933.

A. Valuations of Petitioner's Experts

1. Paul J. Much

Petitioner's first expert, Paul J. Much, is senior managing

director of Houlihan Lokey Howard & Zukin, an investment banking

firm. He valued both the class A voting shares and class B

nonvoting shares at $2,964.10 per share on a nonmarketable

minority-interest basis as of the valuation date. 
- 36 -

In his expert witness report, Mr. Much stated that the

valuation of decedent's holdings in J.R. Simplot Co. on a per-share

basis requires an initial determination of the enterprise and net

equity value of J.R. Simplot Co. In this regard, he considered the

value of J.R. Simplot Co.'s business operations and the value of

its nonoperating assets (its 13.36-percent ownership in Micron

Technology), as well as whether any difference exists, on a pershare basis, between the class A voting and class B nonvoting

shares. 

In determining a value for J.R. Simplot Co., Mr. Much examined

the following factors: The Company's history, economic growth,

financial condition, and earning capacity; the amount (if any) of

dividends paid; the value of the Company's tangible and intangible

assets; prior sales of the Company's stock to similar companies;

and restrictions placed on the stock of the Company. He considered

both historical and projected earnings of J.R. Simplot Co.'s

operating divisions, using a market capitalization approach (which

applies market-related pricing ratios of comparable publicly traded

companies to the performance measures of each of the Company's

operating divisions) and by doing so arrived at an enterprise value

for J.R. Simplot Co. of $1,066,740,000. He also used a discounted

cash-flow approach (DCF) (which estimates the present value of the

projected future operating cash-flows generated from the business

of the Company) and by doing so arrived at an $1,079,900,000

enterprise value. (In arriving at J.R. Simplot Co.'s enterprise

value through the use of both these approaches, Mr. Much gave no
- 37 -

6 Mr. Much selected the following companies for

comparison purposes: ConAgra, Inc., Dean Foods Co., Flowers

Industries, Inc., Hormel Foods Corp., International Multifoods

Corp., Tyson Foods, Inc., and Universal Foods Corp. 

consideration to the Company's liabilities, cash, and nonoperating

assets (i.e., the Micron Technology stock).) Mr. Much then

averaged the values obtained under these two approaches and

concluded that the appropriate enterprise value for J.R. Simplot

Co. as of the valuation date was $1,073,320,000. 

In using the market capitalization approach, Mr. Much examined

seven comparable public companies6 and concluded that J.R. Simplot

Co.'s "Food Division" (consisting of FPG, AG, and DPG) is similar

to the comparable companies in terms of revenues, total assets,

activity, and liquidity. However, he concluded that the Food

Division was less profitable than the comparable companies and was

highly dependent upon McDonald's for a large portion of its annual

revenue, presenting a risk to which the comparable companies were

not exposed. Applying the total invested capital (TIC) multiples

(including earnings before interest and taxes (EBIT) and earnings

before interest, taxes, depreciation, and amortization (EBITDA)),

Mr. Much determined the TIC value of J.R. Simplot Co.'s Food

Division to be $492,470,000. 

Mr. Much performed a similar analysis with regard to J.R.

Simplot Co.'s Fertilizer Division (consisting of MCG), selecting

four public companies for comparison purposes (IMC Global, Inc.,

Potash Corp. of Saskatchewan, Inc., Terra Industries, Inc., and

Vigoro Corp.). After comparing the quantitative factors of the
- 38 -

Fertilizer Division with those of the four comparable companies,

Mr. Much concluded that, taken as a whole, the Fertilizer Division

operations "represent a similar investment risk, for a given

return", as the public fertilizer comparables as a group. Applying

his TIC/EBIT and TIC/EBITDA multiples, he determined the TIC value

of J.R. Simplot Co.'s Fertilizer Division as $574,270,000 (using a

market capitalization approach). 

Following his comparative companies analysis, Mr. Much turned

to a DCF analysis to value J.R. Simplot Co.: (1) Determination of

the appropriate cash-flows to discount, based upon J.R. Simplot

Co.'s projected income statements and balance sheets; (2) selection

of a discount rate for J.R. Simplot Co. projections, based upon an

analysis of alternative investments (including public company

discount rates); (3) determination of a terminal value for J.R.

Simplot Co., as of the end of the last period for which projections

were available; and (4) determination of TIC value for J.R. Simplot

Co. 

In determining the free cash-flows, Mr. Much concluded that

J.R. Simplot Co. had a revenue growth rate of 8.5 percent and an

EBIT margin of 4.5 percent based on historical performance. He

then applied a 10- to 12-percent discount rate, concluding that the

TIC value of the Food Division was between $481,100,000 and

$575,880,000, or $522,780,000 using an 11-percent discount rate. 

In a similar manner, Mr. Much determined a 7.5- to 9.5-percent

discount rate with regard to the Fertilizer Division. He concluded

that using the discounted cash-flow approach, the TIC value of the
- 39 -

7 The following summarizes Mr. Much's TIC conclusions

regarding the Food and Fertilizer Divisions (before considering

the value of nonoperating assets and liabilities):

Market Capitalization Method

Food Division $492,470,000

Fertilizer Division 574,270,000

J.R. Simplot Co. Consolidated 1,066,740,000

 

Discounted Cash Flow Method

Food Division $522,780,000

Fertilizer Division 557,120,000

J.R. Simplot Co. Consolidated 1,079,900,000

8 As of June 24, 1993, John R. Simplot, Don J. Simplot,

and Gordon C. Smith, all J.R. Simplot Co. officers, were also

members of Micron Technology's board of directors, and J.R.

Simplot Co. owned more than 10 percent of Micron Technology's

common stock. 

Fertilizer Division was between $493,590,000 and $648,610,000, or

$557,120,000 using an 8.5-percent discount rate.7 

Next, Mr. Much valued J.R. Simplot Co.'s investment in Micron

Technology, a nonoperating asset. Considering that J.R. Simplot

Co. is an "affiliate" of Micron Technology under the Securities

Exchange Act of 1933 (rendering any sale of J.R. Simplot Co.'s

Micron Technology shares subject to certain restrictions under

Securities and Exchange Commission rule 144),8 Mr. Much concluded

that a year (based on approximately 250 trading days per year) or

more would be required for J.R. Simplot Co. to sell its Micron

Technology shares through normal market channels, assuming that the

shares are sold on each available day (subject to Micron
- 40 -

9 Micron Technology maintained a trading "blackout"

policy that prohibited insider transactions in the stock for a

period from 30 days before the end of each quarter until after

each quarterly earnings announcement (which typically occurred

approximately 2-3 weeks following the end of every quarter). 

Technology's "blackout" policy9) and that the sale of stock

constitutes 15 to 25 percent of daily trading volume.

 Mr. Much also considered "blockage" (referring to the market's

ability to absorb an individual block of stock without an adverse

impact on the market price), analyzing block trades between June

27, 1989, and April 16, 1993, the length of the holding period,

blackout restrictions, and the relative size of the block; he

concluded that a 5-percent blockage discount was appropriate.

Moreover, he took into account the transaction costs (estimated to

be $500,000) necessary to sell the block of shares. Mr. Much

concluded that gross proceeds to J.R. Simplot Co. would approximate

$173.7 million. As an alternative means of realizing value, Mr.

Much considered selling the Micron Technology stock via a secondary

stock offering. Using this means of selling the stock, Mr. Much

determined that J.R. Simplot Co. would realize $176.4 million. Mr.

Much then considered income taxes payable as a result of J.R.

Simplot Co.'s selling its Micron Technology holding. Using the

estimated $176.4 million sale proceeds (via a secondary stock

offering), and after considering corporate income taxes (40

percent) on the gain, Mr. Much determined the maximum amount of net

proceeds J.R. Simplot Co. would realize from the sale of its Micron

Technology stock was $111,193,870.
- 41 -

10 Mr. Much applied this discount because, in his view, a

minority shareholder of J.R. Simplot Co. could not force the sale

of the Micron Technology shares. 

11 Mr. Much calculated the $644,650,000 marketable

minority equity value of J.R. Simplot Co. as follows: 

Total invested capital 

 (J.R. Simplot operations) $1,073,320,000

Value of Micron Technology

 shares 104,522,238

(continued...)

Inasmuch as Mr. Much valued decedent's J.R. Simplot Co. shares

on a marketable, minority-interest basis, he believed the same

basis should be applicable to the valuation of the Company's

Micron Technology holding. Accordingly, Mr. Much applied a 6-

percent net minority discount10 to the maximum amount of net

proceeds J.R. Simplot Co. would receive ($111,193,870), which

resulted in an equivalent marketable minority interest value of

$104,522,238 for the Micron Technology shares.

In sum, Mr. Much averaged the results he determined under the

market capitalization ($1,066,740,000) and discounted cash-flow

($1,079,900,000) methods, arriving at $1,073,320,000. He then

added his predetermined value of the Micron Technology shares

($104,522,238) and J.R. Simplot Co.'s cash balance as of May 31,

1993 ($31,232,000), yielding an adjusted TIC value of

$1,209,070,000 (rounded). He then subtracted interest-bearing debt

($564,418,000), which yielded a marketable minority equity value of

$644,650,000 (rounded), or $4,560.18 per share of class A voting

and class B nonvoting stock outstanding.11 (In making the
- 42 -

11(...continued)

Cash balance (May 31, 1993) 31,232,000

Adjusted total invested 

 capital (rounded) 1,209,070,000

Interest bearing debt (564,418,000)

Equity value of J.R.

Simplot Co. (rounded) 644,650,000

adjustments for long-term debt and cash, Mr. Much believed that

under the discounted cash-flow method, all interest-bearing debt

must be taken into account, and the inclusion of cash provides an

adjustment to reflect the seasonal nature of the Company's

operations.) 

Next, Mr. Much turned his attention to the relative voting

premium, if any, to be accorded the 18 class A voting shares vis-avis the value of the 3,942.048 class B nonvoting shares, using the

following factors: (1) The potential for economic benefits (if

any) which might be attributable to class A shareholders and not to

class B shareholders; (2) market-based evidence of the allocation

of sale proceeds between dual class voting and nonvoting shares of

public companies involved in a sale or takeover; and (3) marketbased evidence of daily trading market data for public companies

with dual classes of voting and nonvoting shares. 

In ascertaining the potential economic benefits attributable

to the class A voting shares, Mr. Much reviewed the compensation
- 43 -

12 The following is a review of the compensation and

perquisites of J. R. Simplot Co.'s class A voting shareholders:

 Name Class A Shares 1991 1992 1993

Gordon C. Smith --- $562,721 $769,890 $722,005

J.R. Simplot --- 314,780 314,519 314,311

Don 18 246,385 314,628 235,972

Decedent 18 222,730 200,801 79,785

Scott 22.445 122,301 17,140 ---

Gay 18 --- --- ---

According to Mr. Much, an independent third-party purchaser

of decedent's 18 class A voting shares on a stand-alone basis

would lack the power of control. Thus, the purchaser would look

to other economic benefits in making an investment decision. 

and prerequisites received by the class A voting shareholders12 and

examined J.R. Simplot Co.'s policy of not paying dividends and the

absence of any foreseeable sale or liquidation of, or public

offering by, J.R. Simplot Co.

Mr. Much first studied 14 transactions involving the

sale/merger/acquisition of publicly traded companies listed on the

stock exchange involving dual class securities. These transactions

involved a pro rata allocation of the sale proceeds (based upon

equal prices paid to both the voting and nonvoting shares). (Mr.

Much noted that in a hypothetical sale of J.R. Simplot Co.'s assets

or a liquidation of the Company, the maximum value a class A

shareholder would receive would be based on a pro rata share

allocation with the other class A and class B shareholders.)

Second, Mr. Much reviewed daily trading market data of public

companies with dual classes of voting and nonvoting shares,

determining that the relative proportion of the equity represented
- 44 -

13 In analyzing the 14 transactions discussed above, Mr.

Much determined that the ratio of outstanding voting shares to

total shares outstanding ranges from 9.8 percent to 92 percent

and is not correlated with a voting premium. 

by voting and nonvoting stock is essentially irrelevant to any

difference in value between those shares.13

Mr. Much concluded that no difference existed in the per-share

value (i.e., voting rights premium) between J.R. Simplot Co.'s

class A voting and class B nonvoting shares primarily because the

class A shareholder could not extract economic benefits. Mr. Much

believed that even if a difference existed, it was negligible.

However, he testified that, on the basis of the available data, and

everything being equal, he would not "quibble" with valuing

decedent's class A voting shares at approximately 5 percent more

than decedent's class B nonvoting shares. In his opinion, this

premium would not be based on economics but rather on a "feel good"

basis for having the right to vote. Nevertheless, Mr. Much opined

that any premium for the feel-good right to vote would be offset by

the liquidation preference in favor of the class B nonvoting shares

and the right of first refusal encumbering the class A voting

shares. 

Finally, Mr. Much determined that the discount for lack of

marketability of the stock would range from 10 to 40 percent of his

determined marketable minority value. After reviewing several

restricted stock studies, and giving consideration to the 360-day

restriction placed on the class A voting stock, Mr. Much concluded

that a 35-percent discount for lack of marketability was
- 45 -

appropriate for both the class A voting and class B nonvoting

shares. 

After applying this 35-percent lack of marketability discount

(to the $4,560.18 per-share value), Mr. Much concluded that as of

the valuation date, the fair market value of both the 18 class A

voting shares and 3,942.048 class B nonvoting shares of J.R.

Simplot Co., on a nonmarketable, minority-interest basis, was

$2,964.10 per share (based on a combined 141,365.029 shares of J.R.

Simplot Co.'s common stock issued and outstanding). 

2. John R. Ettelson

Petitioner's second expert, John R. Ettelson, is a senior

banker in the corporate finance department of William Blair & Co.,

L.L.C., an investment banking and securities brokerage firm. Mr.

Ettelson was requested to render an opinion as to the voting rights

premium, if any, to be assigned to decedent's 18 class A voting

shares vis-a-vis decedent's 3,942.048 class B nonvoting shares. He

was not requested to render an opinion as to the per-share value of

the class A or class B stock as of decedent's death. In performing

his assignment, he focused on those public corporation having a

substantial value with the per-share price of their stock being

high (rather than low), working under the assumption that the

equity value of J.R. Simplot Co. on the valuation date was in

excess of $600 million and the value of its shares in excess of

$3,000 per share. 

Mr. Ettelson began his analysis by considering the mindset and

objectives of a hypothetical buyer of decedent's 18 class A voting
- 46 -

14 According to Mr. Ettelson, a buyer's economic return

consists of the future stream of dividends or other forms of cash

benefits such as salary, expense reimbursements, or other

perquisites that the buyer could reasonably expect to receive

from his ownership of the 18 class A voting and 3,942.048 class B

nonvoting shares, as well as any "exit dividend" (the amount

received when the buyer sells or liquidates his shares

individually or through the sale or liquidation of the business). 

shares. He stated that such a buyer would expect his investment in

J.R. Simplot Co. to provide an economic return14 over time.

Mr. Ettelson concluded that a buyer would not pay a

significant premium for decedent's class A voting shares vis-a-vis

decedent's class B nonvoting shares because the voting rights

acquired with the class A shares could not influence the buyer's

economic return. In reaching this conclusion, Mr. Ettelson

believed that because the controlling voting power of J.R. Simplot

Co. was held by only three individuals (other than decedent), all

of whom were related and had family interests to protect, a

hypothetical "outside" investor would have difficulty changing the

Simplot family's philosophy with regard to dividends, salaries, and

other perquisites. He further believed that an outside investor

would have difficulty in building a majority position (from the

investor's 23.55-percent minority interest) due to the fairly even

distribution of the class A voting stock among the three family

members and their desire to maintain control of the Company within

the family group. 

Mr. Ettelson examined empirical market data, reviewing

approximately 40 public company dual class stock situations where
- 47 -

market capitalizations exceeded $75 million. He found that in

situations where both classes of stock traded publicly between

January 1990 and June 24, 1993, and where only one class held the

voting power and no dividend rights or other economic disparity

existed, the class with the voting power traded at an average 4.1-

percent premium over the per-share value of the nonvoting stock,

with a maximum price difference of 14.2 percent. According to Mr.

Ettelson, on June 24, 1993, the sample group of voting stock traded

at an average of 1.7 percent over the per-share value of the

nonvoting stock, with a maximum price difference of 10.3 percent.

Mr. Ettelson also studied publicly traded companies from June

24, 1993 to 1998, where only one class held the voting power and no

economic disparity in favor of the voting shares existed. The

average voting rights premium in such cases was 2.8 percent. In

examining studies by others, he noted that the shares of stock

having voting or greater voting rights traded at a premium of 5.4

percent to 9.2 percent relative to nonvoting shares. 

Mr. Ettelson opined that no material economic benefit or

advantage existed to owning the 18 class A voting shares. Thus, he

stated he would not advise a hypothetical buyer to pay a

significant voting rights premium for decedent's class A stock in

excess of what he observed in the public markets (i.e., a typical

range of 3 to 7 percent, and occasionally up to 20 percent over the

fair market value of a nonvoting share). 
- 48 -

15 According to Dr. Spiro, the income approach is based on

the premise that a rational buyer of an asset would pay only the

equivalent of the present value of the net cash stream realized

from the asset. Future cash inflows and outflows are projected

in this analysis and then discounted to the present to yield a

value. The market approach presumes that the most an investor

will pay for an asset is the price other investors are currently

(continued...)

B. Valuations of Respondent's Experts

 1. Herbert T. Spiro

Respondent's first expert, Herbert T. Spiro, has been

president of American Valuation Group, Inc., a consulting firm

specializing in economic analyses and financial valuations, since

1985, as well as a professor of finance at California State

University at Northridge. In his expert report submitted for

trial, Dr. Spiro concluded that as of the valuation date, the fair

market value per share of J.R. Simplot Co.'s class A voting stock

was $616,116.36, and the value per share of J.R. Simplot Co.'s

class B nonvoting stock was $3,522.79 (resulting in the value of 18

shares of class A voting stock at $11,090,094 and 3,942.048 shares

of class B nonvoting stock at $13,887,007). 

Dr. Spiro's approach in determining an equity value for J.R.

Simplot Co. was generally similar to that of Mr. Much. First, he

valued J.R. Simplot Co. exclusive of its Micron Technology

investment and then added the value of the Micron Technology

investment to determine the total equity value of J.R. Simplot Co.

In determining the value of J.R. Simplot Co. exclusive of its

Micron Technology holding, Dr. Spiro (in a manner similar to that

of Mr. Much) used both the income and market approaches15 and then
- 49 -

15(...continued)

paying for identical assets. 

16 Dr. Spiro defined "free cash flow" as the amount of

cash that could be drawn out of the business without impairing

operations, and represents the maximum amount of money available

to long-term debt and equity holders. Under this valuation

method, a calculation is made as to the level of sustainable

cash-flow the business can be expected to generate in the future. 

reconciled the resulting values. Dr. Spiro used discounted free

cash-flow projections16 to determine the value of J.R. Simplot Co.

(exclusive of its Micron Technology holdings) under the income
- 50 -

17 Dr. Spiro's calculations (in millions) were as follows: 

(We note that mathematically his calculations are slightly off.)

 8/31/94 8/31/95 8/31/96 8/31/97 8/31/98 

Net income $59,900 $70,033 $80,908 $92,329 $96,133

Cash-flow

 adjustments:

(+)depreciation 75,097 81,104 86,782 91,989 96,588

(-)Capital

 Expenditures (96,278) (103,980) (111,259) (117,934) (123,831)

(-)Working

 capital 

 additions (20,669) (20,026) (18,924) (17,356) (15,331)

Free cash-flow 18,051 27,131 37,506 49,027 53,559

Discount rate 10.20%

Present value 

 factor 0.9526 0.8644 0.7844 0.7118 0.6459

Present value

 of cash-flow 17,195 23,453 29,421 34,899 34,595

Total present 

 value of cash-

 flows 139,563

Present value 

 of reversion 956,900 Reversion cash-flow: $80,8021

Business 

 enterprise

 value 1,096,462

Less total 

 long-term

 debt as of

 5/31/93 375,536

Aggregate equity 

 value-liquid

 minority 

 basis 720,926 

1 Dr. Spiro explained that the discounted cash-flow model projects

cash-flows independently for 5 years. However, the business is expected to

generate cash-flows after the 5th year of the forecast. The present value of

the cash-flows that the business is expected to generate after the 5th year

or, equivalently, the present value of the reversion, is calculated using the

Gordon Model formula (or Dividend Discount Model). 

approach, determini ng a $720,926,00017 aggregate equity value for

J.R. Simplot Co. on the valuation date. 
- 51 -

18 Because J.R. Simplot Co.'s sales and profitability

figures were unavailable for the 12 months preceding the

valuation date, and the Company's fiscal yearend data was

sufficiently removed from the valuation date to be of limited

direct use, Dr. Spiro used two methods to derive J.R. Simplot

Co.'s revenue, earnings, and performance ratios. The first

method is based on a fiscal 1993 forecast prepared by J.R.

Simplot Co.'s management in May 1993. Certain financial

statistics were not computed for the fiscal 1993 period because

of insufficient support data. Second, Dr. Spiro derived

performance measures for the Company by annualizing operating

data for the 9 months ended May 31, 1993. 

Then, Dr. Spiro used a market valuation approach, focusing on

three food companies (ConAgra, H.J. Heinz, and Universal Foods) and

one fertilizer company (Vigoro), with size and business operations

comparable to J.R. Simplot Co.'s two primary divisions. He

compared relevant ratios (price-to-revenue; price-to-cash-flow;

price-to-EBIT; price-to-EBDIT) and data for J.R. Simplot Co. and

the chosen comparable companies as of their most recent fiscal year

or 12-month period,18 concluding: (1) J.R. Simplot Co. was smaller

than the average of the four comparable companies in revenue; (2)

the average comparable company used less debt in its capital

structure than J.R. Simplot Co., and J.R. Simplot Co.'s debt-toassets ratio was higher than the average of the comparable

companies; (3) based on revenue and income growth rates, J.R.

Simplot Co. was growing faster than all of the comparable companies

(only H.J. Heinz increased its assets faster, primarily due to

several acquisitions); (4) profitability ratios indicated that J.R.

Simplot Co. and ConAgra were less profitable than the other
- 52 -

19 According to Dr. Spiro, both companies have substantial

operations in food processing, fertilizers, and crop protection

products, as well as low gross and net margins. In Dr. Spiro's

opinion, because J.R. Simplot Co. is growing faster than ConAgra,

the applicable multiples would be increased.

20 As subsequently discussed, except for a disagreement

about how short-term debt factors into the value, as well as a

minority discount in valuing the Company's Micron Technology

shares, this amount is close to that determined by Mr. Much.

comparable companies; and (5) J.R. Simplot Co. was more liquid than

most of the comparable companies.

Dr. Spiro concluded that J.R. Simplot Co. was smaller and less

profitable than the average comparable company but was growing

faster and had slightly greater liquidity than the comparable

companies. (Dr. Spiro believed that J.R. Simplot Co. most closely

resembled ConAgra.19) Dr. Spiro used a weighing process for his

valuation ratio indicators and as a result determined a

$719,809,754 fair market value for J.R. Simplot Co. under the

market approach. 

Dr. Spiro then averaged the values he determined for J.R.

Simplot Co. under the market ($719.8 million) and income ($721

million) approaches, arriving at $720 million.20

(According to Dr. Spiro, the value of J.R. Simplot Co. arises

from its resources, which, if properly used, could have yielded a

higher return. Dr. Spiro believed that if the Company had

sufficient equity capital, the Company could potentially be a

giant. Thus, in Dr. Spiro's opinion, J.R. Simplot's balance sheet

is not reflective of the Company's true value. He based his

valuation of the Company using the cash-flow generated but noted
- 53 -

21 This is an average of the high and low prices reported

during trading on June 24, 1993. 

22 Dr. Spiro deducted estimated underwriting costs of

3.825 percent and estimated taxes of 40 percent attributable to

the appreciation in value of the Micron Technology shares.

23 In Dr. Spiro's expert witness report, he arrived at a

$900 million aggregate equity value. Subsequently, he revised

this value to $830 million.

that the Company's cash-flow could have been substantially greater

if the assets of the Company had been better used. Thus, in Dr.

Spiro's opinion, if the hypothetical buyer could maximize the

Company's cash-flows, the aggregate equity value of the Company

would be greater than $720 million.) 

The next step of Dr. Spiro's analysis was to determine the

fair market value of J.R. Simplot Co.'s interest in Micron

Technology on a freely traded, minority basis. He multiplied

Micron Technology's share price on June 24, 1993 ($34.63)21 by the

number of shares J.R. Simplot Co. owned (5,259,800) and arrived at

$110,269,092.22 (For purposes of this analysis, Dr. Spiro assumed

that any perceived blockage discount would be offset by the

anticipated premium from a sale of the block.) 

Dr. Spiro then added the $110,269,092 valuation of J.R.

Simplot Co.'s Micron Technology holdings to the $720 million fair

market value of J.R. Simplot Co., rendering a total of $830

million23 aggregate equity value (rounded) for J.R. Simplot Co. on

a freely traded, minority-interest basis.

At this point, Dr. Spiro used the $830 million fair market

value to ascertain the value of decedent's class A voting and class
- 54 -

24 Dr. Spiro defines a simple voting stock price premium

as the percentage difference between voting share prices and

nonvoting or inferior-voting share prices. 

B nonvoting stock. In addressing the economic theory underlying

voting rights valuation, Dr. Spiro opined that because decedent's

class A voting stock constitutes only a 23.55-percent voting

interest in J.R. Simplot Co., it does not enable the hypothetical

buyer to exercise all the prerogatives of control. However,

relying on empirical evidence, Dr. Spiro noted that nonmajority

voting blocks of sufficient size are valued at a premium in the

marketplace in excess of the pro rata equity value represented by

those blocks. Moreover, analyzing the available studies, Dr. Spiro

suggested that voting premiums, if measured on a per-share basis

against nonvoting or low-voting shares (a "simple voting premium"),

are affected by the scale factor--generally, a small proportion of

voting stock in a capital structure tends to produce a high pershare voting premium, pointing to the utility of calculating the

value of the aggregate voting stock as a percentage of total equity

capitalization (the "aggregate voting rights percentage").

 Dr. Spiro also analyzed U.S. public markets, noting their

limitations and impediments to the trading of nonvoting stock. In

his view, it is unlikely that a company with a similar capital

structure to J.R. Simplot Co.'s would list its securities on the

U.S. exchanges. Moreover, he believed that a simple voting stock

price premium24 is irrelevant to the valuation of the class A voting

shares because the U.S. dual-capitalization stock price data for
- 55 -

25 Dr. Spiro did not apply a minority discount to the

value of decedent's class A voting shares because the underlying

equity value of J.R. Simplot Co. was calculated on a freely

traded minority-interest basis. 

publicly traded companies would not necessarily be representative

of the value of voting rights inherent in an interest in a closely

held company. Dr. Spiro observed that voting premiums observed in

U.S. stocks tend to be understated. 

Dr. Spiro next considered the aggregate value of J.R. Simplot

Co.'s class A voting stock on a 23.55-percent minority block basis.

In reviewing relevant empirical evidence, Dr. Spiro found aggregate

voting rights premiums ranging from 8.58 percent to 23.9 percent of

the equity value of the Company. After evaluating factors which he

deemed relevant (such as the lack of dividend payments, the remote

possibility of liquidation, the nonmajority status of the voting

stock block, the relative distribution of voting rights, the

attractiveness of J.R. Simplot Co. as an acquisition target, the

nature of the family-owned business, and the lack of a foreseeable

takeover offer) Dr. Spiro determined that the appropriate aggregate

voting rights premium applicable to decedent's block of voting

shares was 10 percent of J.R. Simplot Co.'s "equity capitalization

value" and then apportioned it according to decedent's 23.55-

percent interest. 

Thus, calculating the aggregate value of the class A voting

and class B nonvoting stock of J.R. Simplot Co. on a freely traded,

minority-interest basis25 as of June 24, 1993, Dr. Spiro arrived at

a pro rata value of class A voting and class B nonvoting shares of
- 56 -

26 Dr. Spiro used the following calculation to arrive at

the $947,871.32 value:

Aggregate value of J.R. Simplot Co. -

 freely traded, minority-interest basis $830,000,000

 

Aggregate value of J.R. Simplot Co. - 

 freely traded, minority interest basis

 (excluding Micron Technology interest) 720,000,000

Value of voting rights associated with

 23.55 percent interest in class A shares

 Pro rata value of 23.55 percent 

 equity interest 169,560,000

 Voting rights premium associated

 with 23.55 percent voting block

 interest 10%

Value of voting rights associated with

 23.55 percent voting interest 16,956,000

Total number of class A shares at issue 18

Additional value per share of voting

 rights associated with 23.55 percent

 voting block interest 942,000.00

Total class A and class B common shares

 outstanding 141,365.029

Pro rata value of class A and class B 

 shares (ignoring voting rights) 

 5,871.32

Value per class A share held in 23.55 percent

 voting interest 947,871.32

$5,871.32 per share ($830,000,000/141,365.029 shares), or a

$947,871.32 value per class A voting share.26 (Dr. Spiro noted that

the value per vote he determined is very large because the voting

block rights are allocated among an extremely small number of class

A voting shares; thus, in his view, traditional valuation concepts,

as used by petitioner's experts, are not applicable to the

calculation of voting rights premium in this case.) 
- 57 -

27 In his expert report, Mr. Matthews assumed a $900

million equity value, based on Dr. Spiro's original conclusion. 

Mr. Matthews subsequently amended his calculations to conform to

Dr. Spiro's amended $830 million.

Dr. Spiro then applied a 35-percent lack of marketability

discount to the class A voting stock, thereby reducing the value of

decedent's voting shares to $616,116.36 per share. He applied a

40-percent lack of marketability discount to decedent's class B

nonvoting stock, resulting in a $3,522.79 per-share value. Thus,

Dr. Spiro determined a value of $11,090,094 (rounded) for

decedent's 18 shares of class A voting stock and $13,887,007

(rounded) for decedent's 3,942.048 shares of class B nonvoting

stock as of the valuation date.

2. Gilbert E. Matthews

Respondent's second expert, Gilbert E. Matthews, served as

chairman of Bear, Stearns & Co.'s valuation committee from 1970

through 1995. Presently, he is chairman of the board and a senior

managing director of Sutter Securities, Inc., an investment banking

firm. Mr. Matthews was requested to render an opinion as to the

fair market value of the class A voting and class B nonvoting stock

held by decedent as of June 24, 1993, assuming the equity value of

J.R. Simplot Co. was $830 million.27 He was not retained to render

an opinion as to the equity value of J.R. Simplot Co. as of June

24, 1993. 

Mr. Matthews believed:

The unusual capital structure of the Company has a

material impact on the relative value of the Class A and

Class B Shares. The Class A Shares, which have 100% of
- 58 -

the votes, were only 0.054% of shares outstanding. As

the Class A Shares collectively have full control of the

Company, they (as a class) are worth a substantial

premium over their pro rata share of enterprise value *

* *

 * * * * * * *

In determining the relative value of the Class A

Shares and Class B Shares, it is my opinion that it is

necessary first to value each class of stock in its

entirety, then calculate the undiscounted value per share

of the Class A Shares and Class B Shares, and only then

to apply the discounts for lack of marketability and for

minority interest to the Estate's Class A Shares and

Class B Shares. As the value of voting control held by

the Class A Shares collectively is a function of the

premium over economic value to the class for the voting

power, it is analytically incorrect to calculate the

premium for voting control on a per-share basis rather

than a class basis. (In this case, the premium for the

Class A Shares as a percent of the total value of the

Company would not change materially if the number of

Class A Shares doubled or tripled, but such change

obviously would materially impact the premium per share.)

Mr. Matthews posited that the 18 shares of class A stock at

issue represent a potential swing block. According to Mr.

Matthews, the value of voting control held by the class A voting

shares collectively is a function of the premium over economic

value to the class for the voting power.

Mr. Matthews agreed with Dr. Spiro that studies of publicly

traded high vote shares in U.S. markets were not useful in

determining a premium for shares of J.R. Simplot Co.'s voting stock

because the prices paid in public markets understate the value of

blocks of shares with the potential for control. Moreover, in his

mind, publicly traded stocks possess neither swing vote

characteristics nor the extreme disparities in the numbers of

nonvoting to voting shares present in this case. 
- 59 -

28 Mr. Matthews testified that reasonable minds can differ

as to the premium to be applied to the class A voting shares. In

his opinion, the midpoint of the range of premiums that could be

reasonable was 4 to 5 percent. A 2-percent premium was below his

comfort level. 

In order to arrive at an appropriate voting premium, Mr.

Matthews examined premium data from acquisitions, mergers, and

recapitalizations, observing that the mean aggregate premium

attributable to the "high-vote class" in relation to the "economic

value" of a company was 8 percent, with a median of 5.3 percent.

(Although Mr. Matthews acknowledged that decedent's minority

interest did not represent voting control on the valuation date,

the potential for such a scenario was real and foreseeable.) After

analyzing this data, Mr. Matthews concluded that an appropriate

aggregate premium for J.R. Simplot Co.'s class A voting shares of

6 to 7 percent of the equity value of the Company would be fair.

However, he acknowledged that the premium could be as low as 3

percent28 of the "economic value" of the Company and still be fair.

To determine the value of each share of class A voting stock

(before any discounts), Mr. Matthews calculated the aggregate

premium for all class A voting shares based on J.R. Simplot Co.'s

equity value and divided that amount by the total number of class

A shares outstanding. To determine the value of each share of

class B stock (before any discounts), Mr. Matthews subtracted the

aggregate premium for all class A voting stock from J.R. Simplot

Co.'s equity value and divided that amount by the total number of

class B shares outstanding. 
- 60 -

Mr. Matthews then ascertained the appropriate discounts.

Considering both potential swing vote characteristics and the risks

associated with decedent's 23.55-percent block of voting shares,

he determined that a 15-percent discount should be applied for

minority interest and lack of marketability. However, because the

right of first refusal materially adversely affected the value of

decedent's class A voting shares, Mr. Matthews determined that an

additional discount of 35 to 40 percent was appropriate. Applying

these discounts cumulatively Mr. Matthews arrived at a combined

range of 45 to 49 percent for the class A voting shares. 

With regard to the class B nonvoting stock, Mr. Matthews

determined a 35-percent discount for lack of marketability. In

reaching this conclusion, he considered J.R. Simplot Co.'s size,

the industries in which it participated, and the fact that the

shares were not publicly traded. (Mr. Matthews observed that to

the extent J.R. Simplot Co.'s valuation is based on the market

prices of shares of publicly traded comparable companies, the

discount for minority interest would be implicitly subsumed in the

valuation because publicly traded shares are minority interests.)

The following chart summarizes Mr. Matthews' analysis and

determinations (using a 6-percent voting rights premium of the

equity value of J.R. Simplot Co.): 
- 61 -

Class A Value at 6% Premium

Equity value of Simplot (Q) $830,000,000.00

Premium for class A voting shares 6%

Aggregate premium for class A shares (P) 49,800,000.00

 Number of class A shares (A) 76.445

 Number of class B shares (B) 141,288.584

 Total number of shares (T) 141,365.029

Economic value per share (E) = Q/T 5,871.32

Class A premium per share = P/A 651,448.75

Value per class A share before discounts 1657,320.08

 Discounts for minority, lack of

 marketability, and right of first

 refusal (class A) 

 (1 - 0.15) x (1 - 0.35) = .5525 = 45% (rounded) discount

 (1 - 0.15) x (1 - 0.40) = .51 = 49% discount

Per share value of decedent's class A shares:

 After 45% discount 361,526.04

 After 49% discount 335,233.24

Total value (rounded) of decedent's 18 class A

 shares:

 After 45% discount 6,507,469

 After 49% discount 6,034,198

1 We note that mathematically Mr. Matthews' calculation is off by 1 cent.

Class B Value Using 6% Class A Premium

Economic value per share (E) =Q/T $5,871.32

Economic value of all class B shares (V) = 

 E x B 829,551,166.60

Less: Aggregate premium for class A shares (P) (49,800,000.00)

Net value of all class B shares = V - P 779,751,166.60

Value per class B share before discounts =

 (V - P)/B 5,518.85

Discount for lack of marketability (class B) = 35%

Per share value of decedent's class B shares

 after 35% discount 3,587.26

Total value (rounded) of decedent's 3,942.048

 class B shares after 35% discount 14,141,134
- 62 -

C. Court's Analysis and Conclusions

The respective valuation methodologies adopted by the parties'

experts produced vastly different results. Petitioner's experts

used a simple, traditional methodology to value an unusual

corporate capital structure, which resulted in little or no premium

for voting rights. On the other hand, respondent's experts used a

valuation methodology which, given the Simplot family's philosophy,

appears to accord the class A stock an extraordinarily high premium

for its voting privileges.

Not unexpectedly, petitioner's experts found fault with the

analyses and conclusions of respondent's experts and vice versa.

We agree that each of the experts' analyses and conclusions is

subject, to an extent, to valid criticism. Specifically, we

believe, among other things, the situations involved in the data

and studies relied upon by both sets of experts to be so different

from the situation involved herein that such data and studies are

inapplicable to the case at hand.

The differing views of the experts as to the proper

methodology to be used in valuing decedent's class A voting shares

vis-a-vis his class B nonvoting shares illustrate the difficulty in

valuing shares of unlisted stock in a large, family-controlled

corporation. Moreover, those differing views give credence to the

belief that valuation is at best an inexact science.

The aforesaid notwithstanding, in fulfilling our task, we deem

it proper to value decedent's shares of class A voting and class B

nonvoting stock in J.R. Simplot Co. using one of the expert's
- 63 -

valuation methodologies. Therefore, as explained in more detail

infra, giving consideration to all the facts and circumstances

presented in this case (in particular, the ratio of the number of

outstanding shares of voting stock to that of the nonvoting shares,

1 to 1,848), and having dissected, analyzed, and evaluated the

reports as well as the testimony of all the experts, we find the

valuation methodology of respondent's experts (that is, a premium

should be accorded to the voting privileges of the class A stock

and the collective premium for those privileges should be expressed

in terms of a percentage of the equity value of J.R. Simplot Co.)

more persuasive than the valuation methodology of petitioner's

experts (that is, the premium, if any, to be accorded to the voting

privileges should be expressed in terms of a percentage of the

value of the class B nonvoting stock). Consequently, we adopt

respondent's experts' valuation methodology, with modifications, in

determining the fair market value of decedent's 18 shares of class

A voting stock and 3,942.048 shares of class B nonvoting stock of

J.R. Simplot Co. as of the valuation date.

We wish to stress at the outset that we are not valuing the

premium for controlling voting power, but rather the premium for

voting rights. The premium for controlling voting power would be

substantially greater than the premium we determine for voting

rights.

Having selected respondent's experts' valuation methodology,

we must now determine (1) the equity value of J.R. Simplot Co. as

of the valuation date, and (2) the appropriate collective voting
- 64 -

premium (expressed as a percentage of the equity value of J.R.

Simplot Co.) to be accorded the class A voting stock.

In determining the proper equity value of J.R. Simplot Co.,

Mr. Much and Dr. Spiro used similar approaches. They began by

valuing J.R. Simplot Co. exclusive of its Micron Technology holding

and later added the value of the Micron Technology holding. In

determining the equity value of J.R. Simplot exclusive of its

Micron Technology holding, both used the income and market

approaches and averaged the two values obtained. Excluding the

investment for Micron Technology and the reduction for short-term

debt, the values that Mr. Much and Dr. Spiro determined are not

materially different. These values can be summarized as follows:

 Income Approach Market Approach

 Mr. Much

 Total Invested Capital $1,079,900,000 $1,066,740,000

 Plus Cash 31,232,000 31,232,000

 1,111,132,000 1,097,972,000

 Less: Long-term debt (375,536,000) (375,536,000)

 Net value 735,596,000 722,436,000

 Dr. Spiro

 Net value 720,926,000 719,809,000

 

As is discernible from this chart, under the income approach

the values are within 2 percent of each other, and under the market

approach the difference is less than 1 percent. Dr. Spiro's

average of the two values is $720,000,000 (rounded), which is

approximately 1 percent less than Mr. Much's average value of

$729,016,000.

The nominal disparity in their respective equity values arises

from adjustments Mr. Much made for the Company's short-term debt

($188,882,000) and for a 6-percent minority discount in valuing the
- 65 -

Company's Micron Technology holding. Mr. Much valued J.R. Simplot

Co. by reviewing financial statements for the 5 fiscal years ended

August 1988 through 1992, and for the 9-month period ended May

1993. The adjustments he made to his values for cash and debts of

the Company were derived from information on the quarterly

financial statement for the quarter ended May 1993.

 J.R. Simplot Co.'s controller, James D. Crawford, testified

that Mr. Much improperly failed to account for the seasonally high

levels of the Company's receivables and inventory. According to

Mr. Crawford, because the Company's business was seasonal, its

financial statements from one quarter to another were not

comparable. Mr. Crawford explained that the Company's balance

sheet for the quarter ending in May would have higher levels of

inventory, receivables, and short-term debt than its balance sheet

for the year ending in August. (The high levels of inventory and

receivables were financed with working capital, resulting in high

short-term debt.) Mr. Crawford estimated that the Company's shortterm debt would have varied by approximately $150 million between

May and August 1993. We found Mr. Crawford a credible witness. 

Mr. Much admitted at trial that if the seasonal changes in

short-term debt were not taken into consideration the equity value

as of August 1993 would be approximately $113,000,000 higher than

his value as of late June 1993. We believe that the high shortterm debt of the Company as of May 1993 is an aberration, and as a

result it should not have been taken into account. 
- 66 -

In addition to not adjusting for the seasonal nature of shortterm debt, in our opinion, Mr. Much should not have discounted the

value of the Micron Technology stock by applying a 6-percent

minority discount. He valued both the operating assets of J.R.

Simplot Co. and its investment in Micron Technology on a minority

basis. Applying a 6-percent minority discount to the Micron

Technology stock has the effect of taking two minority discounts.

Although we agree with Mr. Much's argument that as a minority

shareholder in Micron Technology, J.R. Simplot Co. would lack

absolute control with regard to any disposition of the Micron

Technology stock, we do not believe a greater discount for an

investment asset than for an operating asset is justified when the

Company has already been valued on a minority basis.

To conclude this aspect of our valuation task, we believe Mr.

Much's determination of J.R. Simplot Co.'s equity value contained

two major flaws. Consequently, although we believe the equity

value of the Company may be greater than $830 million, we adopt Dr.

Spiro's $830 million equity value. (We note that Dr. Spiro stated

that if the Company's cash-flows could have been maximized, the

equity value of J.R. Simplot Co. would be greater than $830

million. Further, we are mindful that the Company is resource

rich, and as Gordon C. Smith, the CEO and president of the Company

in 1993, testified, the Company has assets worth substantially more

than their book values.) 

We now turn our attention to the more difficult task--

ascertaining the amount of the collective voting premium (expressed
- 67 -

as a percentage of J.R. Simplot Co.'s $830 million equity value) to

be accorded the class A voting stock. 

Petitioner's experts used what Dr. Spiro referred to as a

"cookie cutter" methodology, which he and Mr. Matthews found

unsuitable in this case. We do not accept petitioner's experts'

assertion that no difference exists between minority voting shares

and nonvoting shares, as well as their conclusion that the value of

the shares of class A voting and class B nonvoting stock were the

same. Common sense dictates otherwise. We believe petitioner's

experts failed to give due consideration to the hypothetical

seller's desire to achieve the highest price obtainable for his/her

stock. 

Here, only four persons held all the class A voting stock, and

there was a relatively equal distribution of this class of stock

among them. In our opinion, the class A shares, on a per-share

basis, are far more valuable than the class B shares because of the

former's inherent potential for influence and control of the

Company. And because of the Company's size and resources, having

a voice (even though not a controlling voice) in the Company is

valuable. Indeed, there was testimony that the Company would be

worth even more if it were managed differently and divested itself

of its unprofitable agriculture (cattle) group. According to

Gordon C. Smith, the Company needed cash in order to remain

competitive and ultimately a choice would have to be made to merge

the Company with or into another entity, sell some of the Company's
- 68 -

29 Petitioner claims that because J.R. Simplot was 90

years old and living at the time of trial, the Simplot family has

unusually good genes. Thus, the argument was made that a good

possibility existed for Don, Gay, and Scott to live until a ripe

old age, and the class A voting shares would wind up in J.R.

Simplot's grandchildren's hands later rather than sooner.

Decedent died at the age of 59. Apparently, J.R. Simplot's

"good genes" were of limited assistance to him. The length of

one's lifetime is unpredictable; no assurances exist that Scott,

Don, and Gay will live until the age of 90.

assets, or take the Company's stock public. Only the holders of

the voting stock would make these decisions.

We agree with respondent's experts that through ownership of

decedent's voting shares, a hypothetical buyer would gain access to

the "inner circle" of J.R. Simplot Co., and by having a seat at the

class A shareholder's table, over time, the hypothetical buyer

potentially could position itself to play a role in the Company.

In this regard, we are mindful that "a journey of a 1,000 miles

begins with a single step."

At this point, we consider the characteristics of the

hypothetical buyer of decedent's class A voting shares. The

hypothetical buyer might well be one or a group of investors or

even one of the Simplots. The investor(s) might be a competitor,

supplier, or major customer of J.R. Simplot Co. The hypothetical

buyer would probably be well financed, with a long-term investment

horizon and no expectations of near-term benefits.29 The

hypothetical buyer might be primarily interested in only one of

J.R. Simplot Co.'s two distinct business activities--its food and

chemicals divisions--and be a part of a joint venture (that is, one
- 69 -

venture being interested in acquiring the food division and the

other being interested in acquiring the chemical division).

We agree with respondent's expert that on the valuation date,

a hypothetical buyer would consider the likelihood that one day

decedent's block of voting shares potentially could become the

largest block of voting shares because the record reveals that Don,

Gay, and Scott intended, upon their deaths, to pass their class A

shares to their children and thereafter no one shareholder (other

than the hypothetical buyer) would own 18 shares of voting stock.

Moreover, we agree with respondent that it was foreseeable on the

valuation date that following the deaths of Don, Gay, and Scott,

third-generation Simplots (a multiple number of descendants with

different personal objectives) would most likely be more willing to

sell their class A voting shares to outsiders than their parents or

grandfather would. And at that time, the hypothetical buyer would

benefit from the right of first refusal restriction on the voting

stock.

Petitioner asserts that Don, Gay, and Scott acted as a

cohesive group in following J.R. Simplot's philosophy to operate

the Company in a manner ensuring its perpetual existence and to

pass their shares and philosophy to their children. We believe

this assertion to be flawed in that J.R. Simplot was the glue that

bonded Don, Gay, and Scott. Indeed, Mr. Ettelson testified that,

over time, chances increase that closely held companies will

eventually sell, merge, or go public. 
- 70 -

We agree with respondent that

The key to acquiring control of Simplot is the Class

A shares. The investor would likely pay large premiums

(in cash or stock) to induce the Class A shareholders to

relinquish control. Once a majority interest of the

Class A shares is obtained, the investor could force a

merger into another company. 

 * * * * * * *

The disparate ratio of nonvoting to voting stock in

this case is particularly important because it

dramatically increases, on a per share basis, the value

of the Class A shares. * * * When there are very few

voting shares, as here, the result is a huge increase in

the per share value of the voting rights associated with

the Class A shares. Simplot's extreme ratio of nonvoting

to voting shares--1,848.24 to one, with only

approximately 76 voting shares--magnifies the per share

premium by a thousand times or more compared to any

company with a typical single digit ratio.

Dr. Spiro opined that the amount of the collective voting

premium should equal 10 percent of J.R. Simplot Co.'s equity value.

Mr. Matthews selected a lesser amount. He stated that an amount

ranging from 7 percent (on the high side) to 3 percent (on the low

side) of the equity value would be a "fair" collective premium for

the voting privileges. 

We recognize that on the valuation date the hypothetical buyer

of decedent's 18 shares of class A voting stock would not have the

ability to control the Company's management and would be subject to

the philosophy of the other three class A shareholders, all of whom

were related and had family interests to protect. And obviously,

an investor would pay more for a block of stock that represents

control than for a block of stock that is only a minority interest
- 71 -

in the Company. On the other hand, here, no one individual had a

controlling block of voting stock. 

We also recognize that Don, Gay, and Scott would want to

maximize their children's interest in the Company and that if a

sale or liquidation of J.R. Simplot Co. occurred or if the Company

merged with or into another, the benefits derived therefrom would

probably be distributed not by class of stock, but rather on an

equal per-share basis, regardless of class. In other words, after

having paid for voting privileges, if on or after June 24, 1993,

the Company were merged, sold, or liquidated, the hypothetical

buyer would suffer a loss if the proceeds of the sale, merger, or

liquidation were to be distributed among all shareholders of J.R.

Simplot Co. on a pro rata share basis, rather than on a class

basis. 

On the other hand, we agree with Mr. Matthews that although on

the valuation date decedent's class A voting shares constituted a

minority interest in J.R. Simplot Co., it was foreseeable that one

day (but not on the valuation date) the voting characteristics

associated with them could have "swing vote" potential if the

hypothetical buyer combined his 18 class A voting shares with

Scott's 22.445 shares or joined with Don and Gay (combined having

36 class A voting shares) to form a control group.

Considering and weighing all of these factors, we adopt Mr.

Matthews' lower range figure of 3 percent of J.R. Simplot Co.'s

equity value as the fair premium for the voting privileges (not

voting control) associated with the class A stock of J.R. Simplot
- 72 -

Co. We have adopted Mr. Matthews' 3-percent premium for voting

privileges because we give the greatest weight to the fact that

Don, Gay, and Scott would be inclined to vote in a manner that

would maximize their children's interests. Thus, we believe the

collective premium for the voting privileges of the 76.445 shares

of class A stock of J.R. Simplot Co. as of the valuation date is

$24.9 million (3 percent x $830 million), or $325,724.38 per share.

The following chart summarizes our valuation determinations

for decedent's 18 shares of class A voting stock and 3,942.048

shares of class B nonvoting stock of J.R. Simplot Co. as of the

valuation date before considering any discounts:

Class A Voting Stock Valuation

Number of class A shares (A) 76.445

Number of class B shares (B) 141,288.584

 Total number of shares (T) 141,365.029

Equity value of J.R. Simplot

 Co. (Q) $830,000,000

Pro-rata share of equity value

 (E) = Q/T 5,871.32

Premium for voting privileges on

 a per share basis 325,724.38

Value per share 331,595.70

 x 18

Value of decedent's 18 shares of 

 class A voting stock, before 

 discount 5,968,772.60 
- 73 -

Class B Nonvoting Stock Valuation

Equity value of J.R. Simplot Co. $830,000,000 

Less: Aggregate premium for voting

 privileges (76.445 shares x $325,724.38) (24,900,000)

Less: Aggregate class A share portion of

 equity value (76.445 shares x $5,871.32) (448,833)

Net value of all class B shares 804,651,167

Value of class B stock on a per share

 basis ($804,651,167 ÷ 141,288.584) 5,695.09

Value of decedent's 3,942.048 shares of x 3,942.048

 class B nonvoting stock, before discount 22,450,318.14

All of the experts agreed that a lack of marketability

discount (liquidity discount) is appropriate; they essentially

agreed that the proper discount should be approximately 35 percent,

although Dr. Spiro allowed a 40-percent liquidity discount for the

class B nonvoting stock. Dr. Spiro believed that although a

restriction of the transferability of the class A voting stock

existed, decedent's class B shares should be given a slightly

higher liquidity discount because the class B stock lacks voting

rights. We adopt Dr. Spiro's liquidity discounts of 35 percent for

decedent's class A shares and 40 percent for decedent's class B

shares. Therefore, we find and thus conclude that the fair market

value of decedent's 18 shares of class A voting stock of J.R.

Simplot Co., as of the valuation date, is $3,879,702.19 or

$215,539.01 (rounded) per share, and the fair market value of

decedent's 3,942.048 shares of class B nonvoting stock of J.R.

Simplot, as of the valuation date, is $13,470,190.88 or $3,417.05

(rounded) per share. 

A few final words before leaving the valuation issues. We

recognize the disparate ratio of our determined value before
- 74 -

consideration of a liquidity discount of the class A voting stock

($331,595.70 per share) to that of the class B nonvoting stock

($5,695.09 per share), that is a ratio of approximately 58 to 1.

This disparity is the consequence of the unique capital structure

of J.R. Simplot Co. and the skewed ratio of the number of class A

voting shares to the class B nonvoting shares, that is,

approximately 1 to 1,848. 

Issue 3. Marital Deduction 

The next issue is the amount of the section 2056 marital

deduction to be allowed the estate. 

Decedent bequeathed all of his class A voting stock, and so

much of the class B nonvoting stock as, when added to the value of

the voting stock, equaled the Federal estate tax return filing

requirement in effect at the time of his death (i.e., $600,000) to

the trustees of a testamentary trust for the benefit of his

children (the credit shelter trust). The residue of decedent's

estate was bequeathed to his wife. 

Decedent's will provides: (1) Decedent's personal

representative is to pay all State transfer and inheritance taxes

payable by reason of a bequest or devise to a devisee and to charge

the amount paid against the distributive interest of that devisee,

and (2) all Federal estate taxes imposed against the estate are to

be paid out of the residue that passes to decedent's wife.

In the notice of deficiency, respondent reduced the amount

reported for the marital deduction from $15,127,237 to $1,723,437.

The amount of this reduction ($13,403,800) is due to respondent's
- 75 -

redetermining of the fair market value of the class A voting stock

and charging the determined estate tax deficiencies against the

portion of the estate (the residue) passing to the wife. In

calculating the amount of the marital deduction, respondent gave no

consideration to the fact that the transfer tax liability payable

to the State of Idaho with respect to the class A voting stock

bequeathed to the credit shelter trust is chargeable against the

trustees. 

Under section 2011, an estate may claim a credit against the

Federal estate tax for State transfer and inheritance taxes paid.

This credit generally applies to State and inheritance taxes paid

and claimed within 4 years of the filing of the original estate tax

return. See sec. 2011(c). Where the taxpayer has filed a petition

with this Court, this 4-year period is extended for 60 days after

the decision of this Court becomes final. See sec. 2011(c)(1). 

Here, no transfer or inheritance taxes to the State of Idaho

have yet been paid. See sec. 20.2011-1(c)(2), Estate Tax Regs.,

regarding proof of payment. Accordingly, respondent correctly did

not include in the computation of the amount of the marital

deduction an amount of State transfer and inheritance taxes

chargeable against the bequest of the class A voting stock to the

trustees of the credit shelter trust. 

The amount of the marital deduction must be recalculated on

the basis of our determination as to the value of the class A

voting stock passing to the trustees of the credit shelter trust.

Hence, a Rule 155 computation is required. In calculating the
- 76 -

amount of the marital deduction, the parties must consider (and not

reduce the marital deduction by) the amount of State transfer and

inheritance taxes actually and timely paid by reason of the bequest

of the class A voting stock to the trustees of the credit shelter

trust. 

Issue 4. Penalties

The last issue is whether petitioner is liable for the

penalties determined by respondent pursuant to section 6662(a),

(g), (h)(1), and (2)(C).

A substantial estate tax valuation understatement occurs if

the value of property claimed on a return is 50 percent or less of

the amount determined to be its correct value, and the portion of

the underpayment attributable to the understatement exceeds $5,000.

See sec. 6662(g). The penalty equals 20 percent of the portion of

the underpayment attributable to the understatement. See sec.

6662(a). The penalty does not apply to any portion of the

underpayment for which the taxpayer shows that he or she: (1) Had

reasonable cause, and (2) acted in good faith with respect thereto.

See sec. 6664(c); see also United States v. Boyle, 469 U.S. 241,

242 (1985). Whether a taxpayer had reasonable cause and acted with

good faith is a factual determination. See sec. 1.6664-4(b),

Income Tax Regs. Reliance on the advice of a professional will

constitute good faith and reasonable cause where the reliance was

reasonable. See id.

Respondent argues that petitioner undervalued decedent's

shares of J.R. Simplot Co. Respondent further contends that
- 77 -

petitioner has failed to prove there was reasonable cause or good

faith reliance for the undervaluation. Petitioner, on the other

hand, maintains that it relied on professional appraisers and

attorneys in preparing the return. Essentially, petitioner argues

that any tax understatements were in good faith and due to

reasonable cause.

The parties stipulated that "the fair market value of the

Class A voting shares and Class B nonvoting shares reported on the

estate tax return was based upon an appraisal report issued by

Morgan Stanley & Co., Incorporated." That appraisal was prepared

for the purpose of guiding the estate in preparation of its tax

return. 

We have found (as an ultimate fact) that petitioner acted

reasonably and in good faith in relying on the advice of tax

professionals and appraisers in valuing decedent's class A voting

and class B nonvoting stock for Federal estate tax purposes. We

believe petitioner exercised ordinary business care and prudence in

attempting to determine its proper tax liability. See Mandlebaum

v. Commissioner, T.C. Memo. 1995-255. Morgan Stanley was a longtime adviser to J.R. Simplot Co., having prepared annual appraisals

for the J.R. Simplot Co.'s ESOP which were relied upon by both the

trustees of the ESOP and the participating employee/stockholders.

Thus, we hold petitioner is not liable for the penalties at issue.
- 78 -

To reflect the foregoing,

 Decision will be

 entered under Rule 155.