T.C. M em o . 2 0 2 0 -2 8

UNITED STATES TAX COURT

PIERSON M . GRIEVE, Pet i t i o ner v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 8 2 4 9-1 8. Fi l edM arch 2 , 2 0 20
.

W i l l i am D. Th om s on an dJ am es G. Bu ll ard , fo r p et i t i o n er. Ran d al l L. Eag er, J r., an dCh ri s t i n a L. Co o k , fo r res p on d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION KERRIGAN, J u dg e: Res p o n den td et erm i n eda d efi ci en cy i n p et it i o n er’ s 2 0 1 3 Fed eral g i ftt ax o f $ 4 , 3 9 9 ,0 3 2 an dan accu racy -rel at edp en al ty p u rs u an tt o
s ect i on 6 6 6 2 (a) an d(b )(5 ) o f $ 6 2 8 ,1 9 9 fo r a s ub s t an t i al g i ftt ax v al u at i o n- 2
-

[* 2 ] u n d ers t at em en t . Aft er co n ces s i o n s , 1 th e rem ai n i ng i s s ues fo r co n s i d erat i o n are t h e fai r m ark etv al ues o f p et i t i o n er’ s 9 9
. 8 % m em b er i n t eres ti n Rab bi t1 , LLC (Rab b i t), t ran s ferred t o th e Pi ers o n M
. Gri ev e 2 0 1 3 Gran t or Ret ai nedAn n u i ty Tru s t(GRAT) o n Oct o b er 9 , 2 0 1 3 , 2 an dh i s 9 9 .8 % m em b er i n t eres t i n An g u s M acDo n al d , LLC (An g us ), tran s ferred t o th e Gri ev e 2 0 1 2 Fam il y Irrev o cab l e Tru s t(Irrev o cab l e Tru s t ) o n No v em b er 1 , 2 01 3
. Un l es s o th erwi s e i n d i cat ed , al l s ect io n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e y ear i n i s s u e, an d al l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed , an dth e s t i p u l at i on o f fact s i s i n co rp o rat edi n o u r fi n d in g s b y th i s referen ce. Pet i t i o n er res i d edi n Fl o ri d a wh en h e t i m el y fi l edh i s p et i t i on .

1 Res p o n d en tco n ced edthatp et i t i o n er i s n o tl i ab l e fo r t h e accu racy -rel at ed p en al ty p u rs uan tt o s ec. 6 6 6 2(a), (b )(5 ), an d (g ). Pet it i on er co n ced edth ath e u n d eres ti m at edh i s t o t al t ax ab le g ift s fro m p ri o r p eri o d s b y

$ 1 8 8 , 9 91
. 2 Th e p art i es s t i p u lat edth atp et i t io n er wi ll n o to we ad di t i o n al g i ftt ax i f we d et erm i n e t h ath e u n d ers t at edth e i n i t i al fai r m ark etv al u e o f as s et s tran s ferred t o th e GRAT i f, wi th i n a reas o n ab l e t i m e, t h e GRAT p ay s t o p et i ti o n er, o r t o h i s p ers o n al rep res en tat i v e i n the ev en to f h is p as s i n g , an am o u n tequ al t o th e d i fferen ce o f t h e p ro p erl y p ay ab l e an n u it y

an d t h e an n u i ty actu al ly

p ai d.- 3
-

[* 3 ] I. Pet i t i o ner’ s Back g ro u n d Pet i t i o ner was m arri edt o Fl o ren ce Gri ev e, an d t h ey h ad th ree ch i l dren . Fl o ren ce d i eds u d d en l y

o n Oct o b er 1 , 2 0 12 . M arg aret Gri ev e was th ei r el d es t ch i l d , an ds h e p ract i cedl aw i n th e fi n an ci al s erv i ces i n dus try an d s erv edas ch ai r
o f t h e b o ardo f t h e Cen tral As ia Am eri can En t erp ri s e Fu nd
. Atth e en do f p et i t i o n er’ s career h e was th e ch ai rm an an dch i ef ex ecu t i v e
o ffi cer o f Eco l ab , In c. (Eco l ab ), fro m 1 9 8 3 t o 1 9 9 6. Eco l ab i s a p ub l ic co rp o rat i o n l i st edo n th e New Yo rkSt o ckEx ch an g e an dh ead qu art eredi n St . Pau l , M in n es o t a. Th ro u g h o u th i s career p et i t i o n er accu m u l at edweal th . Whi l e atEco lab h e acq u i red th e co rp o rat io n’ s s t ockthath e an dh i s fam i l y co n t in u edt o o wn . In th e l at e 1 9 8 0s o r earl y 1 9 9 0 s p et i t i o n er es t ab l is h edth e Gri ev e Fam i l y Li m i t edPart n ers h i p . Pi ers on M . Gri ev e M an ag em en tCo rp . (PM G) was th e g en eral p art n er o f t h e Gri ev e Fam i l y Li m i t edPart ners h i p . Pet i t i o n er co ns o l i d at ed
m an ag em en to f h i s as s et s i n PM G. Th es e en t i t i es were creat edt o p res erv e an d
m an ag e p et i t i o n er’ s fam i l y weal th. In th e earl y 2 0 0 0s M arg aret b ecam e i n v o l v ed i n h el p i n g p et i t i o n er m an ag e th e fam i l y

weal th . In2 0 0 8 s h e p u rch as edPM G fro m p et i t i o ner fo r $ 6 ,2 0 0 an d b ecam e i t s p res i d en t . Si n ce 2 0 0 8 M arg aret h as o wn edal l o f t h e o u ts tan d i n g- 4
-

[* 4 ] s h ares o f PM G. Ad d i t io n al l y , s h e h as m an ag edth e Gri ev e fam i l y o ffi ce th ro u g h PM Gan dh as n o tb een co m p en s at ed
. Pet i t i o ner an d Fl o ren ce h aden g ag ed a l aw fi rm t o h an d l e t h ei r b u si n es s an d
es t at e p l an n in g n eed s . In2 0 12 th ey d eci d edt o up d at e t h ei r es t at e p l an . Pet i t i o n er req u es t edth at th e l aw fi rm p erfo rm a t op -t o -b o t t o m

an al y s is o f h i s as s et s t o ad dres s h o w b es tt o ach i ev e t h e fam i l y ’ s weal th -m an ag em en tg o al s i n a t ax effi ci en tm an n er. Fl o ren ce d i edb efo re t h e up d at ed es t at e p l an was fi n al i zed . As p arto f t hei r up d at ed es t at e p l an p et i t i o n er an dFl oren ce as k ed M arg aret t o as s u m e fu l l -t i m e res p o n si b i l it y

fo r m an ag i n g th e fam i l y weal th . Si n ce 2 0 1 2 M arg areth as b een res p o n si b l e fo r i n v es t i n g an dm an ag in g th e fam i l y weal th
. PM G h el da co n tro ll i n g o wn ers h i p i n t eres ti n cl o s el y h el den t i t i es wi th ap p ro x i m at el y $ 7 0 m i l l i o n i n as s et s . Th e p o rt fo l i o o f as s et s was h el di n an i n v es t m en tacco u n t atGo ld m an Sach s . M arg aret s el ect ed th e weal th m an ag em en t g ro up atGo l d m an Sach s as PM G’ s i n v es t m en tad v is er an d as s etm an ag er. Al th ou g h the fam i l y ’ s Eco l ab s t o ckwas h el di n cu s t o dy acco u n t s at Go l dm an Sach s ’ San Fran ci s co o ffi ce, M arg aret m ad e t h e i n v es t m en td eci s i o n s p ert ai n i n g t o th e Eco lab s t o ck . Go l d m anSach s n ei th er m an ag edn o r ch arg eda
m an ag em en tfee o n th e Eco l ab s t o ckh el di n i t s cu st o dy acco u n t s . M arg aret- 5
-

[* 5 ] d eci d edt o m ai nt ai n a co n cen trat edp o s it i o n i n th e Eco lab s t ockb ecau s e o f i t s l o w co s t b as i s . M arg aret wo rk edwi th th e l aw fi rm t o d ev el op p et i ti o n er’ s up d at edes t at e p l an . Ino rd er t o acco m

pl i s h p et i t i o n er’ s g o al , two en t i t i es were creat ed : Rab b i t
an d An g us . II. Rab b i t Rab b i twas fo rm edas a l i m i t edl i ab il i ty co m p an y (LLC) u n d er t h e l aws o f Del aware o n J u l y 3 1 , 2 0 1 3. Ati t s i ncep t i on Rab b i t h adtwo m em b ers : PM G an d th e Pi ers o n M
. Gri ev e Rev o cab l e Tru s t (Gri ev e Rev ocab l e Tru s t ). OnAu g u s t2 8 , 2 0 1 3 , PM G co n tri b u ted$ 2 an dth e Gri ev e Rev o cab l e Tru s tco n tri b u t ed$ 9 9 8 t o a b ro k erag e acco u n t in Rab b i t ’ s n am e. Th e fo l l o wi n g ch artrefl ect s m em b er
co n tri b u t i o n s an dthe o wn ers h i p s tru cture o f Rab b i t as o f J u l y 3 1 , 2 0 1 3 :
M em b er In i t i al

co n tri b u t i o n Cl as s A

v o ti n g u ni t s Cl as s B

n o nv o t i n g u ni t s Own ers h i p

i n t eres t PM G $ 2 2 0 -0
- 0 .2 % Gri ev e Rev o cab le Tru s t 9 9 8 -0
- 9 ,9 8 0 9 9.8 % OnSep t em

b er 3 , 2 01 3 , p et i t i on er t ran s ferred t o Rab b i t ’ s b ro k erag e acco u n t 8 2 ,9 8 4 Eco l ab s h ares wi th a fai r m ark etv al u e o f $ 7 ,6 8 2 , 6 5 9. Pet i t i o ner d ep o s it ed $ 1 m i l l i o n i n cas h i n t o Rab bi t ’ s b ro k erag e acco un to n Sep t em b er 1 8 , 2 0 1 3 . As o f- 6
-

[* 6 ] Oct o b er 9 , 2 0 1 3 , Rab b i th adn o d eb tan di t s b ro k erag e acco u nth ada fai r
m ark etv al u e o f $ 9 , 1 0 2 ,7 5 7
. 3 OnOct o b er 6 , 2 0 13 , p et i t i o ner an dM arg aret , i n h er cap aci ty as tru s t ee o f th e Gri ev e Rev o cab l e Tru st , ex ecu t edth e GRAT ag reem en t . Pet i t i o n er s tru ctu red th e GRAT acco rd i ng t o In t ern al Rev en u e Serv i ce g u id an ce t o av o i di n cu rri n g g i ft t ax l i ab i l i ty . 4 Th e GRAT ag reem en tp ro vi d ed th atth e tru st ee s h al l p ay t o p et i t i o n er an an nu i ty

equ al t o the fai r m ark etv al u e o f as s et s tran s ferred t o th e t ru s t fo r Fed eral g i ftt ax p u rp o s es as fo l l o ws : (1 ) 4 7 .1 4 7 5 7% t o b e p ai dwi th i n 1 0 5 d ay s o f Oct o b er 9 , 2 0 1 4 , an d (2 ) 5 6 .5 7 7 08 % t o b e p ai dwi th i n 1 0 5 d ay s o f Oct o b er 9 , 2 01 5
. OnOct o b er 9 , 2 0 13 , M arg aret , as tru s t ee o f t h e Gri ev e Rev o cab l e Tru s t , as s i g n ed9 ,9 8 0 cl as s B n o n vo t i n g u n i t s o f Rab bi tt o t h e GRAT. Pet it i on er d et erm i n edth atth e fai r m ark etv al u e o f t h e 9 ,9 8 0 cl as s B u n i t s o f Rab b i twas $ 5 ,9 0 3 ,7 6 9 as o f Oct o b er 9 , 2 0 1 3 , res ul t i n g i n an n ui ty p aym en t s p u rs uan tt o t erm s
o f t h e GRAT o f $ 2 ,7 8 3 ,4 8 5 an d$ 3 ,3 4 0 ,1 8 0
.

3 Th e p art i es s t i p u lat edth atth e fai r m ark etv al u e as o f Oct o ber 9 , 2 0 1 3 , was $ 9 ,0 6 7 ,0 7 4
.

4 Gen eral l y , u n d er s ec. 2 7 0 2 an di t s co rres p o n d i n g reg u l at i o n s , wh ere p ro p erty i s tran s ferred i n tru s twi th th e d o n o r ret ai n i n g an i n t eres ti n th e p ro p ert y , th e v al u e o f t h e g i fti s t h e v al u e o f t h e p ro p erty tran s ferred , l es s th e v al u e o f t h e d o n o r’ s ret ai n edi n t eres t . See al s o s ec. 2 5.2 7 0 2 -1 , Gi ftTax Reg s .- 7
-

[* 7 ] III. An g us An g us was fo rm ed as an LLC u n d er t h e l aws o f Del aware o n Au g u st1 3 , 2 0 1 2
. 5 Ati t s i ncep t i o n An g us h adtw o m em b ers : PM G an d Fl o ren ce. On Sep tem b er 7 , 2 0 1 2 , PM Gco n tri b u t ed$ 2 0 0 an dFl o ren ce co n tri b u t ed$ 9 9 ,8 0 0 t o a b ro k erag e acco u n t in An g u s’ n am e. Fl o ren ce t ran s ferred h er i n t eres ti n An g u s t o p et i t i o n er o n Sep t em

ber 2 6 , 2 0 1 2 . Th e fo l l owi n g t ab l e refl ect s m em ber
co n tri b u t i o n s an dthe o wn ers h i p s tru cture o f An g us as o f Sep t em b er 7 , 2 0 1 2 :
M em b er In i t i al

co n tri b ut i o n Cl as s A

v o t i ng u n i t s Cl as s B

no n v o t i ng u n i t s Own ers h i p

i n t eres t PM G $ 2 0 0 20 -0
- 0 .2 % F. Gri ev e 9 9 ,8 0 0 -0
- 9 , 9 8 0 9 9.8 % As o f No v em

b er 1 , 2 0 1 3, An g u s h adn o d eb tan d i t s b ro kerag e acco u n th el d th e fo l lo wi n g as set s wi th t h e fo l l o wi n g fai r m ark et v al u es :

5 An g u s was o ri g i n al l y fo rm edas “ Gri ev e 1 , LLC”, an dch an g edi t s n am e t o An g u s o n Sep tem

ber 6 , 2 0 1 2
.- 8
- As s et s Fai r m ark et v al u e Cas h an d s ho rt -t erm

i n v es t m en t s (b ro kerag e acco u n t) $2 0 ,6 6 5,8 2 4 Li m i t ed p art n ers hi p i n t eres t s (Pal l ad i u m In v es tm en t s ) 7 ,3 1 6,8 8 2 In ves t m en t s i n v en tu re cap i t al fu n d s (Gro s s m an In v es tm en t s ) 4 0 6 ,4 0 6 Pro m i s s o ry

n o t es 3 ,5 8 1,5 7 1 To t al 3 1 ,9 7 0,6 8 3 OnNo vem

b er 1 , 2 0 1 3 , p et i t i o n er an dSo u th Dak o t a Tru s t Co ., LLC, as tru s t ee o f t he Irrev o cab l e Tru s t , ex ecu t eda s i n g le-l i fe p ri v at e an n u i ty ag reem en t . Pet i t io n er creat ed th e Irrev o cab l e Tru s ti n 2 0 1 2 fo r t h e b en efi to f t h e Gri ev e ch i l dren . Un d er t he t erm s o f th e s i n g l e-l i fe p ri v at e an n ui ty ag reem en t p et i ti o n er
as s i g n edh i s 9 ,9 8 0 cl as s B u n i t s i n An g us t o th e Irrev o cab l e Tru s ti n ex ch an g e fo r
a s i n g l e-l i fe an n ui ty th atp ai dan an n u al s u m o f $ 1 ,4 2 0,0 0 0 . OnNo v em b er 1 , 2 0 1 3 , th e s i n g le-l ife p ri v at e an n u i ty h ad a fai r m ark etv al u e o f $ 8,0 4 3 ,6 7 5. Th ro u g h th i s t ran s act i o n p et i t io n er i n t en d edt o m ak e a n ett ax ab l e g iftt o th e Irrev o cab l e Tru s tt o th e ex t en t th atth e fai r m ark etv al u e o f h i s i n t eres t i n An g u s
ex ceed edth e fai r m ark etv al u e o f t h e s i n g l e-l i fe p ri vat e an n u i ty . IV. Op erat i on s o f Rab b i tan d An g u s PM G o wn edthe cl as s A v o t i n g u n i t s , a 0 .2 % o wn ers hi p i n t eres t , i n b o th Rab bi tan dAn g us . Th es e en t i t i es were m an ag ed s im i l arl y . M arg aret was th e s o l e [* 8 ]- 9
-

[* 9 ] o wn er o f PM G an d was ch i ef m an ag er o f b o th Rab b i tan dAn g u s. Th e LLC ag reem en t s o f b o th Rab b i tan dAn g u s g av e h er a l i fet i m e ap p oi n t m en t as ch i ef
m an ag er. Th e ag reem en t s al l o wedh er t o b e rem o v edfo r cau s e an dal s o p ro v i d ed h er wi th th e ri g h tt o d es i g n at e a s u cces s o r ch i ef m an ag er. Pu rs uan tt o th e ag reem en t s th e ch ief m an ag er was en t i t l ed t o reas o nab l e
co m p en s at i o n ; h o wev er, M arg aret ch o se n o tt o recei v e co m p en s at i o n . M em

b ers h ad th e ri g htt o ap p ro v e co m pen s at i o n , b u ti f t he ch i ef m an ag er was a m em b er o r
an affi l i at e o f a m em

b er, h e o r s h e co u l dn o tp art i ci pat e i n t h e co m p en s at i o n ap p ro v al p ro ces s . Th e ag reem en t s d efi n ed“ m em b er” as th e h o l d er o r h ol ders o f th e i s s uedan d o u ts t an d i n g m em b ers h i p u n i t s wh i ch were d i vi d ed i n t o cl as s A
v o t i n g m em

b ers h i p u n i t s an dcl as s B n o n v o ti n g m em b ers h ip u n it s . Th ey

d efi n ed

“ affi l i at e” t o i n cl u d e a p ers on wh o co n tro l s o r i s co n tro l ledb y a m em b er. Ho l d ers o f cl as s A u n i t s p o s s es s edal l o f t h e v o t i n g p o wers fo r al l p u rp o ses , wh ereas h o l d ers o f cl as s B u n i t s h adn o v o t i n g p o wer. Cl as s B u n i t s co u l dn o t
v o t e o n o r p art i ci pat e i n an y p ro ceed i n g s i n wh i ch th e en t it y o r i t s m em

b ers t o o k act i on . Th e LLC ag reem en t s co nt ai n edp ro vi s i o n s ab o u ttran sferri n g m em b ers h i p
u n i t s t o a p ers on o ther t h an th e i n i t i al m em b ers . Th ey

req ui redth e fu l l co n s en to f al l m em b ers o wn i n g cl as s A u ni t s b efo re a m em b er co u ldtran s fer al l o r p arto f- 1 0 -

[* 1 0 ] th ei r u n i t s , u n l es s th e p ers o n t o wh o m th e u ni t s were b ei ng tran s ferredwas a

“p erm i t t edtran s feree”. “ Perm i t t edtran s feree” was d efi n edt o i ncl u d e an y l i n eal d es cen dan t o f p et i t io n er o r Fl o ren ce, a t ru s tcreat edfo r th e ex cl u s i v e b en efi to f
an y o n e o r m o re s u ch l i neal d es cen d an t s an d/ o r t h ei r s p o us es , an d , i n th e cas e o f Rab bi t , a ch ari t ab l e o rg an i zat i o n . Nei ther t h e Rab b itn o r th e An g u s cl as s B u n i t s h av e b een s o l d s i n ce t h ei r
as s i g n m en tt o th e GRAT an dth e Irrev o cab l e Tru s t , res p ect i vel y . Th ey h av e n ev er b een offered fo r s al e. V. Gi ftTax Retu rn an d No t i ce o f Defi ci en cy Pet i t i o ner t i m el y

fi l edh i s 2 0 13 Fo rm

7 09 , Un i t edSt at es Gi ft(an d Gen erat i o n -Sk i p p i n g Tran s fer) Tax Retu rn , al o ng wi th v al uat i o n ap p rai s al rep o rt s p rep aredb y

Val u e Co n su l t i n g Gro up (VCG). Un d er t h e GRAT ag reem en t p et i t i o n er’ s an nu i ty

p aym en t s equ al edth e fai r m ark etv al u e o f as s et s tran s ferredt o th e GRAT p lu s th e req u i reds t atu t o ry i n t eres t . OnSch edu l e A, Co m pu t at i o n o f Tax ab l e Gi ft s , h e rep ort eda t o t al t ax ab l e g i fto f zero fro m th e t ran s fer o f t h e 9 ,9 8 0 Rab bi tcl as s B u n it s t o the GRAT. Fo r t h e t ran s fer o f th e 9 , 9 8 0 cl as s B u n i t s o f An g u s t o the Irrev o cab l e Tru s t, h e rep o rt eda t o t al t ax ab l e g i fto f $ 9 ,9 6 6 ,6 5 9 o n Sch edu l e A. Pet i ti o n er co m p u t ed th e n ett ax ab l e g i ftres ul t i n g fro m th e s i ng l e-l i fe p ri v at e an n u i ty

u s i n g th e v al ues VCG es t i m at edfo r t he An g u s cl as s B u ni t s .- 1 1 -

[* 1 1 ] VCG’ s ap p rai s al rep o rt s p ro v i dedth e fo l l o w i ng v al u at i o n s o f each en t i ty :

Val u at i o n o f Rab b it Fai r m ark etv al u e Val u e es t im at e o f 1 00 % co n tro l l i n g i n t eres t (as o f Oct o b er 9 , 2 0 1 3) $ 9 ,1 0 2,7 5 7 .0 0 Di v i d edb y : To t al u n i t s o u t s t an d i n g 1 0 ,0 0 0 Val u e p er u n i t(co nt ro l l i n g o wn ers h i p b as is ) $ 9 1 0 .2 8 Les s : Lacko f co n tro l d i sco un t(1 3 .4 %) ($ 1 2 1 .5 3 ) Val u e p er u n i t(m ark et ab l e, m i n o ri ty o wn ers h i p b as i s ) $ 7 8 8 .7 5 Les s : Lacko f m ark et ab i l i ty d i s co u n t(2 5 %) ($ 1 9 7 .1 9 ) No n m ark et ab l e, m i no ri ty fai r m ark etv al u e p er cl as s B n o n v o t i n g m em

b ers h i p u n i t $ 5 9 1 .5 6 Val u e o f 9 ,9 8 0 cl as s B n o n v o ti n g u n i t s $ 5 ,9 0 3,7 6 8 .8 0

Val u at i o n o f An g u s Fai r m ark etv al u e Val u e es t im at e o f 1 00 % co n tro l l i n g i n t eres t (as o f No v em

ber 1 , 2 0 1 3 ) $ 3 1 ,9 7 0 ,6 8 3 .0 0 Di v i d edb y : To t al u n i t s o u t s t an d i n g 1 0 ,0 0 0 Val u e p er u n i t(co nt ro l l i n g o wn ers h i p b as is ) $ 3 ,1 9 7 .0 7 Les s : Lacko f co n tro l d i sco un t(1 2 .7 %) ($ 4 0 6 .0 3 ) Val u e p er u n i t(m ark et ab l e, m i n o ri ty o wn ers h i p b as i s ) $ 2,7 9 1 .0 4 Les s : Lacko f m ark et ab i l i ty d i s co u n t(2 5 %) ($ 6 9 7 .7 6 ) No n m ark et ab l e, m i no ri ty fai r m ark etv al u e p er cl as s B n o n v o t i n g m em

b ers h i p u n i t $ 2,0 9 3 .2 8 Val u e o f 9 ,9 8 0 cl as s B n o n v o ti n g u n i t s $ 20 ,8 9 0 , 9 3 4 .4 0- 1 2 -

[* 1 2 ] VCG u s edth e ad

ju s t edn et -as s etm et h odu n d er t h e co s tap p ro ach t o d et erm i n e t h e v al ues o f Rab b i tan do f An g u s as o f t h ei r res p ect iv e ap p rai s al
v al u at i o n d at es . Si n ce t h e s ubm i s si o n o f p et i t i o n er’ s t ax retu rn , th e p art i es h av e
s t ip u l at edth atthe fai r m ark etv al u e o f as s et s h el d i n Rab b i tas o f Oct o ber 9 , 2 0 1 3 , i s $ 9 ,0 6 7,0 7 4 . To d et erm in e t he n o n m ark et ab l e, m i n o ri ty fai r m ark etv al u e p er cl as s B u n i tfo r each o f Rab b i tan dAn g u s, VCG co n cl ud ed th ati twas n eces s ary t o
co n si d er d i s co u n t s fo r l acko f co n tro l an dl acko f m ark et ab i l i ty . To d et erm i n e t h e l acko f co nt ro l d i s co u n tfo r Rab b i t th e VCG rep ortl o o k ed ata s tu dy th atco m pi les co n tro l -p rem i u m

d at a an dm i no ri ty

s t o cki n t eres ts h el di n p ub l i cl y o wn ed cl o s ed -en dm

u tu al fu n ds i n v es t i ng i n p ubl i cl y trad ed s ecu ri t i es . Becau s e o f Rab b i t’ s s m al l s i ze an dl ack o f d iv ers i fi cat i o n, VCG’ s rep o rts el ect eda l acko f co n tro l d i sco un to f 1 3 .4 %, wh i ch was atth e h ig h en d o f t h e ran g e o f d i s co u n ts i n d i cat edfo r cl o s ed -en dm utu al fu n dd at a t h atVCG co n s i d ered
. To d et erm i n e t h e l acko f co nt ro l d i s co u n tfo r An g us th e VCG rep o rtl o o k ed ata s tu dy th atco m pi les co n tro l -p rem i u m

d at a an dcl os ed -en dm

u tu al fu n d s . Th e rep o rtco n cl ud edth atth e l acko f co n tro l d i s co u n t was 1 2 .7 %
. To d et erm i n e t h e l acko f m ark et ab i l i ty d i s co u n tfo r Rab b i t the VCG rep o rt l o o k edatv ari o u s s tu di es th atad dres s ed th e ap pro p ri at e d i s co u n t s fo r l acko f
m ark et ab i l i ty

o f cl os el y

h el d equ it y

i n t eres t s , i n cl u d i n g res tri ct eds t o cks tu d i es .- 1 3 -

[* 1 3 ] VCG’ s rep o rtco n cl ud edth at th e l ack o f m ark et ab i l i ty d i s co u n t fo r Rab b i t
was 2 5%. Th e rep o rtu s eda s i m i l ar m et h o dfo r An g u s an dco n cl u d edth atth e l ack
o f m ark et ab i l i ty d i s co u n twas 2 5 %. OnJ an u ary

2 9 , 2 0 1 8 , res p o n d en ti ss u eda n o t i ce o f d efi ci en cy d et erm i n i n g th atp et i t i o n er h adu n d ers t at edth e fai r m ark etv al u e o f t h e 9 ,9 8 0 cl as s B u n i t s o f Rab bi ttran s ferred t o th e GRAT an di n creas i n g the fai r m ark etv al u e fro m $ 5 ,9 0 3 ,7 6 9 t o $ 9,0 4 8 ,8 6 6 . Res p o n d en t al s o d et erm i n edth atp et i t i o n er h ad
u n d ers t at edth e fai r m ark etv al u e o f t h e 9 ,9 8 0 cl as s B u n i t s o f An g u s t ran sferred t o th e Irrev ocab l e Tru s t an d i n creas edth e fai r m ark etv al u e fro m $ 20 ,8 9 0 ,9 34 t o $ 3 1 ,8 8 4 ,4 0 3 . Res p o n d en tco rres p o n d i n g l y i n creas edth e n etv al u e o f t h e g i ftfro m $ 9 ,9 6 6 ,6 5 9 t o $ 17 ,8 1 9 ,1 3 9
. OPINION I. Bu rd en o f Pro o f Gen eral ly , th e Co m

m i s s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h o se d et erm i n at i o n s erro n eo u s . Ru l e 1 4 2 (a)(1 ); W el ch v . Hel veri ng , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Th e b urd eno f p ro of m ay s h i ft t o th e Co m

m i s s io n er i f t h e t ax pay er
es t ab l i s h es th ath e o r s h e co m p l i edwi th th e req u i rem en t s o f s ect i o n 7 4 9 1 (a)(2 )(A)- 1 4 -

[* 1 4 ] an d (B) t o s ubs t an t i at e i t em s , t o m ai n t ai n req u i redreco rd s , an d t o co o p erat e fu l l y wi th th e Co m

m is s i o n er’ s reas o n ab l e req u es t s . Pet i t i o ner co n ten d s th ath e m eet s th e req ui rem en t s o f s ect io n 7 4 9 1(a) an d th u s th e b u rd eno f p ro of s h ift s t o res p on d en treg ard i n g the fai r m ark etv al u e o f h i s g i ft s . Th e d et erm i nat i o n o f fai r m ark etv al u e i s a qu es t i o n o f fact . Es t at e o f Newh o us e v . Co m

m i s s i on er, 9 4 T.C. 1 9 3 , 2 1 7 (1 99 0 ). Th e p art i es ’ ex p ert s o ffer
co n tras t in g co ncl u s i o n s o f v al u e o f t h e t ran s ferred i n teres ts b as edo n d i fferi n g i n t erp ret at io n s o f t h e rel ev an tfact s . Ho wev er, we are n o t b o u n db y th e o p i n i o n o f
an y ex p ertwi tn es s wh en th ato p i n i o n i s co n trary t o o u r o wnju d g m en t. Es t at e o f Hal l v . Co m

m i s s i on er, 9 2 T.C. 3 1 2 , 3 3 8 (1 9 8 9 ). W e res o l v e th e v al uat i o n i s s u e o n th e p rep o n d eran ce o f t h e ev i d en ce i n th e reco rdwi th th e g u i d an ce o f t h o s e ex p ert
o p i n i o n s th atwe fi n dm o s th el pfu l . See Es t at e o f Bo ng ardv . Co m m i s s i o n er, 1 2 4 T.C. 9 5 , 1 1 1 (2 0 0 5 ). II. Ev i d en t i ary

Is s u e In acco rd an ce wi th th e Co u rt ’ s s t an di n g p ret ri al o rd er an dRu l e 1 4 3 (g ),
res p o n d en t p ro v i d edt o p et it i on er an ds ub m i t t edt o th i s Co u rtM arkM it ch el l ’ s
ex p ertrep o rt s . Inh i s rep o rt s M r. M i t ch el l o p i nes o n wh ath e co n si d ers t o b e t h e fai r m ark etv al u es o f t h e 9 ,9 8 0 cl as s B u n it s o f b ot h Rab b i tan d An g us .- 1 5 -

[* 1 5 ] Du ri n g tri al p et i ti o n er o bject edt o M r. M i t ch el l’ s ex p ert rep o rt s’ b ei n g ad m i t t edi n t o ev i d en ce. Th e Co u rtd eferred ru l i n g o n h i s o b j ect i on . Th e M i t ch el l rep o rt s were m ark ed , an dt es t i m o n y o f res p o n d en t ’ s ex p ertwas h eard
. 6 Wh et h er th e rep o rt s an d t es t i m o n y wi l l b e recei v edi nt o ev i den ce an dco n s i dered i n d et erm i n i n g th e v al u at i on s o f Rab b i tan dAn g u s d ep en d s o n th e ap p li cat i o n o f p ri n ci p l es ex p res s edi n Daub ertv . M errel l Do w Ph arm ., In c., 5 0 9 U.S. 5 7 9 (1 9 9 3),
an d ru le 7 0 2 o f th e Fed eral Ru l es o f Ev i d en ce. 7 Ru l e 7 0 2 o f t h e Fed eral Ru l es o f Ev i d en ce p ro v i d es : A wi tn es s wh o i s qu al i fi ed as an ex p ert b y kn o wl ed g e, s k i ll , ex p eri en ce, t rai n i n g , o r edu cat i o n m ay t es t i fy i n th e fo rm

o f an o p i n i o n o r o th erwi s e i f: (a) t h e ex p ert ’ s s ci en t i fi c, t ech n i cal , o r o th er s p eci al i zed kn o wl ed g e wi l l h el p t h e t ri er o f fact t o u n d ers t an dth e ev i d en ce o r t o d et erm i ne a fact i n i s su e; (b ) t h e t es t i m o n y

i s b as ed o n s uffi ci en tfact s o r d at a; (c) t h e t es t i m o n y

i s th e p ro du cto f rel i ab l e p ri n ci p l es an d m et h o d s ; an d

6 W i th ag reem en to f t h e p art i es we d i rect edth e ex p ertwi tn es s es t o t es t i fy co n cu rren t ly . Th e p ro cedu re was i m p l em en t edi n s ub s t an t i al ly th e s am e way

as i n Ro v ak at , LLC v
. Co m

m i s s i o n er, T.C. M em o . 2 0 1 1-2 2 5 . Th e co n cu rren tex p ert t es t i m o ny was i n ad d i t io n t o t h e Co u rt ’ s cu s t o m ary p ract i ces reg ard i n g ex pert wi tn es s es co n s i s t en t wi th Ru l e 1 4 3 (g ).

7 Pro ceed i ng s o f t h i s Co u rtare co n du ct edi n acco rd an ce wi th th e Fed eral Ru l es o f Ev i d en ce. See s ec. 7 4 5 3
.- 1 6 -

[* 1 6 ] (d ) t h e ex p erth as rel i ab l y ap p l i edth e p ri n ci p l es an dm eth o d s t o th e fact s o f t he cas e. In Daub ert , 5 0 9 U.S. at 59 2 -5 9 3 , th e Suprem e Co u rts tres s edth e tri al
co u rt ’ s ro l e as a “ g at ek eep er” i n ex cl u d i n g atthe o u t s etev id en ce t h ati s u n rel i ab l e
o r i rrel ev an t . Th e rel i ab i li ty an drel ev an cy

s t an d ard s are em

b o d i edi n ru l e 7 0 2 o f th e Fed eral Ru l es o f Ev i d en ce, an d th ey ap pl y equ al l y t o ex p ertt es t i m o n y

th ati s
n o t“ s ci en t i fi c”. Ku m

h o Ti re Co . v . Carm i ch ael , 5 2 6 U.S. 1 37 , 1 4 8 (1 9 99 ). M r. M i t ch el l was qu al i fi ed , wi th o u to b ject io n fro m

p et i t i o ner, as an ex p ert i n b u s i n es s v al u at i o n , i n cl u di n g th e v al uat i o n o f n o n co n tro l l i n g m em b ers h i p i n t eres t s i n fam i l y

i nv es t m en t ho l d i n g co m

p an i es . Pet i ti o ner co n t en d s th atth e M i t ch el l rep ort s are “ i rrel ev an t , s p ecu l at i v e, an d u n rel i ab le”. Pet i t io n er fu rt h er
co n ten d s t h atth e M i tch el l rep o rt s ’ v al uat i o n s are i nco ns i s t en t wi th th e ap p l i cab l e Treas u ry g ui d el in es an d th at i n s t eadth ey ap p l i ed a n o v el v al u at io n ap p ro ach
. Si n ce t h ere i s n o d i sp u te ab o u tth e qu al i fi cat io ns o f M r. M i t ch el l , we fo cu s
o n th e rel ev an cy

an d t h e rel i ab i l i ty

o f h i s v al u at i o n ap p ro ach
. Ru l e 7 0 2 o f t h e Fed eral Ru l es o f Ev i d en ce i s v i ewed as a ru l e o f ad m i s s i b i l it y rat her t h an
ex cl u s i o n . Arco ren v . Un i t edSt at es , 9 29 F.2 d 1 2 3 5 , 1 2 3 9 (8 th Ci r. 1 9 9 1). Wh en
an ex pert ’ s m et h o d o lo g y , n o tqu al ifi cat i on s , i s i n d i s p u t e, ex cl us i o n o f t h e ex p ert- 1 7 -

[* 1 7 ] rep o rt i s n o twarran t ed
. See Syn erg et i cs , In c. v . Hu rs t , 4 7 7 F.3 d9 49 , 9 5 6 (8 th Ci r. 2 0 0 7 ). Th e M it ch el l rep o rt s s et fo rt h th e fact s an dd at a rel i edupo n , th e
m et h o do l o gy

em p l o y ed , an d t h e m an n er i n wh ich th e m et h o do l o g y was ap p l i edt o th e fact s an dd at a. Pet i t i o n er h adth e o p p ortu n it y duri n g cro s s -ex am in at i o n t o ch al l en g e M r. M i t ch el l ’ s as s u m p t i o n s . See i d. at9 5 5 -9 5 6
. Acco rd i n g l y , the M i t ch el l rep ort s are ad m i tt edi nt o ev i d en ce. III. Gi ftTax Val u at i o n Pri n ci p l es Sect io n 2 5 0 1 (a) i m

p o s es a t ax o n th e t ran s fer o f p ro p ert y b y g i ftm ad e du ri n g th att ax ab l e y ear b y an i n d i v i du al
. Th e d o n o r i s p ri m ari l y res p o n s ib l e fo r p ay i n g th e g i ftt ax . Sec. 2 5 02 (c). Th e am o u n to f g iftt ax i s b as edo n th e ag g reg at e
v al u e o f t ax ab l e g i ft s m ad e du ri n g th e y ear, am o n g o th er th i n g s . See s ec. 2 5 0 2 (a) (i m p o s i n g th e g i ftt ax on a cu m u l at i v e b as is ). Tax ab le g i ft s are t h e t o t al am o u n to f g i ft s m ad e du ri n g th e y ear, l es s cert ai n d educt i o n s . Sec. 2 5 0 3 (a). Th e t o t al
am ou n to f g i ft s i n th e y ear i s th e s u m o f t h e v al u es o f t h e g i ft s m ad e i n the y ear i n
ex ces s o f the ex cl u s i o n am o u n ti n s ect i o n 2 5 0 3 (b ). Sec. 2 5 .2 5 0 3-1 , Gi ftTax Reg s . Th e v al u e o f a g i fto f p ro p ert y i s g en eral l y the v al u e o f th e p ro p ert y o n the d at e o f t h e g ift . See s ec. 2 5 1 2 (a). Th e fai r m ark etv al u e o f t h e p ro p ert y i s th e p ri ce atwh i ch the p ro p ert y wo u l dch an g e h an d s b etween a wi l l i n g b u y er an da- 1 8 -

[* 1 8 ] wi ll i n g s el l er, n ei th er b ei n g u n d er an y co m p u l s i o n t o b u y

o r t o s el l an db o th h av in g reas o n ab l e kn o wl ed g e o f t h e rel ev an t fact s . See Un i tedSt at es v . Cart wri g h t , 4 1 1 U.S. 5 4 6 , 5 5 1 (1 9 7 3 ); s ec. 2 5 .2 5 1 2 -1 , Gi ftTax Reg s . Th e wi l li n g b u y er an ds el l er are h y

p o th et i cal p ers on s , rat her t h an s p eci fi c i nd i v i du al s o r
en t i t i es , an dth e i n d i v i du al ch aract eri st i cs o f t h es e h y p o th et i cal p ers o n s are n o t
n eces s ari l y

th e s am e as th e i n d i v i du al ch aract eri s t ics o f t h e act u al b u y er o r t h e actu al s el l er. Es t at e o f Bri g h tv . Un i tedSt at es , 6 58 F.2 d 9 9 9 , 1 0 05 -1 0 06 (5 th Ci r. 1 9 8 1 ); Es t at e o f Kah n v . Co m m i s s i o n er, 1 25 T.C. 2 2 7, 2 3 1 (2 0 0 5 ); Es t at e o f Dav i s
v . Co m m i s s i o n er, 1 1 0 T.C. 5 30 , 5 3 5 (1 9 9 8). Th e h y p o th et i cal wi l li n g b uy er an dth e h y p o th et i cal wi l l i n g s el ler are p res u m edt o b e d ed icat ed t o ach i ev i n g th e m ax i m u m eco no m i c ad v an t ag e. Es t at e
o f Dav i s v . Co m

m i s s i o n er, 1 10 T.C. at5 3 5 . Tran s act i o ns th atare u n l i k el y an d p l ai n l y co n traryt o t h e eco n om i c i n t eres t s o f a h y p o th et ical wi l l i n g b u y er o r a h y p o th et i cal wi ll i ng s el l er are n o t refl ect i ve o f fai r m ark etv al u e. See Es t at e o f Newh o us e v . Co m

m i s s i on er, 9 4 T.C. at2 3 2
. Inv al u i ng an LLC i n t eres tth e ri g h t s , res tri ct i o n s , an dl im i tat i o n s o f t h e v ari o u s cl as s es o f i nt eres t s m u s tb e co n s i d ered
. Id . at2 1 8
.- 1 9 -

[* 1 9 ] IV. Ex p ert s ’ Val u at io n s Pet i t i o ner rel i es o n th e v al u at io n d et erm i n at i o n s o f M r. Frazi er, an d
res p o n d en t rel i es o n t h e v al u at i o n d et erm in at i o n s o f M r. M it ch el l. Bo th ex p ert s p rep aredrep o rt s co n t ai n i n g th ei r res p ect i v e an al y ses an dco n cl us i o n s o f t h e fai r
m ark etv al u es fo r t he 9 ,9 8 0 cl as s B u n i t s o f b o th Rab b i tan dAn g u s . W e m ay ad o pto r reject an ex p ert ’ s o p i n i o n i n wh o l e o r i n p art . Es tat e o f Dav i s v . Co m m i s s i o n er, 1 1 0 T.C. at5 3 8; s ee al s o Bu ffal o To o l & Di e M fg . Co . v . Co m m i s s i o n er, 7 4 T.C. 4 41 , 4 5 2 (1 9 8 0 ). W h ere ex pert s o ffer d i v erg en t es t i m at es
o f fai r m ark etv al u e, we wei g h each es t i m at e b y an al y zi n g th e fact o rs wh i ch th o s e
ex p ert s u s edt o arri v e atth ei r co n cl u s i o n s . Es t at e o f Dav i s v . Co m m i s s i on er, 1 1 0 T.C. at5 3 8 ; Cas ey

v . Co m m i s si o n er, 3 8 T.C. 3 5 7 , 3 8 1 (1 9 6 2 ). M r. Frazi er u s eda co m

b i n at i o n o f th e m ark etap p ro ach an dth e i n co m e ap p ro ach . He co n cl u d edth ato n Oct ob er 9 , 2 0 13 , th e 9 ,9 8 0 cl as s B u n i t s o f Rab b i t
were wo rt h $ 5 ,8 84 ,0 00 o n a n o n co n tro l l i n g , n o n m ark et ab l e b as i s , aft er ad ju s t m en t s an dd i s co u n t s . He v al u edeach u n itat$ 5 89 .5 8 . M r. Frazi er
co n cl u d ed th at o n No v em b er 1 , 2 0 1 3 , th e 9 , 9 8 0 cl as s B u n i t s o f An g u s were wo rt h $ 1 9 ,8 5 4 ,0 0 0 o n a n o nco n tro l l in g , n o n m ark et ab l e b as i s , aft er ad ju s t m en t s an d d i s co u n ts . He v al u edeach u ni tat$ 1 , 9 8 9.3 9
.- 2 0 -

[* 2 0 ] In h i s an al y s i s M r. M i tch el l rel iedo n th e n etas setv al u e (NAV) o f Rab b i t th atwas s t ip u l at edb y

th e p art i es an do f An g u s as d et erm i n edb y VCG. He
co n cl u d ed th at an y

wi l l i n g s el l er o f t h e cl as s B u n i t s wo ul d l o o kt o acq u i re co n t ro l
o f t h e 0 .2 % i n t eres th el db y th e cl as s A u n i t h o l d er t o av o i dth e l arg e d i s co u n t s th ata wi l l i ng b u y er wo u l ds eek . M r. M i t ch el l cal cu l at ed$ 1 3 0 ,0 0 0 an d$ 45 0 ,0 0 0
as th e reas o n ab l e p rem i u m s a h y p o th et i cal s el l er co u l d p ay PM G fo r i t s 0
. 2 % i n t eres t s i n Rab bi tan dAn g u s, res p ect i vel y . M r. M i t ch el l co n cl ud edth ato n Oct o b er 9 , 2 01 3 , th e 9 ,9 8 0 cl as s B u n i t s o f Rab bi twere wo rt h $ 8 ,9 1 8 ,9 4 0 an deach u n i t was wo rt h $ 8 9 3 .6 8. He co ncl u d ed th ato n No vem

b er 1 , 2 01 3 , th e 9 ,9 80 cl as s B u ni t s o f An g us were wo rt h $ 3 1 ,4 5 6 ,7 4 2 an deach u n i twas wo rt h $ 3 ,1 5 1 .9 8
. A. NAV M r. Frazi er as s es s edi n d ep en d en t l y th e as set s co n tri b u tedt o Rab b i tan d d et erm i n eda co m

b in edNAV o f $ 9 ,0 66 ,6 5 9 as o f Oct ob er 9 , 2 0 1 3 . Th e p art i es
s t ip u l at edth atthe NAV was $ 9 ,0 6 7 ,0 7 4 as o f Oct ob er 9 , 2 0 13
. 8 As o f t h e d at e o f
v al u at i o n Rab bi t ’ s as s et s i n cl u d edcas h an dcas h equ i v al en ts an dEco l ab s t o ck
. M r. Frazi er l o o k edatth e av erag e h i g h an dl ow p ri ce p er s h are o f Eco l ab s t o cko n Oct o b er 9 , 2 0 1 3 , t o d et erm i n e t h e fai r m ark etv al u e as o f t h e v al u at i o n d at e.

8 Th i s i s am o u nt i s l o wer t h an the $ 9 ,1 0 2 ,7 5 7 rep ort edo n the VCG rep o rt .- 2 1 -

[* 2 1 ] M r. M i t ch el l u s edth e NAV s t i p u l at edb y th e p art ies . M r. Frazi er’ s
v al u at i o n i s $ 4 1 5 l es s th an th e v al u e wh i ch th e p art i es s t i p ul at ed . W e co n cl u d e th atth e NAV as o f Oct o b er 9 , 2 0 1 3 , was $ 9 ,0 6 7 ,0 74 . W e d o n o ts ee a reas o n t o ch an ge t he NAV fro m

th atwh i ch was s t i p u l at edb y th e p art i es . M r. Frazi er as s es s edi n d ep en d en t l y th e as set s co n tri b u tedt o An gu s an d d et erm i n eda co m

b in edNAV o f $ 3 0 ,9 3 0 ,0 9 9 as o f No v em b er 1 , 2 0 1 3 . VCG
co n cl u d ed th at th e NAV was $ 3 1 ,9 7 0 ,6 8 3 as o f No v em b er 1 , 2 01 3 , an dth atv al u e
was rep o rt ed i n VCG’ s ap p rai s al rep o rtat t ach edt o p et i t i o n er’ s 2 0 1 3 Fo rm 7 0 9
. M r. Frazi er co m

p ut edth e v al u es o f Pal l ad i u m In v es t m en t s an dGro s s m an In v es t m en t s b u td i dn ot reach th e s am e res u l t s as VCG. Pal l ad i u m In v es t m en t s h el di n v es t m en t s i n a p o rt fo l i o o f co m pan i es th atwere i n tran si ti o n an d req u i reda
n ew fi n an ci al o r o p erat i on al s trat eg y . Gro s s m an In v es t m en t s h el di n v es t m en t s i n
v en tu re cap i tal fu n ds . M r. Frazi er s t art edwi th VCG’ s v al u at i o n s o f $ 7 ,3 1 6 ,8 8 2 fo r Pal l ad i u m

In v es t m en t s an d$ 4 0 6 ,4 0 6 fo r Gro s sm an In v es t m en t s . He th en ap p li eda m i n o ri ty

i n t eres td i s co u n to f 1 5 % an dm ark et ab i l i ty d i s co u n t o f 2 0 % wh i ch res u l t edi n a v al u at io n o f $ 5 ,1 2 5 , 8 8 0 fo r Pal l ad i u m In ves t m en t s an d $ 2 7 6 ,3 5 6 fo r Gro ss m an In v es t m en t s . Res p o nd en t o p p os es th es e ad ju s t m en t s an d
co n ten d s t h atth e ad

ju s t m en t s res u l ti n m

u l t i p l e t i ers o f d i s co un t s i f t h e Frazi er- 2 2 -

[* 2 2 ] rep o rt ’ s v al u at i o n o f An g u s i s accep t eds i n ce h i s v al uat i o n i n cl u d es fu rt h er d i s co u n ts . M r. M i t ch el l u s edth e s am e NAV d et erm i n edb y VCG i n i t s ap p rai sal rep o rt . M r. Frazi er’ s v al uat i o n i s $ 1 ,0 40 ,5 8 4 l es s th an the v al u e p et i t i o ner rep o rt edo n th e
s ch edu l es an d at t ach m en t s t o h i s 2 0 13 Fo rm 7 0 9 . W e co n cl ud e t h atth e NAV o f An g u s as o f No v em

b er 1 , 2 0 1 3 , was $ 31 ,9 7 0 ,6 83 . W e fi n dn o ju s t i fi cat i o n t o l o wer t h e NAV o f An g u s t o a v al u e th ati s s i gn i fi can t l y l o wer t h an th e v al u e t o wh i ch p et i t i on er p rev i ou s ly ad m i t t ed . See Es t at e o f Hal l v . Co m m i ss i o n er, 9 2 T.C. at3 3 7 -3 3 8 (“ [T] h e rep o rt edv al u es are an ad m i s si o n b y * * * [t h e t ax p ay er] , s o th atl ower v al u es can n o tb e s ub s t i tu t edwi th o u t co g en tp ro of t hatth e rep o rt ed
v al u es were erro n eo u s .”). B. Frazi er Rep o rt s ’ Val u at i o n s Aft er M r. Frazi er d et erm i n edth e NAVs o f Rab b i tan dAn gu s , h e u s edth e
m ark etap p ro ach an d th e i n co m e ap p ro ach t o d et erm in e th e v al u e o f th e cl as s B
u n i t s o f b o th Rab bi tan dAn g u s.

1
. Val u at i o n o f Rab b it M r. Frazi er u s edthe m ark et ap p ro ach an d l o o ked atav ai l ab l e d at a fro m
em pi ri cal s tu d i es . Inh i s rep o rth e an al y zedcl o s ed -en dfu n d s t o d et erm i n e th e l ack
o f co n tro l d i s co un tan dres tri ct eds t o cks tud i es t o d et erm i n e t h e l acko f- 2 3 -

[* 2 3 ] m ark et ab i l i ty d i s co u n t . Th en h e p erfo rm eda v al u at i o n u s i n g the i n co m e ap p ro ach . Each an al y si s reach eda d i fferen t co n cl u s i o n , an d t h e rep o rtwei g h t ed b o th equ al l y t o d et erm in e t he fai r m ark etv al u e.

a. M ark etAp p ro ach M r. Frazi er s el ect edan d an al y zed3 3 cl o sed -en dfu n d s fro m a d at ab as e p ro v id edb y

M o rn i n g s tar, In c. (M o rn i n g s tar). Acco rd i ng t o M r. Frazi er, cl o s ed
en d fu nd s h av e s o l dh i s t o ri cal l y ata d i s co u n tb ecau s e o f t h e n o nco nt ro l l i n g n atu re
o f an i n v es t m en ti n a cl o s ed -en dfu n d
. Inh is rep o rt M r. Frazi er ex p l ai n s th atth e l acko f co n tro l o v er d ay -t o -d ay o p erat i o n s an di n v es t m en td eci s i o n s , an d the i n ab i l i ty t o l i qu i d at e as s et s o f t h e en t i ty are i n v es t m en t ch aract eri st ics s h aredb y i n v es t o rs i n p ub li cl y

trad edcl o s ed -en dfu n d s. He h i g h l i g h t s d ifferen ces b et ween
an i n v es t m en ti n Rab b it an d an i n v es t m en ti n a cl o s ed -en d fu n d
. Fo r ex am p l e, an i n v es t m en ti n Rab b i ti s i l li qu i d , an di n v es t o rs i n a cl o s ed -en dfu n dare p ro t ect ed b y Secu ri t i es an dEx ch an ge Co m m i s s i on reg u l at i o ns . To d et erm i n e t h e l acko f co nt ro l d i s co u n tM r. Frazi er co n si d eredth e d ay -t o -d ay

m an ag em en to f Rab b i t an dth e ab i l i ty o f t he o wn er o f t h e cl as s B u n it s t o i nfl u en ce l i qu i d at i o n o f t h e co m p an y ’ s as s et s . He d et erm i n edth atth e m ed i an
an d av erag e d is co u nt s fo r l acko f co n tro l o f t h e 3 3 cl os ed -en dfu n d s were 1 1 .2 %- 2 4 -

[* 2 4 ] an d 1 0
. 8 %, res p ect iv el y . He al s o d et erm i n edth atth e l o w-p ay o u t , d o m es t i c equ it y cl os ed -en dfu nd s trad edata m ed i an d is co u n t o f 1 5 .5 % fo r l acko f co n tro l
. Onth e b as is o f h i s an al y s i s o f t h e 3 3 cl os ed -en dfu n d s M r. Frazi er
co n cl u d ed th at a 1 6 .4 % l acko f co n tro l d i s co u n t s h o u l dap p l y t o the p o rt i o n o f Rab bi t ’ s NAV co ns i st i n g o f m ark et ab l e eq ui ty s ecu ri t ies an da n o m i n al 5 % d i s co u n t s h o u ld ap pl y

t o i t s NAV co n s i s t i ng o f cas h an d s h o rt -t erm i nv es t m en t s. He ap p l i edan o v eral l wei g h t edd i s co u nto f 1 5 .1 % fo r l acko f co n tro l
. Nex t , M r. Frazi er u s edres t ri ct eds t o cks tu d i es t o d et erm i n e a l acko f
m ark et ab i l i ty

d i s co u n t . Res tri ct eds t o cks tud i es co m pare p ub li cl y

trad eds t o ck p ri ces t o th e p ri ce o f t h e s am e s t o cks o l di n p ri v at e p l acem en t . Inh i s an al y s i s h e t o o ki n t o co n s i d erat i on th e t erm s o f t h e LLC ag reem en t an d fo cu s edo n th e l i kel i h o o d o f d i ss ol u t i o n , l i kel i h o o do f d i s tri b u t i o n s, ab i l i ty t o wi th draw fu n d s , an d res tri ct i on s o n tran s fers . Hi s an al y s i s co n s i d eredfact ors th atwe o u tl i nedi n M an d el b au m

v . Co m m i s s i o n er, T.C. M em o . 1 9 9 5-2 5 5 , aff’ d, 9 1 F.3 d1 2 4 (3 dCi r. 1 9 9 6 ), wh i ch h e d es cri b ed as th e h o l d i n g p eri o d , th e ri s k o f t h e u n d erl y i n g as s et s , an d th e co m

p an y ’ s d is tri b u t i on p o li cy . He co n cl u d edth atRab b i t ’ s l acko f
m ark et ab i l i ty

d i s co u n t was 2 5 %. Us i n g the m ark et ap pro ach th e Frazi er rep o rt
co n cl u d ed th at th e fai r m ark etv al u e o f Rab b i t’ s 9 ,9 8 0 cl as s B u n i t s was $ 5 ,7 6 1 ,6 4 9
.- 2 5 -

[* 2 5 ] b
. In co m e Ap p ro ach M r. Frazi er u s edthe n on m ark et ab l e i n v es tm en tco m p an y ev al u at i o n (NICE)
m et h o d wh i ch h e d ev el o p edas a v al u at i o n t ech n iqu e ap p l i cab l e t o en t i t i es th at h o l da p ort fo li o o f i n v es t m en tas s et s . Th e NICE m et ho dd et erm i n es a p ri ce th atan i n v es t o r wo u l dp ay

fo r the s ub

jecti n t eres tth atl ack s co n tro l an d m ark et ab il i ty b y t ak i n g i n t o co n s id erat i o n th e i nv es t m en tri s k s an dex pect edretu rn s . Inap p l y i n g th e NICE m et h o d , em

p i ri cal s tud i es were u s edt o d et erm i n e t h e i n crem en tal req u i redrat es o f retu rn i n th e l i g h to f i n fo rm at i o n as ym m etry (l acko f co nt ro l ) an d th e co s to f i l l i qu i di ty

(l acko f m ark et ab il it y ). Us i ng th e NICE m et h o d M r. Frazi er d et erm i n edth atRab b i t ’ s 9 ,9 8 0 cl as s B u n it s h ada fai r m ark et v al u e o f $ 6 ,0 0 6 ,6 5 9
. c. Fai r M ark etVal ue Co n cl u s io n In h i s rep ortM r. Frazi er wei g h t edequ al ly th e o u t co m es o f t h e m ark etan d i n co m e ap pro ach es an dco n cl u d edth atth e fai r m ark et v al u e o f Rab b i t ’ s 9 ,9 8 0 cl as s B u n i t s was $ 5,8 8 4 ,0 0 0
. Th e an al y s i s res u lt ed i n a t o t al d i sco u n tt o Rab b i t ’ s NAV o f ap p ro xi m at el y

3 4 .9 7 %. Hi s an al y s i s i s s u m m ari zedi n th e fo l l o wi n g t ab l e:- 2 6 -

Ap p ro ach Fai r m ark etv al u e W ei g h t (p ercen t ) To tal M ark etap p ro ach $ 5 ,7 6 1 ,6 4 9 5 0 $ 2 , 8 8 0,8 2 4 .5 0 In co m e ap p ro ach 6 ,0 0 6 ,6 5 9 5 0 3 ,0 0 3 ,3 2 9 .5 0 Fai r m ark etv al ue 5 ,8 8 4 ,1 5 4 .0 0 Ro u n d ed 5 ,8 8 4 ,0 0 0 .0 0 Per-u ni tv al u e 5 8 9 .5 8

2
. Val u at i o n o f An g u s M r. Frazi er u s edthe s am e m et h o d o l o g y fo r th e v al uat i on o f An g u s as h e d i d fo r t h e v al u at i o n o f Rab b it
.

a. M ark etAp p ro ach In h i s rep ortM r. Frazi er an al y zedth e m ax i m um , m i n i m

u m , an dm ean d i s co u n ts fo r each as set ty p e An g u s h el d. Fo r t h e m ark et ab l e s ecu ri t ies h e i d en t i fi ed3 3 cl o s ed -en dd o m es t i c eq ui ty fu n d s , u s i n g M o rn i n g s t ar i n fo rm at i o n , co m p arab l e t o a m ajo ri ty

o f An g u s ’ as s et s an d co n cl u ded th atth e m ax i m um d i s co u n t was 2 1
. 1 %, the m i n i m u m d i s co u n t was 1 0 .1 %, an dth e m ean d is co u n t
was 1 5.6 %. He d et erm in edth atth e l acko f co n tro l d i s co u n tap p l i cab l e t o t h e
m ark et ab l e s ecu ri t i es h el db y An gu s was 1 5 .6 % . He d et erm i n ed a 9 % d i s co u n tt o th e n o nm ark et ab l e s ecu ri t i es h el db y Pal l ad i u m

In v es t m en t s an dGro ss m an In v es t m en t s , wh i ch was th e l ower q u art il e d i sco u n to f t h e 1 3 cl o sed -en dco rp o rat e [* 2 6 ]- 2 7 -

[* 2 7 ] b o n dfu n d s t h ath ads i m i l ar i n v es t m en tcri t eri a. He fu rt h er d et erm i n eda 1 2 .3 % d i s co u nt t o the p ro m i ss ory n o t es . A 5 % l acko f co n tro l d i s co u n twas ap p li edt o th e cas h an dcas h eq u i v al en t s h el d b y An g u s . He co n cl u d edth ata l ack
o f co n tro l d i s co un tfo r cl as s B u n it s was 1 2.6 %. Hi s an al y s i s i s s umm ari zedi n th e fo l l o w i n g t ab l e:

As set s Fai r m ark et

v al u e 1 Percen to f

t o t al as s et s Sel ect ed

d i s co u n t (p ercen t ) W ei g h t ed

di s co u n t (p ercen t ) Cas h an d cas h equ i v al en t s $ 3 , 83 2 ,1 8 4 1 2 .4 5 .0 0 .6 M ark et ab l e eq u i ty s ecu ri t i es 1 6,8 3 3 ,6 4 1 5 4 .4 1 5
. 6 8 .5 Pal l ad i u m

In ves tm en t s 5 , 12 5 ,8 8 0 1 6 .6 9 .0 1 .5 Gro s s m anIn v es t m en t s 2 7 6 ,3 5 6 0 .9 9 .0 0 .1 Pro m i s s o ry

n o t es 4 , 86 2 ,0 3 8 1 5 .7 1 2
. 3 1 .9 To t al 3 0 , 93 0 ,0 9 9 1 0 0 .0 1 2 .6 Ov eral l s el ect ed d i s co u n t 1 2 .6

1 Th e fai r m ark etv al u es l i s t edi n th i s co l u m n d i ffer fro m

th e fai r m ark et v al u es d et erm i n edi n th e VCG rep o rtb ecau s e M r. Frazi er i n d ep en d en t l y v al u ed An g u s ’ as s et s. Nex t , M r. Frazi er u s edres t ri ct eds t o cks tu d i es t o d et erm i n e a l acko f
m ark et ab i l i ty

d i s co u n t . He co n cl u d edth atres tri ct eds t o cks tu d i es i n d i cat e a d i s co u n t fo r l acko f m ark et ab i l i ty ap p l i cab l e t o th e cl as s B u n i t s i n th e ran g e o f- 2 8 -

[* 2 8 ] 2 3 % t o 3 4 %. Aft er an al y zi n g at tri b u t es o f t h e cl as s B u n i t s wi th a fo cu s o n th e h o ld i n g p eri odan dl acko f d i s cret i o n ary d i s tri b ut io n s, h e d et erm i n eda 2 5 % d i s co u n t fo r l acko f m ark et ab i l i ty . Hi s m ark etap p ro ach v al u at i o n res ul t edi n a fai r
m ark etv al u e o f $ 2 0,2 3 4 ,1 3 1 fo r 9 ,9 8 0 cl as s B u ni t s .

b
. In co m e Ap p ro ach As wi th Rab b i t M r. Frazi er u s edthe NICE m et h o d i n h i s an al y s is o f An g u s. Th i s m et h o dd et erm i n es the an n u al req u i redrat e o f retu rno f t h e An g u s cl as s B
u n i t s b y l o ok i n g fo r t h e o n e p ri ce t h atb es ts at i s fi es the fi n an ci al p aram et ers o f t h e wi l l i ng b u y er an d th e wi l l i n g s el l er fo r al l p eri o d s ex am i n edb y th e m o del . Onth e b as i s o f t h e m o d el h e co n cl u d edth atth e 9 ,9 8 0 cl as s B u n i t s h ad a fai r m ark et
v al u e o f $ 1 9 ,4 74 ,5 26
.

c. Fai r M ark etVal ue Co n cl u s io n M r. Frazi er wei g ht edequal l y th e o ut co m es o f th e m ark etan di n co m e ap p ro ach es an d co n cl u d edth atth e fai r m ark etv al u e o f t h e 9 ,9 8 0 cl as s B u n i t s was $ 1 9 ,8 5 4 ,0 0 0 . Hi s v al u at i on res u l t edi n a t o t al d is co u n t t o An g us ’ NAV o f ap p ro x i m at el y 3 5 .6 8 %. M r. Frazi er’ s an al y s i s i s s u m m ari zedi n th e fo ll o wi n g t ab l e:- 2 9 -

Ap p ro ach Fai r m ark etv al u e W ei g h t(p ercen t ) T o tal M ark etap p ro ach $ 2 0 ,2 34 ,1 3 1 50 $ 1 0 ,1 1 7 ,0 6 6 .0 0 In co m e ap p ro ach 1 9 , 4 7 4 ,5 2 6 50 9 ,7 3 7,2 6 3 .0 0 Fai r m ark etv al ue 1 9 ,8 5 4 ,3 2 9 .0 0 Ro u n d ed 1 9 ,8 5 4 ,0 0 0 .0 0 Per-u ni tv al u e 1 ,9 8 9 .3 8 C. M i t ch el l Rep o rt s ’ Val u at i o n s In h i s v al u at io n rep o rt s M r. M i tch el l s o u g h tth e p ri ce at wh i ch a 9 9 .8 %
n o n co n tro l l i ng i n t eres two u l dactu al l y b e b o u g h to r s o ld . Acco rd i n g t o M r. M i t ch el l th ere was n o em p i ri cal d at a o n t h e s al e o f a 9 9 .8 % n o n co n tro l li n g i n t eres t . Hi s v al u at i o n s were b as edup o n th e p rem i s e t h atth e reas o n ab l e b u y er o f a 9 9 .8 % i n t eres t co u ld b e ex p ect edt o s eekt o m ax i m i ze h i s o r h er eco n om i c i n t eres tb y

co n s o l i d at i ng o wn ers h i p th ro u g h t h e p u rch as e o f th e 0
. 2 % i n t eres t . M r. M i t ch el l al s o co nt en d s thata wi l l i n g b u y er wo u ldco n s id er t h e l i kel i h o o do f p u rch as in g th e 0 .2 % i n t eres t . M r. M i t ch el l d et erm i n edth ata h y p o th et i cal wi l l i n g s el l er wo u lds eekfi rs t t o acq u i re t h e cl as s A u n i t s fo r a p rem i u m . Acco rd i n g t o h i s rep ort s an d t es t i m o ny , p urch as i n g th e cl as s A u n i t s wo u l dres u l t i n co n s o l i d at edco nt ro l an d [* 2 9 ]- 3 0 -

[* 3 0 ] fu rt h er m ax im i ze t h e v al u e o f t h e cl as s B u n i t s b y redu ci ng an y

d i sco u n t
s o u g htb y a h y p o th et i cal wi l l i n g b u y er. Hi s v al u at i o n fo r Rab bi t b eg an wi th th e NAV s t i p u l at ed b y th e p art i es , an d h i s v al u at i o n fo r An g u s b eg an wi th the NAV d et erm in edi n th e VCG rep ort . To arri v e atth e ap p ro p ri at e p rem i u m s fo r t h e cl as s A u n i t s o f Rab b i tan dAn g u s h e d ev el o p ed a t h eo ret i cal ap p li cat i o n o f t h e d i s co u n t edNAV ap p ro ach . He as s i g n ed t o each en t it y ’ s NAV a 1 0 % l acko f co n tro l d i s co u n tan da 2 0 % l acko f
m ark et ab i l i ty

d i s co u n t . Th i s th eo ret i cal ap p ro ach p ro duced a 2 8 % t ot al d i s co u n t fro m th e NAVs . Th e d i s co u nt edv al u es were t h enu s edt o es t im at e reas o n ab l e p rem i u m s t h ata p ers on wo u ld p ay t o acq u i re t h e cl as s A u n i t s . Th e reas o n ab l e p rem i u m am o u n t s were d edu ct edfro m th e u n d i s co u nt edNAV t o d et erm i n e th e fai r m ark etv al u at io n o f t h e cl as s B u n i ts .

1
. Val u at i o n o f Rab b it Us i n g h is th eo ret i cal ap pl i cat i o n o f a d i s co un t edNAV M r. M i t ch el l d et erm i n edth atRab b i t ’ s cl as s B u n i t s h ada fai r m ark etv al u e o f $ 6 ,5 15 ,2 3 7 . He
s t at edth atth e u n d i s co u nt edv al u es were $ 1 8 ,1 3 4 fo r t he cl as s A u n i t s an d $ 9 ,0 4 8 ,9 4 0 fo r the cl as s B u n i ts . He cal cu lat edth e t h eo ret i cal d i s co u n tb y
s ub tract in g th e d i s co u nt edv al u e fro m th e u n d i s co u n tedv al ue. Th e t h eo ret i cal d i s co u n t o f $ 2,5 3 3,7 0 3 was g reat er t h an th e u n di s co un t edv al u e o f $ 1 8 ,1 3 4- 3 1 -

[* 3 1 ] at tri b u t ab l e t o th e cl as s A u n i t s . Acco rd in g t o M r. M i t ch el l a wi ll i ng s el l er
o f t h e 9 9 .8 % i n t eres two u l db e ex p ect edt o s eekt o l i m i tth e d ol l ar am o u n to f an y d i s co u n t s o u g ht b y a wi l l in g b uy er b y co n s o l i dat i n g o wn ers h i p . He fu rt h er
co n ten d s t h ata wi l l i n g b u y er wo u l db e wi l l i n g t o p u rch as e th e 9 9 .8 % i n t eres tfo r
m o re th an $ 6,5 1 5,2 3 7 b ecau s e h e o r s h e wo u l dreas o n ab ly b el iev e t h ath e o r s h e
co u ldp ay a p rem i u m

t o acq u i re t h e cl as s A u n i t s aft er acq u i ri n g th e cl as s B u n i t s . In h i s rep ort s M r. M i t ch el l es t i m at edth atth e p u rch as e p rem i um wo u l db e 5 % o f t he t h eo ret i cal d o l l ar d i sco u n to f $ 2 , 5 3 3 ,7 0 3 . Th e 5 % p u rch as e p rem i u m equ al ed ap p ro x i m at el y

$ 1 2 7 ,0 0 0 , wh i ch h e ro u n d edt o $ 1 3 0 , 0 0 0 . He redu ced Rab bi t ’ s cl as s B u n i t s’ u n d i s co u n t ed NAV o f $ 9,0 4 8 ,9 4 0 b y th e $ 13 0 , 0 0 0 p u rch as e p rem i u m

t o arri v e ata v al u e o f $ 8 ,9 1 8,9 4 0 wi th a p er-u n i tp ri ce o f $ 8 9 3 .6 8
. 2
. Val u at i o n o f An g u s Fo r t h e v al uat i o n o f An g u s M r. M i t ch el l u s edth e s am e reas o n i n g an d
m et h o do l o gy

th ath e u s edt o an al y ze Rab b it . M r. M i t ch el l rel i ed o n th e NAV o f An g u s d et erm i n edb y

th e VCG rep o rt . Us i n g h i s t h eo ret i cal ap p l i cat i o n o f a d i s co u n tedNAV M r. M it ch el l d et erm i n edth atth e An gu s cl as s B u n i t s h ada fai r
m ark etv al u e o f $ 2 2,9 7 2 ,8 5 4
. He s t at ed thatth e u n di s co un t ed v al u es were $ 6 3 ,9 4 1 fo r t h e cl as s A u n it s an d$ 3 1 ,9 0 6,7 4 2 fo r t h e cl as s B u n i ts . He cal cu l at ed- 3 2 -

[* 3 2 ] th e t heo ret i cal d i s co u n tas $ 8 ,9 3 3 , 8 8 8 , wh i ch was g reat er th an th e
u n d i s co un t edv al ue o f $ 63 ,9 41 at tri b ut ab l e t o th e cl as s A u n i t s . M r. M i t ch el l es ti m at edthatth e p u rch as e p rem i um wo u l d b e 5 % o f t h e th eo ret i cal d o l l ar d is co u n to f $ 8 ,9 33 ,8 8 8 . Th e 5 % p u rch as e p rem i um equ al ed ap p ro x i m at el y $ 4 4 7,0 0 0 , wh i ch h e ro u n dedt o $ 45 0 ,0 0 0. He redu cedth e cl as s B
u n i t s ’ u n d i s co un t edNAV o f $ 3 1 ,9 0 6 ,7 4 2 9 b y th e $ 4 5 0 ,0 0 0 p u rch as e p rem i u m t o arri v e ata v al u e o f $ 3 1,4 5 6 ,7 4 2 wi th a p er-u n itp ri ce o f $ 3 ,1 5 1 .9 8
. V. An al y s i s Wh en a g i fto f p ro p ert y

i s m ad e, i t s v al u e atth e d at e o f t h e g i ft s hal l b e
co n si d eredth e am o u nto f t he g i ft . Sec. 2 5 .2 5 1 2 -1 , Gi ftTax Reg s . W e d o n o t
en g ag e i n i m ag i n ary

s cen ari o s as t o wh o a p u rch as er m i g h tb e. Es t at e o f Gi u s t i n a
v . Co m m i s s i o n er, 5 8 6 F. Ap p ’ x 4 1 7 , 4 1 8 (9 th Ci r. 2 0 1 4 ), rev ’ g an drem an d i n g T.C. M em o . 2 01 1 -1 4 1 . InOl s o n v . Un i tedSt at es , 2 9 2 U.S. 2 46 , 2 5 7 (1 9 3 4 ), th e Sup rem e Co u rtex p l ai n ed : El em en t s affect i n g v al u e th atd ep en d upo n ev en t s o r co m bi n at i o n s o f o ccu rren ces wh i ch , wh i l e wi th i n th e real m o f p o s si bi l i ty , are n o t fai rl y s h o wn t o b e reas o n ab l y

p ro b ab l e s h o u l db e ex cl u d edfro m co n s i d erat i o n fo r t h atwo u l db e t o al l o w m ere s p ecu lat i o n an d co n jectu re t o b eco m e a g u i d e fo r t h e as cert ai n m en to f v al u e--a t h i n g t o b e co n d em

n edi n b u s i n es s tran sact i o n s as wel l as i n ju d i ci al as cert ai nm en to f tru th. * * *

9 Th i s v al u e i s 9 9 .8 0 % o f t h e NAV o f $ 3 1 ,9 7 0,6 8 3
.- 3 3 -

[* 3 3 ] Res p o n d en t ’ s ex p ertrel i es up o n an ad di t i o n al act i o n , th e p u rch as e o f t h e cl as s A u n i t s . M r. M i t ch el l co nt en d s th at th e eco n o m ic real it i es h av e t o b e t ak en i n t o co n s i d erat i o n an dthatthe eco no m i c s t ak e o f t h e h o l d er o f a 9 9
. 8 % i n t eres to f th e cl as s B u n i t s “ dwarfs ” t h ato f t h e h o l der o f t h e cl as s A u n i t s . Ho wev er, M arg aret , th e s o l e o wn er o f t h e cl as s A u n i t s , t es t i fi edthats h e h adn o i n t en t i o n o f
s el l i n g th e u n i t s . Sh e fu rt h er t es t i fi ed thati f s h e ev er s o l dthe u n i t s s h e wo u l d d em an da p rem i u m

m u ch h ig h er t han wh atwas es t im at edi n the M i tch el l rep o rt s . If t h e cl as s B u n i t s were ev er s o l do u t si d e t h e fam i l y , M arg aret ex pl ai ned th ats h e
wo u l dreq u i re th ats h e b e p ai da m an ag em en tfee. W e are l o o k i n g atth e v al u e o f t h e cl as s B u n it s o n th e d at e o f t h e g i ft s an d
n o tth e v al u e o f t h e cl as s B u n i t s o n th e b as i s o f s ubs equ en tev en t s t hat , wh i l e wi th i n th e real m

o f p os s i b i li t ies , are n o treas on ab ly p ro bab le, n o r t h e v al u e o f t he cl as s A u n i t s . See i d
. InSu cces s i o n o f M cCo rdv . Co m m i s s i o n er, 4 6 1 F.3 d6 1 4 , 6 2 9 (5 th Ci r. 2 0 06 ), rev ’ g an d rem an d i n g M cCo rdv . Co m m i ss i o n er, 1 2 0 T.C. 3 5 8 (2 0 0 3), t h e Co u rto f Ap p eal s fo r t h e Fi ft h Ci rcu i treas o n edth atth ere are t h ree ty p es o f co n d i t i o ns al o n g th e “ s p ecu l at i v e” co n t in uu m : (1 ) a fu tu re ev en tth ati s ab s o lu t el y

cert ai n t o o ccu r; (2 ) a fu tu re ev en t“ th ati s n o tab s o l u t el y cert ai n t o
o ccu r, b u tn ev erth el es s m ay b e a ‘ m o re . . . cert ai n p ro p hec[y ] ’ ”; an d(3 ) “ a- 3 4 -

[* 3 4 ] p o s s i b l e, b u tl o w-o d d s , fu tu re ev en t ” wh i ch i s “ u n d en i ab l y a ‘ l es s . . . cert ai n p ro p hec[y ] ’ ”. M r. M i t ch el l ’ s v al u at i on s rel i edo n an ad d i t i o nal act i o n . He co n cl u dedth at t o d et erm i n e t h e v al u e o f wh ata wi l l i ng b u y er wo ul dp ay an dwh ata wi l li n g s el l er
wo u l ds eekfo r th e cl as s B u n i t s , a p rem i u m t o p u rch as e t h e cl as s A u ni t s h as t o b e t ak en i n t o acco u n t . El em en t s affect in g th e v al u e t h atd ep en d up o n ev en ts wi th i n th e real m o f p o s si b il i ty

s h o ul dn o tb e co n s i dered i f t h e ev en t s are n ots h o wnt o b e
reas on ab l y

p ro b ab l e. Ol s o n , 2 9 2 U.S. at2 5 7 . Th e fact s d o n o t s ho w th at i ti s
reas on ab l y

p ro b ab l e t h ata wi l l i n g s el l er o r a wi l l in g b uy er o f t h e cl as s B u n i t s
wo u l dal s o b uy

th e cl as s A u n i t s an dth atth e cl as s A u n i t s wo u l d b e av ai l ab l e t o p u rch as e. To d et erm i n e t he fai r m ark etv al u es o f t h e cl as s B u n it s we l o o katth e wi l l i ng b u y er an d wi l l i n g s el ler o f t h e cl as s B u ni t s , an d n o tth e wi l l i n g b u y er an d wi l l i ng s el l er o f t he cl as s A u n i t s . Nei ther res p on d en t n o r M r. M it ch el l p ro v i d edev i d en ce t o s ho w s up p o rtfo r h i s v al u at i o n s . Hi s rep o rt s d idn o t i n cl u d e em p i ri cal d at a wh i ch b ackup h i s cal cu l at io n o f t h e 5 % p rem i u m t o p u rch as e t h e cl as s A u n i ts o f ei th er en t i ty . He p ro v id edn o ev i den ce s h o wi n g th ath i s m et ho d o l o g y was s ub jectt o p eer rev i ew. Res po n d en tci t ed n o cas el aw i n s up p o rto f M r. M i t ch el l ’ s m et h o d o l o g y . Acco rd in g ly , we rejectM r. M i t ch el l ’ s v al uat i o ns o f t h e cl as s B u n i t s o f Rab b i tan d- 3 5 -

[* 3 5 ] An g u s . See Es t at e o f Hal l v . Co m m i s s i o n er, 9 2 T.C. at3 4 0 ; Es t at e o f Dep ut y v . Co m m i s si o n er, T.C. M em o . 2 0 0 3 -1 7 6 , s l i p o p . at2 0 ; Es t at e o f Sm i th v . Co m m i s s i o n er, T.C. M em o . 1 9 9 9 -3 6 8 , s l i p o p . at4 0
. In p ri o r i n s t an ces th i s Co u rth as accep t edth e t rad i t i o n al as s et -b as ed
m et h o do l o gy

i n v al u in g a m i n o ri ty

i n t eres t . InEs tat e o f Kel l ey v . Co m m i s s i o n er, T.C. M em o . 2 00 5 -2 3 5 , we ap p ro v eda l ack o f co n tro l d i s co u n t o f 1 2 % an dl acko f
m ark et ab i l i ty

d i s co u n t o f 2 3 % fo r a 9 4 .8 3 % n o n co n tro l l i ng i n t eres ti n a fam i l y o wn edl i m i t edp art n ers h i p wh o s e as s et s were cas h an dcert i fi cat es o f d ep o si t . In Es t at e o f St ran g i v . Co m

m i s s i on er, 1 1 5 T.C. 4 7 8 (2 0 0 0 ), aff’ di n p art , rev ’ di n p art
o n o th er g ro u n d s , 2 93 F.3 d 2 7 9 (5 th Ci r. 2 0 02 ), we co n cl u d edth ata 9 9 %
n o n co n tro l l i ng i n t eres ti n a l i m i t edp art n ers h i p wi th i n ves t m en t s i n cas h an d
s ecu ri t i es h ada l acko f co n tro l d i s co un to f 8 % an da l acko f m ark et ab i l it y d i s co u n t
o f 2 5 %
. In h i s rep ort s M r. M i t ch el l th eo ri zed ab o u tth e d i s co u nt edNAV ap pro ach fo r t h e cl as s B u n i t s o f b o th Rab b i t an dAn g u s an dco n cl u d edth atth e l acko f
co n tro l d i s co u nt s were 1 0 % an dth e l acko f m ark et ab i l i ty d i s co un t s were 2 0 %. M r. M i tch el l s t at edi n h i s rep o rt s th at thes e d i s co un t s were i ll u s trat i ve es t i m at es . Ho wev er, h e fu rt h er s t at edi n h i s rep ort s th atthes e d i s co u n t s were “ n ot i n co n s i s t en twi th rel ev an t m ark etd at a an d qu an t i t at iv e m et h o d o l o gi es ”. Ho wev er,- 3 6 -

[* 3 6 ] th e rep o rt s p ro v i d edn o d et ai l s o n h o w th e d is co u n t s were d et erm i n ed . W e real ize t h atth es e d i s co u n t s were u s edo n l y as p arto f th e m et h o d o lo g y i n th e M i t ch el l v al u at i o n s . W it h o u tm o re i n fo rm at i o n o n h o w M r. M i t ch el l arri v edath i s i l lu s trat i v e es t i m at es , we d o n o tb el i ev e t h atres p o n d en t p ro v i d eden o u g h ev i d en ce t o s up p o rtad op t i n g s u ch es t i m at es fo r a l acko f co n tro l d i s co u n to f 1 0 % an da l ack
o f m ark et ab i l i ty d i s co u n to f 2 0 %. M r. Frazi er co m

b in edtwo m et h o d o l o g i es : th e m ark et ap pro ach an d t h e i n co m e ap pro ach . Th e v al u es o f t he cl as s B u n i t s o f Rab b i tan dAn g us i n th e VCG rep o rt s were cal cu l at edu s i n g th e m ark etap p ro ach . Th e VCG rep o rt s d et erm i n eda l ack o f co n tro l d i s co u n to f 1 3 .4 % an d1 2 .7 % fo r Rab b i tan d An g u s , res p ect i vel y , an da l acko f m ark et ab i l i ty d i s co u nto f 2 5 % fo r b o th Rab b itan d An g u s , wh i ch are wi th i n th e ran g e o f s ev eral cas es . See Es t at e o f Stran g i v
. Co m m i s s i o n er, 1 1 5 T.C. 4 7 8 ; Es t at e o f Kel l ey v . Co m m i s s i o n er, T.C. M em o . 2 0 0 5 -2 3 5 ; Peracch i o v . Co m m i s s i o ner, T.C. M em o . 2 0 03 -2 8 0 ; Es t at e o f M u rp h y
v . Un i t edSt at es , No . 0 7-CV-1 0 1 3 , 2 0 0 9 W L 3 36 6 09 9 (W .D. Ark . Oct
. 2 , 2 0 0 9 ). Th e m et h o do l o g y

u s edi n the VCG rep o rt s i s s i m i l ar t o th e m et h o d o l og y th atM r. Frazi er u sed fo r h i s m ark et -ap p ro ach v al u at i o n s . W e are n o t co n v in cedth atth e h i g h er d i s co u n tfo r l ack o f co n tro l fo r Rab b itan dl o wer v al u es i n the Frazi er rep o rt s s h o u l d b e s ub s t i tu tedfo r t he v al u es th atthe p art i es s ti p u lat ed an dth e- 3 7 -

[* 3 7 ] d i s co u n t s p et it io n er p ro v i d edi n th e VCG rep o rt s. See Es t at e o f Hal l v . Co m m i s s i o n er, 9 2 T.C. at 3 3 7 -3 3 8 ; Es t at e o f Dep ut y v . Co m m i s s i o n er, s l i p o p . at1 2 n . 6 . Fu rt h erm o re, we co ncl u d e t h atth e m ark etap p ro ach i s a reas o n ab l e
m et h o d. VI. Co n cl u si o n Fo r Rab b i tth e NAV i s th e NAV s t i p u l at edb y th e p art i es . Fo r An g us th e NAV i s th e v al u e d et erm i nedi n th e VCG rep o rt . W e are p ers u ad edth atth o s e
v al u at i o n s are t h e m o s t rel i ab l e. W e h av e n o reas o n t o o b jectt o th e d i sco u n t s i n VCG’ s rep ort s. Th erefo re, we ad o p tth e ab o ve-d es cri b edv al uat i on s an dl acko f
co n tro l d i s co u nt s o f 1 3 .4 % an d1 2 .7 % fo r Rab b itan dAn g u s , res p ect i v el y , an d l acko f m ark et ab i l i ty d i s co u n t s o f 2 5 % fo r Rab b i t an dAn gu s . W e h av e co n s id eredal l o f t h e arg um en t s rai sedb y th e p art i es , i n cl u di n g th e cri t i ci s m s o f each ex p ert ’ s rep o rt s , an d , t o the ex t en tth ey are n o tad dres s ed , we fi ndth em wi th ou tm eri t . Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.